Many Washington tax-exempt organizations are surprised to learn they are not exempt from Washington’s B&O Tax.
Business and Occupation Tax Liability
While Washington tax-exempt organizations are generally exempt from income tax, they are not necessarily exempt from other state and local taxes such as Washington’s business & occupation (B&O) tax. Many tax-exempt organizations in Washington are still subject to business and occupation tax at both the state and local level. For B&O tax purposes, nonprofit organizations are generally presumed taxable in the same manner as for profit organizations. Thus, if there is no exemption applicable to your organization, your organization will be required to register with the Department of Revenue and pay B&O tax on gross receipts.
Application to Exempt Organizations
B&O tax is imposed on any organization conducting business activities in Washington state. The tax is calculated based on the value of products, gross proceeds from sales, or gross income from services. However, certain nonprofits are exempt from liability for the B&O tax. These include, among others, artistic or cultural organizations; adult family homes; comprehensive care centers; and the state and federal governments and housing authorities.
Further, nonprofits with gross annual receipts of $12,000 or less are not required to register with the Department of Revenue or pay the B&O tax. Similarly, some organizations may be eligible for the small business tax credit, which may offset all or a portion of the B&O tax. Nonprofit organizations that are not required to collect sales tax or pay taxes or fees to the Department of Revenue are not required to register with the Department of Revenue.
Exempt Activities and Deductions
Additionally, some sources of income are exempt or may be deducted from gross receipts. Notably, nonprofits can deduct revenue from qualifying fundraising activity that is not carried out regularly at the organization’s principal place of business. An example would be income from a charity auction. Further, bona fide donations and contributions are not subject to B&O tax provided the nonprofit does not furnish any goods or services, other than recognition of the gift, in exchange for the contribution. Additionally, grants are excluded from Washington’s B&O tax provided that the grantor receives no significant goods, services, or benefits; the grantee is a nonprofit or governmental organization; and the grant is used to promote, advance, or fulfill charitable purposes. Finally, receipts from contracts with organizations outside of Washington are not subject to B&O tax inside Washington.
Bona fide dues from members can be deducted from the nonprofit’s Washington B&O tax liability. However, if the members receive significant goods and services in consideration of the dues, the nonprofit is not eligible for the deduction. The provision of certain goods and services, such as newsletters and the conduct of conventions and shows for members, will not cause the nonprofit to lose the deduction.
This post is intended as a general overview of Washington’s B&O tax. It does not contain a complete list of exemptions and deductions. For more information on whether your organization is required to pay B&O tax, consult an attorney.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.