The staffing industry provides workers who perform a variety of business activities, including services such as construction, customer software design and implementation, manufacturing and light industrial activities, other skilled and unskilled labor, clerical, and other professional services.
The gross income received by a staffing business for each of these activities is subject to the business and occupation (B&O) tax. The nature of the activity determines the appropriate classification and tax rate. In addition, staffing businesses must collect retail sales tax and remit the collected tax to the state on all income subject to the retailing classification of the B&O tax unless a specific statutory exemption applies.
The tax owed by a staffing business is based on the gross income received for the work performed and the services provided. Generally, no deduction is allowed from gross income for payroll or any other expenses incurred by the business.
B&O tax classification & retail sales tax
A staffing business is subject to tax based on the services provided to customers through their workers. This means the gross income received by the staffing business is subject to the classification of the business and occupation tax that applies to that activity.
When a worker performs an activity defined as a retail sale, the staffing business must collect sales tax from its customer. If a retail-type service is performed for a person that resells that service, such as construction work performed for a general contractor, sales tax is not collected. Instead, the staffing business is required to obtain a reseller permit from the contractor and report such charges for the worker under the Wholesaling B&O tax classification (RCW 82.04.050).
Identifying the proper B&O tax classification
A staffing business is responsible for determining the applicable B&O tax classification for the activity to be performed by the worker. This determination should be made prior to dispatching the worker to the customer. It is important for the staffing business to know whether retail sales tax should be collected from the customer, or if an exemption certificate or other documentation should be obtained from the customer as evidence of a sales tax exemption.
Note: The staffing business should not assume that the income it receives through the activities of its workers is subject to tax under the same classification that the customer reports under.
The activity or service performed by the worker may be classified differently for tax purposes from the classification reported by the customer. For example, a person operating an insurance agency is taxable under the Insurance Agents B&O tax classification. If a temporary staffing business provides a receptionist for the insurance agency, the gross income received for the worker's services is subject to B&O tax under the Service and Other Activities classification. This is because the receptionist is not providing services under the authority of an insurance agent's license.
If the staffing business provides a worker who is licensed as an insurance agent to an insurance agency, and the worker performs services under the authority of that license, the related income is taxable under Insurance Agents B&O tax classification. In all cases, the staffing business must look to the activity engaged in by the worker, regardless of the nature of the customer's business.
Examples for classifying income
Below are descriptions of the major B&O tax classifications and examples of the activities that fall within those classifications.
Retailing B&O tax applies to gross income received for repairing, altering, or improving real or personal property for the property owner, even in those cases where only labor is provided. In addition, retail sales tax must be collected from the customer. Examples of retail services include:
- Clearing land
- Commercial construction
- Concrete work
- Electrical work
- Excavation work
- Installation of canned software
- Installation of personal property
- Landscape maintenance
- Moving earth
- Paper hanging
- Plastering/Drywall installation
- Repairs of computer hardware
- Residential construction
- Sheet metal installation
- Site cleanup
- Water/Sewer/Utility line installation
Retail sales tax exemptions (documentation required)
All retail sales are subject to sales tax unless the customer provides documentation to establish its exemption from the retail sales tax. With documentation, certain retail sales and services are exempt from the retail sales tax. Examples include repair and/or maintenance of certain manufacturing machinery and equipment, and repair and/or maintenance of carrier property used substantially in interstate commerce.
In all cases where the customer claims exemption from retail sales tax, the client must provide the staffing business with a properly completed exemption certificate. The Buyers' Retail Sales Tax Exemption Certificate (pdf) is used to document retail sales tax exemptions.
Wholesaling B&O tax applies to income received for repairing, altering, or improving real or personal property for someone other than the property owner, even in those cases where only labor is provided. The gross income billed to the customer for wholesaling activities must be reported under the Wholesaling classification of the B&O tax. Retail sales tax is not collected. Examples include construction services performed for a prime contractor or subcontractor and repair work performed for a repair shop. In both of these examples, the labor is used by the customer to produce something for resale.
Specific documentation required: The customer must provide the staffing business with a reseller permit.
A manufacturing activity is any activity of a commercial or industrial nature where labor or skill is applied, by hand or machinery, to materials so that as a result a new, different or useful substance or article of tangible personal property is produced for sale or for commercial or industrial use. A person who engages in a manufacturing activity is generally subject to either the manufacturing B&O tax or processing for hire B&O tax, depending on whether or not the materials upon which the activity is performed belongs to that person.
Persons report under the manufacturing classification when they perform manufacturing activities on materials that belong to them. The manufacturing B&O tax applies against the value of articles or substances manufactured in Washington. The B&O tax under this classification applies whether the resulting product is used by the manufacturer or is delivered to the customer within or outside this state.
Specific documentation required: The person taxable under the manufacturing classification must either obtain a reseller permit from their customer or collect retail sale tax on their sales of the manufactured items.
Processing for hire
Persons report under the processing for hire classification when they perform manufacturing activities on materials that belong to someone else. Thus, a processor for hire is any person who would be a manufacturer if that person were performing the labor and mechanical services upon his or her own materials. Examples include producing a fully or partially completed item from raw materials provided by the customer; assembling parts provided by the customer to produce a fully or partially completed item; performing a function on an assembly line that alters tangible personal property; and operating machinery on an assembly line that alters tangible personal property. The processing for hire B&O tax applies against the total charge for the processing services, including any charge for materials furnished by the processor.
Specific documentation required: The person taxable under the processing for hire classification must either obtain a reseller permit from their customer or collect retail sale tax on their charges for the processing services, including any charge for the materials they furnish.
Service and other activities
The Service and Other Activities classification may be considered a "catch-all" classification of the B&O tax. It applies to any business activity for which a specific rate is not provided under the law, or which is not specifically exempt from excise taxes by statute. In general, it includes personal and professional services. Examples include:
- Accounting services
- Architectural design
- Beauty shop services
- Bookkeeping and payroll services
- Call center staffing
- Computer consulting services
- Computer programming
- Detective services
- Engineering services
- Hair cutting and styling
- Health care services
- Housecleaning services
- Janitorial services
- Laboratory work
- Legal services
- Licensed Massage Therapy
- Property appraisal
- Secretarial/clerical services
- Software designing
- Stenography services
- Web design services
The Service and Other Activities classification includes merely inspecting, sorting, counting, moving, packing, loading, or unloading or operating machinery that performs these tasks even when they are performed at a manufacturing facility.
Special B&O tax rates - specific licenses required
Some activities may require the worker to have a special license or certification through the Department of Licensing. Generally, whether the worker has a license does not affect the application of tax. For example, income received from the activities of a health care worker is subject to the Service and Other Activities classification whether the activity requires a licensed physician or requires no license at all.
However, certain licensed professions have a special classification of the B&O tax classification that is lower than the Service and Other Activities classification. In order to take advantage of the lower B&O tax classification, the worker provided by the staffing business must hold the appropriate valid license and perform services under authority of the license. An example of this is seen in the Insurance Agents classification.
Public utility tax - motor or urban transportation
The public utility tax is a tax on gross receipts, similar to the B&O tax. It applies to most utility services, such as water, power, and gas distribution, and sewerage collection. It also applies to providing transportation of persons or property for hire within five miles of the city limits (Urban Transportation classification) and beyond (Motor Transportation classification). These classifications apply whether or not the person performing the work owns the vehicle with which the activity is being performed.
- taxi cab service
- limousine service
- hauling goods belonging to others (hauling for hire)
See WAC 458-20-180