I receive a number of calls from staffing companies about the application of the Washington Business and Occupations tax (B&O Tax) to their businesses. Many out of state staffing companies (and even many who are based here) are surprised to find out that the B&O Tax applies to the total receipts of a staffing company received from it’s clients including the cost of the payroll and not just the service fees.
First, a bit of background for those who are unfamiliar with the B&O Tax. The B&O Tax is a tax on gross receipts for the benefit of doing business in the State of Washington. We have no income tax in Washington, so the primary revenue source for the state is the sales tax and the B&O Tax on businesses. The B&O Tax is assessed against gross revenue. Generally, this means that the tax is assessed against all invoices regardless of what is actually collected (although there is a credit for bad debt) and regardless of profitability (i.e., expenses do not matter).
There is an exemption to the applicability of the B&O Tax for pass-through expenses that the taxpayer pays on behalf of (as an agent of) the client. The staffing industry has long argued that the costs the employees is a pass through cost incurred on behalf of the client and that only the service fee should be subject to B&O Tax.
A staffing company in Tacoma, William Rogers, challenged the application of the B&O Tax and a similar tax levied by the City of Tacoma. William Rogers was initially successful in obtaining a refund of the tax that was charged by the City of Tacoma after which it sought a refund from the Department of Revenue. William Rogers initially won it’s appeal but, finally, in 2003, the Washington State Supreme Court weighed in on the subject and found that staffing companies could not exclude the cost of payroll in most cases.
Staffing companies are in an unfortunate position because they hire employees and then contract with their clients to make those employees available for the client. The client pays for the cost of the employees plus a mark-up. Believe it or not, the Washington State Supreme Court has taken the position that, because the staffing company is the employer of record, that the services provided by the employees are not considered a pass-through expense.
If you have issues with the Washington State B&O Tax, please contact us.