Washington state residents don’t pay an income tax, one of the reasons why some companies have found the area an attractive place to invest and expand. But go anywhere in startup circles in the state and you’ll hear the story of the dreaded B&O taxThe business and occupation tax — which is taken out of gross receipts — tends to hit smaller startups that have yet to achieve profitability especially hard. 

Now, some state legislators, including Bellevue’s Cyrus Habib, are looking to put some limits on the B&O tax, offering a potential $2 million deduction for those companies less than two years old.

The concept has been floated before, with Seattle Mayor Mike McGinn convening a roundtable last May where the idea of altering the B&O tax in the city, among other proposals, was discussed. (Disclosure: I’ve been participating on an advisory panel with the Mayor’s office as it relates to efforts to improve the climate for startups in the city). 

McGinn said that he’d favor a corporate income tax over a B&O tax, adding that if companies have less than $100,000 in gross receipts they are exempt from the tax. But McGinn pointed out the potential problems with the B&O tax, noting that his hands are basically tied by the state.

Asked about the potential of B&O tax deferrals, McGinn said he could consider it, but his hands are tied by the state. 

“We want to encourage startup activity, and we want to encourage risk,” he said. “And we want to encourage businesses that are investing for the future. I just have a tax code right now that doesn’t give me many tools to do that.”

The Washington Policy Center once introduced a proposal to get rid of the B&O tax, and former Washington governor Chris Gregoire added in a comment three years ago that “if you want to come forward with an alternative to the B&O tax system in the state of Washington, the welcome mat is out from me.”

Now, it appears that the state is looking to take some action. A public hearing on the tax is slated for February 19th in Olympia. (Note: The post has been updated to reflect the new date of the hearing). What are your experiences with the B&O tax? Think it’s time for a change?

Comments

  • http://www.facebook.com/husting Patrick Husting

    Get rid of the B&O tax. I hate it and not sure what I get for the money.

  • gseattle

    Currently no tax if under 20,000 if I’m not mistaken, and raising that threshold, I would feel more welcome to risk startups.

    What about a system where the state sets the default and cities can override if they wish to go to all the trouble of trying various things? (a spur-of-the-moment brain dropping)

  • Business Owner

    The B&O tax is unfair, even for established and profitable businesses, since it’s based on revenues. As an example, a services business, with $5,000,000 in revenue would pay 1.8% B&O tax, or $90,000. If the business owner has a net profit of 10% of revenues ($500,000) then the result of the tax is the equivalent of an extra 15.25% in income tax (90,000 divided by 590,000). This is on top of Federal income tax rates that are now 39.6% at the top. Of course, if the business owner has less net income the percentage goes up. It wouldn’t be a stretch for B&O tax to equate to much more (i.e. 30%, 40%, 50% or greater) as a percentage of income if the business owner (in this scenario) nets much less over the year. Unfair!!

  • Chris Leyerle

    Why limit this to a pre-defined list of industries (mostly software)? We should be encouraging startups of all kinds, in every sector.

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