Washington loses up to $375 million annually – equal to about 5 percent of tax collections – to as many at 164,000 unregistered businesses operating in the state, according to a new study issued by the Washington State Department of Revenue.
The department recovers about $25 million annually from unregistered businesses through its tax discovery efforts, but the findings will help it bring more businesses into compliance through a combination of education and enforcement, Director Cindi Holmstrom said Thursday. "Legitimate businesses have told us time and again that nobody should enjoy a competitive advantage simply by evading taxes."
The analysis found that an estimated 99,000 businesses conducting business in Washington were registered with the Internal Revenue Service (IRS) but not the state, costing the state an estimated $225 million in annual tax revenue, equal to 3 percent of taxes collected from registered businesses. An additional $150 million may be lost to another 65,000 businesses that are not registered with either the IRS or the state.
By comparison, the state has 760,000 registered businesses, though only about 460,000 those have to file and pay taxes after small business credits are considered.
The study confirms that out-of-state businesses operating in Washington comprise the bulk of the tax losses, with an estimated $155 million of the $225 million in unpaid tax. These businesses comprise about 25,000 of the 99,000 businesses registered with the IRS but not the state. Many may not realize that their activity requires them to register to do business in Washington. Most of the Department’s current tax discovery efforts are targeted at identifying these businesses and getting them registered and paying taxes.
Washington-based sole proprietors comprise the largest number of unregistered businesses, at 45,000 of the 99,000. Professional and management services constituted the largest dollar loss at $19.6 million of the $52 million in unpaid taxes.