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Recent decision may create Washington apportionment opportunities

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July 2020


In light of a recent decision of the Washington Court of Appeals, Washington taxpayers may wish to revisit their current sourcing methodology for service-based receipts subject to the B&O tax. [LendingTree, LLC v. State of Washington, Department of Revenue, 460 P.3d 640(March 30, 2020)]). The court rejected the Department of Revenue’s decision to source income to the marketplace of the taxpayer’s customers (the location of prospective borrowers). Instead, the court sourced the income to the state where the business activities of taxpayer’s customers (the lenders) are located. 

The court’s reasoning is best understood using a three-step approach. This approach helps taxpayers evaluate where the benefit of its service income received is apportioned by determining: 

  1. Who is the taxpayer’s customer; 
  2. What is the business activity of the customer to which the taxpayer’s service is most closely related; and 
  3. Where the business activity of the customer occurs. 

Service companies with nexus in Washington state should analyze their Washington apportionment methods in light of the decision.

The takeaway

The Court of Appeals decision provides a framework to aid in analyzing where the benefit of a taxpayer’s service is received. This decision indicates that the Department’s traditional method of apportioning receipts based solely on the customer’s market may be subject to challenge given the proper facts. While uncertainties remain as to how the Department of Revenue will apply this precedent, service businesses should re-examine how receipts are being apportioned to Washington. Businesses should be aware that the Department can be expected to challenge any requested changes in apportionment methodology. As a result, careful analysis is necessary to determine who is the taxpayer’s customer, what is the taxpayer’s service and the closely related business activity of its customers, and where that business activity occurs.

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Peter Michalowski

State and Local Tax Leader, PwC US

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