Virtually every business owner understands common tax obligations, like paying tax on profits. Some states, however, are outliers and don't collect revenue the way most others do.
Washington is one of those states.
Washington doesn't have a state income tax. Instead, the state collects revenue from consumers by requiring business owners to charge sales tax on most items, and collects revenue from business owners by imposing a Business and Occupation (B&O tax).
Washington's B&O tax works very differently from traditional income tax. Your company must pay this tax based on gross receipts, not profit. You're taxed on total income from all sources, with no deduction for labor, materials, or operating costs. So, you can lose money and still owe.
Companies in Washington aren't the only ones that must understand how B&O taxes work. If your company generates $100,000 or more in combined gross receipts from Washington customers, the Department of Revenue requires you to register and pay taxes.
This guide explains who owes B&O tax in Washington, recent changes that have imposed new obligations on digital and software businesses selling to Washington customers, and how companies can fulfill their B&O compliance requirements.
What is the Washington B&O tax & why does it matter?
Many business owners are caught off guard by the B&O tax in Washington because it's uncommon.
Only seven states have a state-level gross receipts tax, and because Washington relies on a gross receipts tax rather than a state income tax, its top gross receipts tax rate is higher than many others.
Gross receipts taxes often surprise business owners who expect to deduct the costs of goods, labor, rent, and other expenses. While these expenses would be deductible under the traditional income tax system, they are not deductible under a gross receipts tax.
The result is that a company with revenue may owe Washington's B&O tax even if it's operating at a loss.
The Washington Department of Revenue (DOR) collects the B&O tax, and companies obligated to pay it—including both in-state and remote sellers—will submit tax information on the Combined Excise Tax return. This is the same form used to report and pay retail sales tax.
Companies must also be aware that some cities in Washington, including Seattle, Tacoma, and Bellevue, impose their own B&O taxes. While this article focuses on the statewide tax, it's also critical to understand local obligations when selling within these areas.
Washington B&O tax classifications and rates
Different B&O taxes apply to different types of business activity in Washington, so it's important to pay tax at the correct rate given your specific business type.
The table below shows the current rates applied to different types of business activities, although rate increases are coming on January 1, 2027.
As you can see, the variation in rates is very substantial. The rate for service businesses is over three times the retailing rate, so a company with $1 million in revenue would pay $4,710 under the retailing category versus $15,000 under the service category.
Unfortunately, classification is not a technicality, and companies cannot pick and choose which classification their business operations fall under. The Department of Revenue has a page that details the specific definitions for each classification.
In some cases, companies have activities that span multiple classifications. For example, the care a chiropractor provides would be classified as a service, but the chiropractor may also sell products, which would be classified as retail sales.
In these situations, the income the company earns must be allocated across each applicable classification so the correct B&O tax for different goods and services is always paid at the proper rate.
Why classification matters for digital and SaaS businesses
Digital and SaaS companies must understand how Washington State classifies their operations so they can pay tax at the correct rate.
Specifically, when it comes to Washington and SaaS taxes:
- SaaS is classified as Remote Access Software (RAS) in Washington. RAS is classified as a retail sale for B&O tax purposes, so SaaS companies are taxed at 0.471% instead of being taxed as a service at 1.5%.
- Digital products or goods, including ebooks and downloadable software, are subject to the retailing B&O tax.
- Businesses that provide only services, including IT services, were traditionally subject to the service B&O tax at the higher rate of 1.5%, but ESSB 5814 changed the rules to classify more IT services as retail sales.
Sellers of digital goods must take note of the changes so they pay tax at the correct rate.
Why the Washington B&O tax change in 2025 affects tech and software companies
Engrossed Substitute Senate Bill 5814 took effect in October 2025 and expanded the definition of a retail sale to include many information technology services sold to consumers, as well as some related services, including digital ads, custom web design, and live webinars.
IT services covered in the bill are now subject to the retail B&O tax and to retail sales tax. Under the new legislation, the IT services affected by the change include (but are not limited to):
- Support activities, including phone consulting, help desk services, and remote training related to network hardware or software.
- Network diagnostic services, analysis, advisory support, quality assurance testing, localization services, network information logistics, and maintenance support services on new or existing network infrastructure.
- Onboarding and offboarding services, such as setting up users with laptops and accounts
- Managed IT services, such as configuring infrastructure networks, analysis, and implementation.
- Consulting or project management services, including planning efforts, analysis, engineering, testing, or deployment.
- Project management and technical program manager services overseeing engineers and consultants who are providing IT Services.
- Migration services and support, including transferring or relocating of services from one environment to another, and associated project management services.
- Consulting and support services connected with digital products, including digital automated services.
- Troubleshooting hardware and software issues and providing information technology solutions.
- Network security management
- Implementation of network security strategies.
- Digital advertising services, including ad design and placement, campaign planning, lead generation, and acquisition of internet advertising space
- Custom Website Development
- Live presentations, including in-person or internet-based workshops, webinars, and courses that feature real-time interaction.
- Access to and use of custom software and customization of prewritten software
For companies providing these services previously classified under the Service classification (which meant they paid B&O tax at the higher rate), this change resulted in a reduction of B&O taxes. However, those companies must now begin to collect sales tax on these services.
Affected businesses both need to update their B&O classifications for any post-October 2025 activity and must comply with Washington sales tax obligations if they weren't in the past.
Does your business owe Washington B&O tax?
If you are doing business in Washington, either because you have a local presence there or because you sell to Washington residents over the Internet, you must understand whether you owe B&O tax.
Washington businesses
Any company with a physical presence in Washington is responsible for B&O tax on revenue sourced in-state from the very first sale. There's no threshold before you become responsible for tax compliance.
While tax credits may reduce the liability of small businesses to zero, you still must register and file Washington sales tax returns.
Out-of-state businesses
Out-of-state businesses are subject to an economic nexus threshold. Once your company has $100,000 in gross receipts sourced to Washington in either the current or prior calendar year, your compliance obligations kick in.
This $100,000 threshold includes all gross receipts, not just taxable retail sales. This includes:
- Wholesale transactions
- Exempt sales
- Taxable sales
- Marketplace facilitated sales (those on platforms like Amazon or Etsy)
The $100,000 threshold is the threshold for both sales tax nexus and B&O tax obligations. As soon as you cross the $100,000 limit, your registration and filing obligations start on the first day of the month, at least 30 days after you exceed the threshold.
While marketplace facilitators like Amazon and Etsy collect and remit sales tax on your behalf, the sales on these platforms still count for determining if you are obligated to pay B&O tax—and the marketplace facilitators do not pay B&O tax for you.
Businesses with a physical presence in Washington
If you have a physical presence in Washington, even if you are not directly making sales there, you will likely have physical nexus, which creates an immediate obligation to comply with B&O and sales tax requirements.
A physical presence can include:
- Offices in Washington
- Employees operating in Washington
- Inventory stored in a Washington fulfillment center (including Amazon FBA)
- Renting or leasing tangible personal property in Washington
- Soliciting sales in Washington through employees or other representatives
- Installing or assembling goods in Washington
- Providing services in Washington, such as accepting returns or providing product training
- Having an exhibit at a trade show to maintain or establish a market in the state
Washington B&O tax credits worth knowing
Tax credits can help to reduce your B&O tax obligations, and in some cases can eliminate those obligations altogether. Credits reduce the tax due on a dollar-for-dollar basis.
Small business B&O tax credit
To protect small businesses from significant tax liability, Washington offers a sliding scale credit. If your total annual B&O tax liability falls below a specific threshold, the credit covers the full amount due. As tax liability grows, the tax credit begins to phase out.
You can claim this credit if:
- Your total B&O tax liability is less than $320 monthly, $960 quarterly, or $3,840 annually, and your taxable income was 50% or more reported under Service and Other Activities, Gambling Contests of Chance, For Profit Hospitals, and/or Scientific R&D.
- Your B&O tax liability is below $110 monthly, $330 quarterly, and $1,320 annually, and your taxable income was less than 50% reported under the Service and Other Activities, Gambling Contests of Chance, For Profit Hospitals, and/or Scientific R&D.
The credit is worth between $0 and the full amount of the B&O tax due.
Your credit is automatically calculated when you file online. However, the Department of Revenue offers a worksheet to determine the value of your credit. If you qualify for the full credit, you won't owe any B&O tax at all. This is common for small e-commerce and SaaS companies.
Multiple Activities Tax Credit (MATC)
The Multiple Activities Tax Credit (MATC) applies if your company performs more than one taxable activity for the same product. The credit exists to ensure that tax isn't paid twice on the same transaction.
For example, if you manufacture furniture in Washington and sell it in Washington, you would report and pay tax on both the manufacturing classification and the retail classification, but would claim a credit for the lower of the two B&O amounts, so you wouldn't be double-taxed.
Companies are expected to report each activity under the correct B&O credit and can claim an internal tax credit for:
- Products extracted and sold in Washington
- Products extracted and manufactured in Washington
- Products manufactured and sold in Washington
There is also an external MATC that companies can claim for activities taxed in Washington if a gross receipts tax is applied to similar activities out of state.
Again, companies must report all activities that occur in Washington under the correct B&O classification. They can then take the external MATC credit for:
- Products extracted in Washington and manufactured, sold, or delivered in another state.
- Products manufactured, in whole or in part, in Washington and sold and delivered to another state.
- Products or ingredients extracted in another state are then sold and delivered to Washington buyers.
- Products wholly or partly manufactured in another state and then sold and delivered to Washington buyers.
- Products partly manufactured in Washington and partly in another state that are sold and delivered to buyers in Washington or another state.
Taxes must be paid before the credit is claimed, and the credit amount can't exceed your B&O tax liability. To claim your credit, you'll need to complete the MATC worksheet (Schedule C) for each reporting period.
How to file Washington B&O tax
Here are the steps you will need to take to file Washington B&O tax:
- Obtain a business license: You can apply for a business license online and will be given a Unified Business Identifier.
- Register with the Washington DOR. You must complete a state Tax Registration as soon as you meet threshold reporting requirements or sell products or services that require sales tax collection.
- File the Combined Excise Tax Return: This is used to report both retail sales tax and B&O tax. Returns must be filed either monthly, quarterly, or annually by the 25th of the month following the close of the filing period. The DOR assigns filing frequency based on estimated annual revenue, with new businesses typically starting with quarterly filing.
Businesses typically file online, and many companies choose to use FileLocal to do so. The DOR includes a detailed page specifying which companies are subject to monthly, quarterly, or annual filing based on annual tax liability, revenue, or specialized business activities.
Because the same Combined Excise Tax Return is used for both B&O and sales tax, many companies find that managing both taxes together can make compliance simpler. However, if calculations don't align, this can add significant complexity.
How Numeral helps with Washington B&O tax compliance
For companies overwhelmed with tax obligations in Washington, Numeral can manage sales tax compliance for you.
As soon as an out-of-state business crosses Washington's $100,000 threshold, the company becomes responsible for both B&O and retail sales tax. Numeral offers free nexus monitoring, so you'll know when you're approaching this deadline and can register and prepare.
Numeral can also fully handle the retail sales tax side of the equation, including:
- Managing sales tax registration
- Calculating the correct amount of sales tax on each transaction
- Filing and remitting sales tax on time
Numeral's services are all backed by the Numeral Guarantee, with each return reviewed by US-based tax experts before it is filed. We even offer virtual mailboxes so we can manage mail from revenue departments for you and call the state on your behalf.
If you're ready to hand off Washington sales tax compliance to a trusted partner, book a demo with Numeral to see how we can help.
Washington B&O tax FAQs
Need more insight into Washington's B&O tax? Here are the answers to some frequently asked questions.
Does an out-of-state business owe Washington B&O tax?
Out-of-state businesses become responsible for complying with B&O tax requirements once they have $100,000 in gross receipts connected with Washington. Whether the company owes tax depends on its business category, total gross receipts, and available tax credits.
What is the B&O tax rate for SaaS companies in Washington?
SaaS companies in Washington, or selling to Washington customers, are subject to B&O tax at the retailing rate of 0.471%.
What is the difference between the Washington B&O tax and sales tax?
Washington B&O tax is imposed on the gross receipts of businesses operating in, or selling to, Washington residents. Sales tax is collected from customers by companies, which then file and remit taxes.
Is there a minimum before you owe Washington B&O tax?
Companies with a physical presence in Washington are subject to B&O tax rules from the first sale. Remote sellers are obligated to comply once they have $100,000 in gross receipts connected to the state. Small business tax credits may eliminate tax liability.
Do marketplace sales (Amazon, Etsy, etc.) count toward the Washington B&O tax threshold?
Marketplace sales count toward the Washington B&O tax threshold. While marketplace facilitators collect sales tax on behalf of companies, the marketplace facilitator does not help companies fulfill B&O tax requirements.
