Washington Business and Occupation Taxes

Andrew Schlegel Q & A, Taxes, Transportation

Q:  My Oregon based motor carrier business received a notice from the State of Washington Department of Revenue saying that my business “may now have tax reporting responsibilities in Washington State” because of a new law expanding collection of  its Business and Occupation tax.  We do occasionally enter Washington to pick up and deliver freight, but have no terminal in Washington.  Am I subject to this new tax?

A:  The Washington State Legislature enacted tax package 2ESSB 6143 earlier this year, which expanded Washington State’s ability to collect Business and Occupation (“B&O”) tax.  Part of this bill removed the “physical presence” requirement and enacted an “economic nexus” evaluation to determine whether a business is subject to the Washington B&O tax.

However, this new evaluation affects only those subject to the B&O Tax because of service and royalty income, whether or not the business is located in Washington.  In order to be subjected to the new “economic nexus” standard, a business must have income from “apportionable activities” which include royalties, professional services and other service related activities as defined by Washington law (WAC 458-20-19402).

According to Washington law, “Trucking and Transportation” services are generally classified under the Urban or Motor Transportation Public Utility Tax classification (WAC 458-20-180 and WA Tax Classifications for Common Businesses).  Because most trucking and transportation services are outside of the scope of the new Washington legislation, the evaluation has not changed for most motor carriers based outside of Washington .

Of course, as with any law, the specific facts and circumstances of how and where a motor carrier operates and which types of services it offers will determine whether it is subject to this expanded B&O taxation from the State of Washington.

With that said, due to the current economic climate, states are reaching further than they have in the past to gather tax revenue.  Under current law, states are allowed to tax interstate motor carriers if there is an “economic nexus” with that state – a vague and all too often undefined term that allows states to collect taxes from businesses with only a slight connection to their state.  Recently, two states (Nebraska and New Mexico) have begun attempts to collect taxes from carriers that traverse its roads, but do no other business in the state.

The American Trucking Association has pressed for Congressional intervention on this issue.  House Resolution 1083 would prohibit state taxation of an out-of-state entity unless such entity has a physical presence in the taxing state.  However, there has been no action on this Bill since February of 2010. Until such a bill is passed, it will be necessary for all motor carriers to carefully evaluate what states they are subject to taxation in, or risk increased taxes, penalties, interest, or even seizure of company property.