Something Smells in Washington State

Washington state has a bad case of BO, as in the business-and-occupations tax levied on all firms for the “the act or privilege of engaging in business” in the state.

Why am I holding my nose? Because Washington calculates the B&O tax on gross revenues–in other words the sum of all monies earned by a company. Nowhere does the tax account for the costs of running the business–leases, payroll, property taxes, supplies and equipment, advertising, etc. So a firm can suffer a net loss, like ours, yet still owe the B&O tax. Only firms grossing less than $12,000 per year escape.

For engineering firms, the B&O rate now stands at 1.8%. The amount we pay each month now roughly equals the amount we receive in food benefits. One fee goes to the state, and the other comes from the federal government, but still it seems insane we must first pay a tax on a loss, and then ask the government to hand the money back so we can eat.

The B&O tax doesn’t hit all businesses the same. Not only do the rates vary by industry, their cost as a percentage of profit also fluctuates with expenses. “The burden varies dramatically,” notes Scott Edwards, a shareholder at law firm Lane Powell in Seattle and an adjunct professor in taxation with the University of Washington School of Law. “Because the B&O is based on cash flow rather than profitability, the impact affects low-margin companies more than high-margin companies.”

In today’s down economy, many firms feel its weight more heavily, he says. “Owners may still have the B&O expense while they’re struggling to make payroll.”

Many studies cite the tax’s basic unfairness. A 2002 study by the Washington State Tax Structure Study Committee points to its pyramiding effect. In other words, a product may be taxed several times as it works its way along the distribution chain to its final user. Unknown to most consumers, these costs often are passed along at each stop with a multiplying effect.

And the tax is hard on start-up firms, which must plow profits back into their companies in order to grow. According to a 2005 report by the Puget Sound Regional Council, Washington ranks 48th in the nation in its survival rate for new businesses, despite being number one in business creation. The B&O tax helps create that dichotomy.

Yet for all the debate, the state isn’t likely to give up the B&O tax anytime soon. Currently Washington faces a $2 billion deficit. In 2011, according to the state Department of Revenue, the B&O tax brought in over $3 billion, or 18.8% of the major taxes the state collected.

So for now, the state continues to kick us as we’re down. We’ll keep paying for the privilege of losing money with one hand, while holding out the other for food stamps. And the state’s costs for administering the food assistance program will keep rising. Crazy, huh?


1 thought on “Something Smells in Washington State

  1. Pingback: A Thank You to the American Taxpayer | The Nouveau Poor

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