Business & Occupation Tax Reform, Part IV
New tax pyramiding data for Washington State: Pyramiding occurs more frequently
than thought, resulting in broader tax base
& Andrew Chamberlain
October 2008
Introduction
In 2001, the state legislature created the Washington State Tax Structure
Committee, also known as the Gates Commission, headed by William H.
Gates, Sr. The mandate given to the Commission by the state legislature was to
conduct “a systematic analysis of Washington’s existing tax structure and provide
recommendations for alternatives to improve the tax system.”
The Committee focused on several aspects of the state’s tax system, ranging from
the property tax to the sales tax and more. But it also zeroed in on the effects the
Business and Occupation tax has on the business community. What they found
was of great concern to the committee and to policymakers.
Washington state’s Business and Occupation (B&O) tax is a gross receipts tax levied upon businesses in the state. The tax applies to all business transactions—as opposed to only the final sale of the product. Therefore, all transactions to produce the final product are taxed, including business-to-business purchases of supplies, raw materials and equipment. In Washington state there are no B&O deductions for the cost of doing business.
One of the consequences of the gross receipts tax policy is the extra layer of taxation applied at each stage of production, an effect called “pyramiding.” Pyramiding, according to the Committee, is the payment of taxes by different companies to produce the same good or service. The B&O tax is similar to a sales tax, yet it is applied to all inputs (raw material needed to produce a good) as well as to the final sale.
