Though known for its beautiful mountains and lush forests, Washington State also has a less inviting side that out-of-state companies are increasingly seeing. Washington’s relatively unique status as a separate company state1 with a statutory economic nexus standard2 catches many out-of-state taxpayers by surprise. In particular, entities that exclusively perform administrative, managerial, and other services for out-of-state affiliates are often swept up in the Business and Occupation (“B&O”) tax regime, despite lacking any direct physical presence in Washington. For impacted taxpayers, awareness of some recent guidance may help soften the blow.
Businesses with the following fact pattern are often captured in Washington’s nexus web: one entity (“ServiceCo”) performs various services (i.e. corporate governance, legal, finance and accounting, human resources, procurement, and/or marketing) for its affiliate (“OpCo”), which is a wholesaler or retailer of tangible personal property:
Both ServiceCo and OpCo are based outside Washington and may have little or no property or payroll in the state. OpCo makes sales nationwide and pays B&O tax, while ServiceCo has no filing history in Washington prior to being audited by the Department of Revenue (“Department”). On audit, the Department sources a portion of ServiceCo’s intercompany receipts from OpCo to Washington, resulting in B&O tax liability for ServiceCo.
Given that the U.S. Supreme Court has already upheld the imposition of the B&O tax on the receipts of taxpayers without a physical presence in Washington,3 the most viable challenge to an assessment of B&O tax against ServiceCo should involve a focus on the sourcing of the fees received from OpCo, rather than on ServiceCo’s nexus with Washington. With this in mind, the Washington Court of Appeals’ recent decision in LendingTree4 may be instructive.
LendingTree involved an online marketplace that matched prospective borrowers with potential lenders. LendingTree received fees from lenders for each borrower referral, and an additional fee if the referral resulted in a loan. In overturning a trial court, the Court of Appeals held that LendingTree’s receipts must be sourced to the location where the lenders conducted their business activity, rejecting the Department’s position that LendingTree should look through the lenders and source its receipts based on borrower location. Specifically, the court determined that under Washington’s regulations5, the benefit of LendingTree’s services were received at the location where its customers were physically located, not at the location of its customers’ market (the borrower location).