Washington levies a business and occupation (B&O) tax, also known as a gross receipts tax, for the privilege of conducting business within the state. The tax is applied to the gross income of the business, meaning there are no deductions allowed for labor, materials, taxes, or other costs of doing business. This tax is calculated based on different tax classifications. This means, if your business is performing more than one activity within the state then you may be subject to tax under more than one tax classification.
Back in May, Washington State updated its apportionment rule for attributing apportionable receipts with the introduction of Wash. Admin. Code section 458-20-19402 (new rule 19402). This rule clarifies how businesses should allocate receipts to determine their B&O tax obligations. This change aims to streamline the process of determining whether the benefit of a service is realized within the customer’s market or at the customer’s primary business location.
The Previous Rule: An Overview
Under the former Wash. Admin. Code section 458-20-19402, apportionable receipts depended on where the service’s benefit was received. The cascading method required receipts to be attributed first to where the customer received the service benefit. A reasonable, proportional attribution method could be used if specific information wasn’t available.
The former rule categorized services into four types, each with specific attribution guidelines:
- Real Property-Related Services: Receipts were attributed to the location of the real property.
- Tangible Personal Property-Related Services: Receipts were attributed based on the tangible property’s location.
- Business-Related Services: Receipts were attributed to where the customer’s business activities occurred.
- Miscellaneous Services: Receipts were attributed based on physical presence, specific known locations, or the customer’s residence.
A significant challenge arose in determining the “most closely or directly related” business activity and its location, leading to frequent disagreements between taxpayers and the Department of Revenue (DOR).
Key Changes in New Rule 19402
The updated rule simplifies the attribution process with a more structured approach. Here’s how it works:
- Binary Decision-Making: Receipts are now attributed to the customer’s market or business location(s). This decision is based on whether the service promotes, engages in, or establishes the customer’s market, among other criteria.
- Attribution to Market: When services are aimed at promoting or maintaining a customer’s market, the receipts are attributed to that market location. New rule 19402 requires service providers to assess whether their services are connected to the customer’s market activities by considering whether they are:
- Promoting the customer’s products
- Completing the customer’s sales
- Facilitating collections for the customer
- Establishing or maintaining the customer’s markets
- Attribution to Business Location(s): If the service does not fall into the market category, receipts are attributed based on a cascading hierarchy:
- Physically Present: Where the customer is located during the service.
- Specific Locations: Known business locations of the customer.
- Principal Place of Business: The customer’s main business location.
This new framework aims to reduce ambiguity by focusing on specific questions about the nature of the service and the location where the benefit is received.
Practical Implications and Next Steps
The updated rule should streamline the attribution process, but some uncertainty remains, particularly in methods for attributing receipts to the market. For example, if a service supports a customer’s sales nationwide, it’s unclear how to distribute receipts without specific data.
Businesses should review their current apportionment methods and prepare for the upcoming reconciliation deadlines. They should consider updating their attribution methods to align with the new rule and consult industry-specific guidance from the DOR if available.
In conclusion, while new rule 19402 aims to clarify and simplify the apportionment process, businesses should stay informed and proactive in adjusting their practices to ensure compliance and minimize disputes. Contact one of our State and Local tax professionals with questions about these new changes.
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