Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction.
(a) This section explains the apportionment
requirements of persons entitled to apportion income under
RCW
82.04.460(1), and applies
only to tax liability incurred during the period of January 1, 2006, through
May 31, 2010. Chapter 23, Laws of 2010, sp. sess. (2ESSB 6143) changed the
apportionment provisions of
RCW
82.04.460(1) effective June
1, 2010. This section specifically applies to taxpayers who maintain places of
business both within and without the state that contribute to the rendition of
services and who are taxable under
RCW
82.04.290,
82.04.2908, or any other statute
that provides for apportionment under
RCW
82.04.460(1) during this
period.
Persons subject to the service and other activities,
international investment income, licensed boarding home, and low-level
radioactive waste disposal business and occupation (B&O) tax
classifications, and who are not required to apportion their income under
another statute or rule, should use this section. In addition, this section
describes Washington nexus standards for business activities subject to
apportionment under
RCW
82.04.460(1) for tax
liability incurred between January 1, 2006, through May 31, 2010. Nexus is
described in subsection (2) of this section; separate accounting in subsection
(3) of this section; and cost apportionment in subsection (4) of this
section.
(b) Readers may
also find helpful information in the following rules:
(i) WAC
458-20-19401, Minimum nexus
thresholds for apportionable activities. This section describes minimum nexus
thresholds that are effective June 1, 2010.
(ii) WAC
458-20-19402, Single factor
receipts apportionment -- Generally. This section describes the general
application of single factor receipts apportionment that is effective June 1,
2010.
(iii) WAC
458-20-19403, Single factor
receipts apportionment -- Royalties. This section describes the application of
single factor receipts apportionment to gross income from royalties and applies
only to tax liability incurred after May 31, 2010.
(iv) WAC
458-20-19404, Single factor
receipts apportionment -- Financial institutions. This section describes the
application of single factor receipts apportionment to certain income of
financial institutions and applies only to tax liability incurred after May 31,
2010.
(v) WAC
458-20-14601, Financial
institutions -- Income apportionment. This section describes the apportionment
of income for financial institutions for tax liability incurred prior to June
1, 2010.
(c) The
examples included in this section identify a number of facts and then state a
conclusion. These examples should be used only as a general guide. The tax
results of all situations must be determined after a review of all the facts
and circumstances.
(2)
Nexus.
(a)
Place of
business - minimum presence necessary for tax. The following discussion
of nexus applies only to gross income from activities subject to apportionment
under this rule. A place of business exists in a state when a taxpayer engages
in activities in the state that are sufficient to create nexus. Nexus is that
minimum level of business activity or connection with the state of Washington
which subjects the business to the taxing jurisdiction of this state. Nexus is
created when a taxpayer is engaged in activities in the state, either directly
or through a representative, for the purpose of performing a business activity.
It is not necessary that a taxpayer have a permanent place of business within a
state to create nexus.
(b)
Examples. The following examples demonstrate Washington's nexus
principles.
(i) Assume an attorney licensed to
practice only in Washington performs services for clients located in both
Washington and Florida. All of the services are performed within Washington.
The attorney does not have nexus with any state other than
Washington.
(ii) Assume the same
facts as the example in (b)(i) of this subsection, plus the attorney attends
continuing education classes in Florida related to the subject matter for which
his Florida clients hired him. The attorney's presence in Florida for the
continuing education classes does not create nexus because he is not engaging
in business in Florida.
(iii)
Assume the same facts as the example in (b)(ii) of this subsection, plus the
attorney is licensed to practice law in Florida and frequently travels to
Florida for the purpose of conducting discovery and trial work. Even though the
attorney does not maintain an office in Florida, the attorney has nexus with
both Washington and Florida.
(iv)
Assume an architectural firm maintains physical offices in both Washington and
Idaho. The architectural firm has nexus with both Washington and
Idaho.
(v) Assume an architectural
firm maintains its only physical office in Washington, and when the firm needs
a presence in Idaho, it contracts with nonemployee architects in Idaho instead
of maintaining a physical office in Idaho. Employees of the Washington firm do
not travel to Idaho. Instead, the contract architects interact directly with
the clients in Idaho, and perform the services the firm contracted to perform
in Idaho. The architectural firm has nexus with both Washington and
Idaho.
(vi) Assume the same facts
as the example in (b)(v) of this subsection except the contracted architects
never meet with the firm's clients and instead forward all work products to the
firm's Washington office, which then submits that work product to the client.
In this case, the architectural firm does not have nexus with Idaho. The mere
purchase of services from a subcontractor located in another state that does
not act as the business' representative to customers does not create
nexus.
(vii) Assume that an
accounting firm maintains its only office in Washington. The accounting firm
enters into contracts with individual accountants to perform services for the
firm in Oregon and Idaho. The contracted accountants represent the firm when
they perform services for the firm's clients. The firm has nexus with
Washington, Oregon, and Idaho.
(viii) Assume that an accounting firm
maintains its only office in Washington and has clients located in Washington,
Oregon, and Idaho. The accounting firm's employees frequently travel to Oregon
to meet with clients, review client's records, and present their findings, but
do not travel to Idaho. The accounting firm has nexus with Washington and
Oregon, but does not have nexus with Idaho.
(ix) Assume that a sales representative earns
commissions from the sale of tangible personal property. The sales
representative is located in Oregon and does not enter Washington for any
business purpose. The sales representative contacts Washington customers only
by telephone and earns commissions on sales of tangible personal property to
Washington customers. The sales representative does not have nexus with
Washington and the commissions earned on sales to Washington customers are not
subject to Washington's business and occupation tax.
(x) The examples in this subsection (2) apply
equally to situations where the Washington activities and out-of-state
activities are reversed. For example, in example (b)(ix) of this subsection, if
the locations were reversed, the sales representative would have nexus with
Washington, but not in Oregon.
(3)
Separate accounting.
(a)
In general. "Separate
accounting" refers to a method of accounting that segregates and identifies
sources or activities which account for the generation of income within the
state of Washington. Separate accounting is distinct from cost apportionment,
which assigns a formulary portion of total worldwide income to Washington. A
separate accounting method must be used by a business entitled to apportion its
income under
RCW
82.04.460(1) if this use
results in an accurate description of gross income attributable to its
Washington activities.
(b)
Accuracy. Separate accounting is accurate only when the activities
that significantly contribute, directly or indirectly, to the production of
income can be identified and segregated geographically. Separate accounting
thus links taxable income to activities occurring in a discrete jurisdiction.
The result is inaccurate when services directly supporting these activities
occur in different jurisdictions. For example, if a taxpayer provides
investment advice to clients in Washington, but performs all of its research
and due diligence activities in another state, then separate accounting would
not be accurate. However, if instead of research and due diligence, only the
client billing activity is performed in another state, then separate accounting
would be allowed.
(c)
Approved methods of separate accounting. The following methods of
separate accounting are acceptable to the department, if accurate:
(i)
Billable hours of employees or
representative third parties performing services in Washington. If a
business charges clients an hourly rate for the performance of services, and
the place of performance of the employee, contractor, or other individual whose
time is billed is reasonably ascertainable, then the billable hours may be used
as a basis for separate accounting. The gross amount received from hours billed
for services performed in Washington should be reported.
(ii)
Specific projects or
contracts. A business may assign the revenue from specific projects or
contracts in or out of Washington by the primary place of performance. For
example:
(A) A consulting business with no
other presence in Washington that agrees to provide on-site management
consulting services for a Washington business and receives five hundred
thousand dollars in payment for the project must report five hundred thousand
dollars in gross income to Washington.
(B) If the same business gets another
Washington client for on-site management consulting, and receives another
payment of five hundred thousand dollars, the business must report an
additional five hundred thousand dollars in gross income to
Washington.
(C) If a business
contracts to distribute advertisements for another business within the state of
Washington, the gross amount received for this action should be reported as
Washington income.
(iii)
Other reasonable and accurate methods -- Notice to the department.
(A) A taxpayer may report with, or the
department may require, the use of one of the alternative methods of separate
accounting.
(B) A taxpayer
reporting under this subsection must notify the department at the time of
filing that it is using an alternative method and provide a brief description
of the method employed. If a taxpayer reports using an alternate method, the
same method must be used for all subsequent tax reporting periods unless it is
demonstrated another method is necessary under the standard in (c)(iii)(E) of
this subsection.
(C) If on review
of a taxpayer's return(s) the department determines another method is necessary
to fairly represent the extent of a taxpayer's business activity in Washington,
then the department may impose the method for all returns within the statute of
limitations. Statutory interest applies to both balances due and refund or
credit claims arising under this section. Further, applicable penalties will be
imposed on balances due arising under this section. However, if the taxpayer
reported using the separate accounting method in (c)(i) or (ii) of this
subsection or cost apportionment under subsection (4)(a) through (h) of this
section, the department may impose the alternate method for future periods
only.
(D) A taxpayer may request
that the department approve an alternative method of separate accounting by
submitting a request for prior ruling pursuant to WAC
458-20-100. Such letter ruling
may be subject to audit verification before issuance.
(E) The taxpayer or the department, in
requesting or imposing an alternate method of separate accounting, must
demonstrate by clear and convincing evidence that the separate accounting
methods in (c) of this subsection do not fairly represent the extent of the
taxpayer's business activity in Washington.
(4)
Cost
apportionment.
(a)
Apportionment
ratio.(i) Each cost must be computed
according to the method of accounting (cash or accrual basis) used by the
taxpayer for Washington state tax purposes for the taxable period. Persons
should refer to WAC
458-20-197 (When tax liability
arises) and WAC
458-20-199 (Accounting methods)
for further guidance on the requirements of each accounting method. Taxpayers
must file returns using costs calculated based on the taxpayer's most recent
fiscal year for which information is available, unless there is a significant
change in business operations during the current period. A significant change
in business operations includes commencement, expansion, or termination of
business activities in or out of Washington, formation of a new business
entity, merger, consolidation, creation of a subsidiary, or similar change. If
there is a significant change in business operations, then the taxpayer must
estimate its cost apportionment formula based on the best records available and
then make the appropriate adjustments when the final data is
available.
(ii) The apportionment
ratio is the cost of doing business in Washington divided by the total cost of
doing business as described in
RCW
82.04.460(1). The
apportionment ratio is calculated under this section as follows. The
denominator of the apportionment ratio is the worldwide costs of the
apportionable activity and the numerator is all costs specifically assigned to
Washington plus all costs assigned to Washington by formula, as described
below. Costs are calculated on a worldwide basis for the tax reporting period
in question. The tax due to Washington is calculated by multiplying total
income times the apportionment ratio times the tax rate. Available tax credits
may be applied against the result. Statutory interest and penalties apply to
underreported income. For the purposes of this rule, "total income" means gross
income under the tax classification in question, less deductions, calculated as
if the B&O tax classification applied on a worldwide basis.
(b)
Place of business
requirement. A taxpayer must maintain places of business within and
without Washington that contribute to the rendition of its services in order to
apportion its income. This "place of business" requirement, however, does not
mean that the taxpayer must maintain a physical location as a place of business
in another taxing jurisdiction in order to apportion its income. If a taxpayer
has activities in a jurisdiction sufficient to create nexus under Washington
standards, then the taxpayer is deemed to have a "place of business" in that
jurisdiction for apportionment purposes. See subsection (2) of this
section.
(c)
Noncost
expenditures. The following is a list of expenditures that are not costs
of doing business within the meaning of
RCW
82.04.460 and are therefore excluded from
both the numerator and the denominator of the apportionment ratio. Expenditures
that are not costs of doing business include expenditures that exchange one
business asset for another; that reflect a revaluation of an asset not consumed
in the course of business; or federal, state, or local taxes measured by gross
or net business income. This list is not exclusive. Costs of an activity
taxable under another BO tax classification are also excluded from the
apportionment ratio. Similarly, the costs of acquiring a business by merger or
otherwise, including the financing costs, are not the costs of doing the
apportioned business activity and must be excluded from the cost apportionment
calculation.
(i) The cost of acquiring assets
that are not depreciated, amortized, or otherwise expensed on the taxpayer's
books and records on the basis of generally accepted accounting principles
(GAAP), or a loss incurred on the sale of such assets. For example,
expenditures for land and investments are excluded from the cost apportionment
formula.
(ii) Taxes (other then
taxes specifically related to items of property such as retail sales or use
taxes and real and personal property taxes).
(iii) Asset revaluations such as stock
impairment or goodwill impairment.
(iv) Costs of doing a business activity
subject to the B&O tax under a classification other than
RCW
82.04.290 or
82.04.2908. For example, if a
taxpayer were subject to manufacturing, wholesaling and service and other
activities B&O tax, the costs associated with a warehouse and a
manufacturing plant (property and employee costs) are excluded from the cost
apportionment formula. But if costs support both the service activity and
either manufacturing or wholesaling (for example, costs associated with
headquarters or joint operating centers), then those costs must be included in
the cost apportionment formula without segregating the service portion of the
costs.
(d)
Specifically assigned costs. Real or tangible personal property
costs, employee costs, and certain payments to third parties are specifically
assigned under (e) through (g) of this subsection.
(e)
Property costs.
(i)
Definitions. Real or
tangible personal property costs are defined to include:
(A) Depreciation as reported on the
taxpayer's books and records according to GAAP, provided that if a taxpayer
does not maintain its books and records in accordance with GAAP, it may use tax
reporting depreciation. A taxpayer may not change its method of calculating
depreciation costs without approval of the department;
(B) Maintenance and warranty costs for
specific property;
(C) Insurance
costs for specific property;
(D)
Utility costs for specific property;
(E) Lease or rental payments for specific
property;
(F) Interest costs for
specific property; and
(G) Taxes
for specific property.
(ii)
Assignment of costs. Real
or tangible personal property costs are assigned to the location of the
property. Property in transit between locations of the taxpayer to which it
belongs is assigned to the destination state. Property in transit between a
buyer and seller and included by a taxpayer in the denominator of the
apportionment ratio in accordance with its regular accounting practices is
assigned to the destination state. Mobile or movable property located both
within and without Washington during the measuring period is assigned in
proportion to the total time within Washington during the measuring period. An
automobile assigned to a traveling employee is assigned to the state to which
the employee's compensation is assigned below or to the state in which the
automobile is licensed. Where a business contracts for the maintenance,
warranty services, or insurance of multiple properties, the relative rental or
depreciation expense may be used to assign these costs.
(f)
Employee costs.
(i)
Definitions. For the
purposes of this subsection:
(A)
"Compensation" means wages, salaries, commissions, and any other form of
remuneration paid to or accrued to employees for personal services. Employer
contributions under a qualified cash plan, deferred arrangement plan, and
nonqualified deferred compensation plan are considered compensation. Stock
based compensation is considered compensation under this rule to the extent
included in gross income for federal income tax purposes.
(B) "Employee" means any individual who,
under the usual common-law rules applicable in determining the
employer-employee relationship, has the status of an employee, but does not
include corporate officers.
(ii)
Allocation method. Employee
costs include all compensation paid to employees and all employment based taxes
and other fees, for example, amounts paid related to unemployment compensation,
labor and industries insurance premiums, and the employer's share of Social
Security and medicare taxes. An employee's compensation is assigned to
Washington if the taxpayer reports the employee's wages to Washington for
unemployment compensation purposes. Employee wages reported for federal income
tax purposes may be used to assign the remaining compensation costs.
(g)
Representative
third-party costs.(i)
Definitions. For the purposes of this section:
"Representative third party" includes an agent, independent
contractor, or other representative of the taxpayer who provides services on
behalf of the taxpayer directly to customers. The term includes leased
employees who meet the standards under (g) of this subsection.
(ii)
Allocation
method. Payments to a representative third party are assigned to the
third party's place of performance. For example, if a business subcontracts
with a representative third party who provides services on behalf of the
taxpayer from a California location, the cost of compensating the
representative third party is assigned to California. This is true even if the
third party provides services to Washington customers. Conversely, the cost of
compensating a representative third party providing services to California
customers from a Washington location is assigned to Washington.
(iii)
Examples.
(A) X, a Washington business, hires Taxpayer
to design and write custom software for a document management system. Taxpayer
subcontracts with Z, whose employees determine the needs of X, negotiate a
statement of work, write the custom software, and install the software. Z's
employees perform all of these services on-site at the X business location.
Taxpayer's payments to Z are representative third-party costs and specifically
assigned to Washington.
(B)
Taxpayer, a service provider, subcontracts with X, who agrees to maintain a
customer service center where staff will answer telephone inquiries about
Taxpayer's services. X in turn subcontracts with Z, whose employees actually
respond to questions from a phone center located in California. The payments by
taxpayer to X are representative third-party costs with respect to Taxpayer
because X is responsible for providing the staff of the service center. The
payments to X are specifically assigned to California.
(C) Taxpayer sells various manufacturers'
products at wholesale on a commission basis. Taxpayer subcontracts with X, who
agrees to act as Taxpayer's sales representative on the West Coast. Taxpayer
has various other sales representatives working on as independent contractors,
who are assigned territories, but may make sales from an office or through
in-person visits, or a combination of both. Taxpayer does not maintain records
sufficient to show the representatives' places of performance. Taxpayer may use
sales records and the standards under (h) of this subsection to assign
commissions by each subcontractor.
(h)
Costs assigned by formula.
(i) Costs not specifically assigned under (e)
through (g) of this subsection and not excluded from consideration by (c) of
this subsection are assigned to Washington by formula. These costs are
multiplied by the ratio of sales in Washington over sales everywhere. For
example, if a business has one thousand dollars in other unassigned costs and
sales of ten thousand dollars in each of the four states in which it has nexus
under Washington standards (including Washington), twenty-five percent
($10,000/$40,000), or two hundred fifty dollars of the other costs are assigned
to Washington.
(ii) Sales are
assigned to where the customer receives the benefit of the service. If the
location where the services are received is not readily determinable, the
services are attributed to the location of the office of the customer from
which the services were ordered in the regular course of the customer's trade
or business. If the ordering office cannot be determined, the services are
attributed to the office of the customer to which the services are
billed.
(iii) If under the method
described above a sale is attributed to a location where the taxpayer does not
have nexus under Washington standards, the sale must be excluded from both the
numerator and denominator of the sales ratio. For the purposes of this
calculation only, the department will presume a taxpayer has nexus anywhere the
taxpayer has employees or real property, or where the taxpayer reports business
and occupation, franchise, value added, income or other business activity taxes
in the state. The burden is on the taxpayer to demonstrate nexus exists in
other states.
(i)
Alternative methods.(i) A
taxpayer may report with, or the department may require, the use of one of the
alternative methods of cost apportionment described below:
(A) The exclusion of one or more categories
of costs from consideration;
(B)
The specific allocation of one or more categories of costs which will fairly
represent the taxpayer's business activity in Washington; or
(C) The employment of another method of cost
apportionment that will effectuate an equitable apportionment of the taxpayer's
gross income.
(ii) A
taxpayer reporting under (i) of this subsection must notify the department at
the time of filing that it is using an alternative method and provide a brief
description of the method employed. If a taxpayer reports using an alternate
method, the same method must be used for all subsequent tax reporting periods
unless it is demonstrated another method is necessary under the standard in
(i)(v) of this subsection.
(iii) If
on review of a taxpayer's return(s) the department determines another method is
necessary to fairly represent the extent of a taxpayer's business activity in
Washington, the department may impose the method for all returns within the
statute of limitations. Statutory interest applies to both balances due and
refund or credit claims arising under this section. Further, applicable
penalties will be imposed on balances due arising under this section. However,
if the taxpayer reported using the cost apportionment method in (a) through (h)
of this subsection and separate accounting is unavailable, the department may
impose the alternate method for future periods only.
(iv) A taxpayer may request that the
department approve an alternative method of cost apportionment by submitting a
request for prior ruling pursuant to WAC
458-20-100. Such letter ruling
may be subject to audit verification before issuance.
(v) The taxpayer or the department, in
requesting or imposing an alternate method, must demonstrate by clear and
convincing evidence that the cost apportionment method in (a) through (h) of
this subsection does not fairly represent the extent of the taxpayer's business
activity in Washington.
Statutory Authority:
RCW
82.32.300 and
82.01.060(2).
10-22-089, § 458-20-194, filed 11/1/10, effective 12/2/10; 05-24-054,
§ 458-20-194, filed 12/1/05, effective 1/1/06. Statutory Authority:
RCW
82.32.300. 83-08-026 (Order ET 83-1), §
458-20-194, filed 3/30/83; Order ET 70-3, § 458-20-194 (Rule 194), filed
5/29/70, effective 7/1/70.