Washington Administrative Code
Title 458 - Revenue, Department of
Chapter 458-20 - Excise tax rules
Section 458-20-19404A - Financial institutions Income apportionment
Universal Citation: WA Admin Code 458-20-19404A
Current through Register Vol. 24-06, March 15, 2024
(1) Introduction.
(a) Effective June 1, 2010, Washington
changed its method of apportioning certain gross income from engaging in
business as a financial institution. This rule addresses how such gross income
must be apportioned when the financial institution engages in business both
within and outside the state and applies to the period June 1, 2010, through
December 31, 2015, only. See WAC
458-20-19404 Financial
institutions Income apportionment for the proper apportionment methodology for
periods beginning January 1, 2016.
(b) Taxpayers may also find helpful
information in the following rules:
(i) WAC
458-20-19401 Minimum nexus
thresholds for apportionable activities. This rule describes minimum nexus
standards that are effective after May 31, 2010.
(ii) WAC
458-20-19402 Single factor
receipts apportionment Generally. This rule describes the general application
of single factor receipts apportionment that is effective after May 31,
2010.
(iii) WAC
458-20-19403 Single factor
receipts apportionment Royalties. This rule 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
458-20-194 Doing business inside
and outside the state. This rule describes separate accounting and cost
apportionment. It applies only to the periods January 1, 2006, through May 31,
2010.
(v) WAC
458-20-14601 Financial
institutions Income apportionment. This rule describes the apportionment of
income for financial institutions for periods prior to June 1, 2010.
(c) Financial institutions engaged
in making interstate sales of tangible personal property should also refer to
WAC 458-20-193 Inbound and outbound
interstate sales of tangible personal property.
(2) Apportionment and allocation.
(a) Except as otherwise
specifically provided, a financial institution taxable under
RCW
82.04.290 and taxable in another state must
attribute and apportion its service and other activities income as provided in
this rule. Any other apportionable income must be apportioned pursuant to WAC
458-20-19402 Single factor
receipts apportionment Generally or WAC
458-20-19403 Single factor
receipts apportionment Royalties. "Apportionable income" means gross income of
the business generated from engaging in apportionable activities as defined in
WAC 458-20-19401 Minimum nexus
thresholds for apportionable activities, including income received from
apportionable activities performed outside this state if the income would be
taxable under chapter 82.04 RCW if received from activities in this state, less
any deductions allowable under chapter 82.04 RCW. All gross income that is not
includable from apportionable activities must be allocated pursuant to chapter
82.04 RCW. A financial institution organized under the laws of a foreign
country, the Commonwealth of Puerto Rico, or a territory or possession of the
United States, except such institutions that are exempt under
RCW
82.04.315, whose effectively connected income
(as defined under the federal Internal Revenue Code) is taxable both in this
state and another state, other than the state in which it is organized, must
allocate and apportion its gross income as provided in this rule.
(b) All apportionable income shall be
apportioned to this state by multiplying such income by the apportionment
percentage. The apportionment percentage is determined by the taxpayer's
receipts factor (as described in subsection (4) of this rule).
(c) The receipts factor 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. Generally,
financial institutions are required to file returns on a monthly basis. To
enable financial institutions to more easily comply with this rule, financial
institutions may file returns using the receipts factor calculated based on the
most recent calendar year for which information is available. If a financial
institution does not calculate its receipts factor based on the previous
calendar year for which information is available, it must use the current year
information to make that calculation. In either event, a reconciliation must be
filed for each year not later than October 31st of the following year. The
reconciliation must be filed on a form approved by the department. In the case
of consolidations, mergers, or divestitures, a taxpayer must make the
appropriate adjustments to the factors to reflect its changed
operations.
(d) Interest and
penalties on reconciliations under (c) of this subsection apply as follows:
(i) In either event (refund or additional
taxes due), interest will apply in a manner consistent with tax
assessments.
(ii) Penalties as
provided in
RCW
82.32.090 will apply to any such additional
tax due only if the reconciliation for a tax year is not completed and
additional tax is not paid by October 31st of the following year.
(e) If the allocation and
apportionment provisions of this rule do not fairly represent the extent of its
business activity in this state, the taxpayer may petition for, or the
department may require, in respect to all or any part of the taxpayer's
business activity:
(i) Separate
accounting;
(ii) The inclusion of
one or more additional factors which will fairly represent the taxpayer's
business activity in this state; or
(iii) The employment of any other method to
effectuate an equitable allocation and apportionment of the taxpayer's
receipts.
(3) Definitions. The following definitions apply throughout this rule unless the context clearly requires otherwise:
(a)
"Billing address" means the
location indicated in the books and records of the taxpayer on the first day of
the taxable period (or on such later date in the taxable period when the
customer relationship began) as the address where any notice, statement and/or
bill relating to a customer's account is mailed.
(b)
"Borrower or credit card holder
located in this state" means:
(i) A
borrower, other than a credit card holder, that is engaged in a trade or
business and maintains its commercial domicile in this state; or
(ii) A borrower that is not engaged in a
trade or business or a credit card holder, whose billing address is in this
state.
(c)
"Commercial domicile" means:
(i)
The headquarters of the trade or business, that is, the place from which the
trade or business is principally managed and directed; or
(ii) If a taxpayer is organized under the
laws of a foreign country, or of the Commonwealth of Puerto Rico, or any
territory or possession of the United States, such taxpayer's commercial
domicile is deemed for the purposes of this rule to be the state of the United
States or the District of Columbia from which such taxpayer's trade or business
in the United States is principally managed and directed. It is presumed,
subject to rebuttal by a preponderance of the evidence, that the location from
which the taxpayer's trade or business is principally managed and directed is
the state of the United States or the District of Columbia to which the
greatest number of employees are regularly connected or out of which they are
working, irrespective of where the services of such employees are performed, as
of the last day of the taxable period.
(d)
"Credit card" means credit,
travel or entertainment card.
(e)
"Credit card issuer's reimbursement fee" means the fee a taxpayer
receives from a merchant's bank because one of the persons to whom the taxpayer
has issued a credit card has charged merchandise or services to the credit
card.
(f)
"Department"
means the department of revenue.
(g)
"Employee" means, with
respect to a particular taxpayer, any individual who, under the usual
common-law rules applicable in determining the employer-employee relationship,
has the status of an employee of that taxpayer.
(h)
"Financial institution"
means:
(i) Any corporation or other business
entity chartered under Title 30, 31, 32, or 33 RCW, or registered under the
Federal Bank Holding Company Act of 1956, as amended, or registered as a
savings and loan holding company under the Federal National Housing Act, as
amended;
(ii) A national bank
organized and existing as a national bank association pursuant to the
provisions of the National Bank Act, 12 U.S.C. Sec. 21 et seq.;
(iii) A savings association or federal
savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. Sec.
1813 (b)(1);
(iv) Any bank or
thrift institution incorporated or organized under the laws of any
state;
(v) Any corporation
organized under the provisions of 12 U.S.C. Secs. 611 through 631;
(vi) Any agency or branch of a foreign
depository as defined in 12 U.S.C. Sec. 3101 that is not exempt under
RCW
82.04.315;
(vii) Any credit union, other than a state or
federal credit union exempt under state or federal law;
(viii) A production credit association
organized under the Federal Farm Credit Act of 1933, all of whose stock held by
the Federal Production Credit Corporation has been retired.
(i)
"Gross income of the
business," "gross income," or "income":
(i) Has the same meaning as in
RCW
82.04.080 and means the value proceeding or
accruing by reason of the transaction of the business engaged in and includes
compensation for the rendition of services, gains realized from trading in
stocks, bonds, or other evidences of indebtedness, interest, discount, rents,
royalties, fees, commissions, dividends, and other emoluments however
designated, all without any deduction on account of the cost of tangible
property sold, the cost of materials used, labor costs, interest, discount,
delivery costs, taxes, or any other expense whatsoever paid or accrued and
without any deduction on account of losses; and
(ii) Does not include amounts received from
an affiliated person if those amounts are required to be determined at arm's
length per sections 23A or 23B of the Federal Reserve Act. For the purpose of
this subsection (3)(i), affiliated means the affiliated person and the
financial institution are under common control. Control means the possession
(directly or indirectly), of more than fifty percent of power to direct or
cause the direction of the management and policies of each entity. Control may
be through voting shares, contract, or otherwise.
(iii) Financial institutions must determine
their gross income of the business from gains realized from trading in stocks,
bonds, and other evidences of indebtedness on a net annualized basis.
(j)
"Loan" means any
extension of credit resulting from direct negotiations between the taxpayer and
its customer, and/or the purchase, in whole or in part, of such extension of
credit from another. Loan includes participations, syndications, and leases
treated as loans for federal income tax purposes. Loan does not include:
Futures or forward contracts; options; notional principal contracts such as
swaps; credit card receivables, including purchased credit card relationships;
noninterest bearing balances due from depository institutions; cash items in
the process of collection; federal funds sold; securities purchased under
agreements to resell; assets held in a trading account; securities; interests
in a real estate mortgage investment conduit (REMIC), or other mortgage-backed
or asset-backed security; and other similar items.
(k)
"Loan secured by real
property" means that fifty percent or more of the aggregate value of the
collateral used to secure a loan or other obligation was real property, when
valued at fair market value as of the time the original loan or obligation was
incurred.
(l)
"Merchant
discount" means the fee (or negotiated discount) charged to a merchant
by the taxpayer for the privilege of participating in a program whereby a
credit card is accepted in payment for merchandise or services sold to the card
holder.
(m)
"Participation" means an extension of credit in which an undivided
ownership interest is held on a pro rata basis in a single
loan or pool of loans and related collateral. In a loan participation, the
credit originator initially makes the loan and then subsequently resells all or
a portion of it to other lenders. The participation may or may not be known to
the borrower.
(n)
"Person" has the meaning given in
RCW
82.04.030.
(o)
"Regular place of business"
means an office at which the taxpayer carries on its business in a regular and
systematic manner and which is continuously maintained, occupied and used by
employees of the taxpayer.
(p)
"Service and other activities income" means the gross income of
the business taxable under
RCW
82.04.290, including income received from
activities outside this state if the income would be taxable under
RCW
82.04.290 if received from activities in this
state, less the exemptions and deductions allowable under chapter 82.04
RCW.
(q)
"State" means
a state of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, any territory or possession of the United States, or any foreign
country or political subdivision of a foreign country.
(r)
"Syndication" means an
extension of credit in which two or more persons fund and each person is at
risk only up to a specified percentage of the total extension of credit or up
to a specified dollar amount.
(s)
"Taxable in another state" means either:
(i) The taxpayer is subject to business
activities tax by another state on its service and other activities income;
or
(ii) The taxpayer is not subject
to a business activities tax by another state on its service and other
activities income, but that state has jurisdiction to subject the taxpayer to a
business activities tax on such income under the substantial nexus standards
explained in WAC
458-20-19401. For purposes of
this subsection (3)(s), "business activities tax" means a tax measured by the
amount of, or economic results of, business activity conducted in a state. The
term includes taxes measured in whole or in part on net income or gross income
or receipts. Business activities tax does not include a sales tax, use tax, or
a similar transaction tax, imposed on the sale or acquisition of goods or
services, whether or not denominated a gross receipts tax or a tax imposed on
the privilege of doing business.
(t)
"Taxable period" means the
calendar year during which tax liability is incurred.
(4) Receipts factor.
(a) General. The receipts factor is a
fraction, the numerator of which is the apportionable income of the taxpayer in
this state during the taxable period and the denominator of which is the
apportionable income of the taxpayer inside and outside this state during the
taxable period. The method of calculating receipts for purposes of the
denominator is the same as the method used in determining receipts for purposes
of the numerator.
(b) Interest from
loans secured by real property.
(i) The
numerator of the receipts factor includes interest and fees or penalties in the
nature of interest from loans secured by real property if the property is
located within this state. If the property is located both within this state
and one or more other states, the income described in this subsection (4)(b)(i)
is included in the numerator of the receipts factor if more than fifty percent
of the fair market value of the real property is located within this state. If
more than fifty percent of the fair market value of the real property is not
located within any one state, then the income described in this subsection
(4)(b)(i) must be included in the numerator of the receipts factor if the
borrower is located in this state.
(ii) The determination of whether the real
property securing a loan is located within this state must be made as of the
time the original agreement was made and any and all subsequent substitutions
of collateral must be disregarded.
(c) Interest from loans not secured by real
property. The numerator of the receipts factor includes interest and fees or
penalties in the nature of interest from loans not secured by real property if
the borrower is located in this state.
(d) Net gains from the sale of loans. The
numerator of the receipts factor includes net gains from the sale of loans. Net
gains from the sale of loans includes income recorded under the coupon
stripping rules of Section 1286 of the federal Internal Revenue Code.
(i) The amount of net gains (but not less
than zero) from the sale of loans secured by real property included in the
numerator is determined by multiplying such net gains by a fraction, the
numerator of which is the amount included in the numerator of the receipts
factor pursuant to (b) of this subsection and the denominator of which is the
total amount of interest and fees or penalties in the nature of interest from
loans secured by real property.
(ii) The amount of net gains (but not less
than zero) from the sale of loans not secured by real property included in the
numerator is determined by multiplying such net gains by a fraction, the
numerator of which is the amount included in the numerator of the receipts
factor pursuant to (c) of this subsection and the denominator of which is the
total amount of interest and fees or penalties in the nature of interest from
loans not secured by real property.
(e) Receipts from credit card receivables.
The numerator of the receipts factor includes interest and fees or penalties in
the nature of interest from credit card receivables and income from fees
charged to card holders, such as annual fees, if the billing address of the
card holder is in this state.
(f)
Net gains from the sale of credit card receivables. The numerator of the
receipts factor includes net gains (but not less than zero) from the sale of
credit card receivables multiplied by a fraction, the numerator of which is the
amount included in the numerator of the receipts factor pursuant to (e) of this
subsection and the denominator of which is the taxpayer's total amount of
interest and fees or penalties in the nature of interest from credit card
receivables and fees charged to card holders.
(g) Credit card issuer's reimbursement fees.
The numerator of the receipts factor includes all credit card issuer's
reimbursement fees multiplied by a fraction, the numerator of which is the
amount included in the numerator of the receipts factor pursuant to (e) of this
subsection and the denominator of which is the taxpayer's total amount of
interest and fees or penalties in the nature of interest from credit card
receivables and fees charged to card holders.
(h) Receipts from merchant discount. The
numerator of the receipts factor includes receipts from merchant discount if
the commercial domicile of the merchant is in this state. Such receipts must be
computed net of any card holder charge backs, but must not be reduced by any
interchange transaction fees or by any issuer's reimbursement fees paid to
another for charges made by its card holders.
(i) Loan servicing fees.
(i)
(A) The
numerator of the receipts factor includes loan servicing fees derived from
loans secured by real property multiplied by a fraction, the numerator of which
is the amount included in the numerator of the receipts factor under (b) of
this subsection and the denominator of which is the total amount of interest
and fees or penalties in the nature of interest from loans secured by real
property.
(B) The numerator of the
receipts factor includes loan servicing fees derived from loans not secured by
real property multiplied by a fraction, the numerator of which is the amount
included in the numerator of the receipts factor under (c) of this subsection
and the denominator of which is the total amount of interest and fees or
penalties in the nature of interest from loans not secured by real property.
(ii) If the taxpayer
receives loan servicing fees for servicing either the secured or the unsecured
loans of another, the numerator of the receipts factor includes such fees if
the borrower is located in this state.
(j) Receipts from services. The numerator of
the receipts factor includes receipts from services not otherwise apportioned
under this subsection (4) if the service is performed in this state. If the
service is performed both inside and outside this state, the numerator of the
receipts factor includes receipts from services not otherwise apportioned under
this subsection, if a greater proportion of the activity producing the receipts
is performed in this state based on cost of performance.
(k) Receipts from investment assets and
activities and trading assets and activities.
(i) Interest, dividends, net gains (but not
less than zero) and other income from investment assets and activities and from
trading assets and activities are included in the receipts factor. Investment
assets and activities and trading assets and activities include, but are not
limited to: Investment securities; trading account assets; federal funds;
securities purchased and sold under agreements to resell or repurchase;
options; futures contracts; forward contracts; notional principal contracts
such as swaps; equities; and foreign currency transactions. With respect to the
investment and trading assets and activities described in (k)(i)(A) and (B) of
this subsection, the receipts factor includes the following:
(A) The receipts factor includes the amount
by which interest from federal funds sold and securities purchased under resale
agreements exceeds interest expense on federal funds purchased and securities
sold under repurchase agreements.
(B) The receipts factor includes the amount
by which interest, dividends, gains and other receipts from trading assets and
activities including, but not limited to, assets and activities in the matched
book, in the arbitrage book, and foreign currency transactions, exceed amounts
paid in lieu of interest, amounts paid in lieu of dividends, and losses from
such assets and activities.
(ii) The numerator of the receipts factor
includes interest, dividends, net gains (but not less than zero) and other
receipts from investment assets and activities and from trading assets and
activities described in (k)(i) of this subsection that are attributable to this
state.
(A) The amount of interest, dividends,
net gains (but not less than zero) and other income from investment assets and
activities in the investment account to be attributed to this state and
included in the numerator is determined by multiplying all such income from
such assets and activities by a fraction, the numerator of which is the average
value of such assets which are properly assigned to a regular place of business
of the taxpayer within this state and the denominator of which is the average
value of all such assets.
(B) The
amount of interest from federal funds sold and purchased and from securities
purchased under resale agreements and securities sold under repurchase
agreements attributable to this state and included in the numerator is
determined by multiplying the amount described in (k)(i)(A) of this subsection
from such funds and such securities by a fraction, the numerator of which is
the average value of federal funds sold and securities purchased under
agreements to resell which are properly assigned to a regular place of business
of the taxpayer within this state and the denominator of which is the average
value of all such funds and such securities.
(C) The amount of interest, dividends, gains
and other income from trading assets and activities including, but not limited
to, assets and activities in the matched book, in the arbitrage book and
foreign currency transactions (but excluding amounts described in (k)(i)(A) and
(B) of this subsection), attributable to this state and included in the
numerator is determined by multiplying the amount described in (k)(i)(B) of
this subsection by a fraction, the numerator of which is the average value of
such trading assets which are properly assigned to a regular place of business
of the taxpayer within this state and the denominator of which is the average
value of all such assets.
(D) For
purposes of (k)(ii) of this subsection, the average value of trading assets
owned by the taxpayer is the original cost or other basis of such property for
federal income tax purposes without regard to depletion, depreciation, or
amortization.
(iii) In
lieu of using the method set forth in (k)(ii) of this subsection, the taxpayer
may elect, or the department may require in order to fairly represent the
business activity of the taxpayer in this state, the use of the method set
forth in this paragraph.
(A) The amount of
interest, dividends, net gains (but not less than zero) and other income from
investment assets and activities in the investment account to be attributed to
this state and included in the numerator is determined by multiplying all such
income from such assets and activities by a fraction, the numerator of which is
the gross receipts from such assets and activities which are properly assigned
to a regular place of business of the taxpayer within this state and the
denominator of which is the gross income from all such assets and
activities.
(B) The amount of
interest from federal funds sold and purchased and from securities purchased
under resale agreements and securities sold under repurchase agreements
attributable to this state and included in the numerator is determined by
multiplying the amount described in (k)(i)(A) of this subsection from such
funds and such securities by a fraction, the numerator of which is the gross
income from such funds and such securities which are properly assigned to a
regular place of business of the taxpayer within this state and the denominator
of which is the gross income from all such funds and such securities.
(C) The amount of interest, dividends, gains
and other receipts from trading assets and activities including, but not
limited to, assets and activities in the matched book, in the arbitrage book
and foreign currency transactions (but excluding amounts described in
(k)(ii)(A) or (B) of this subsection), attributable to this state and included
in the numerator is determined by multiplying the amount described in (k)(i)(B)
of this subsection by a fraction, the numerator of which is the gross income
from such trading assets and activities which are properly assigned to a
regular place of business of the taxpayer within this state and the denominator
of which is the gross income from all such assets and activities.
(iv) If the taxpayer elects or is
required by the department to use the method set forth in (k)(iii) of this
subsection, it must use this method on all subsequent returns unless the
taxpayer receives prior permission from the department to use, or the
department requires a different method.
(v) The taxpayer has the burden of proving
that an investment asset or activity or trading asset or activity was properly
assigned to a regular place of business outside of this state by demonstrating
that the day-to-day decisions regarding the asset or activity occurred at a
regular place of business outside this state. If the day-to-day decisions
regarding an investment asset or activity or trading asset or activity occur at
more than one regular place of business and one such regular place of business
is in this state and one such regular place of business is outside this state,
such asset or activity is considered to be located at the regular place of
business of the taxpayer where the investment or trading policies or guidelines
with respect to the asset or activity are established. Such policies and
guidelines are presumed, subject to rebuttal by preponderance of the evidence,
to be established at the commercial domicile of the taxpayer.
(l) Attribution of certain
receipts to commercial domicile. All receipts which would be assigned under
this rule to a state in which the taxpayer is not taxable are included in the
numerator of the receipts factor, if the taxpayer's commercial domicile is in
this state.
(5) Effective date. This rule applies to gross income that is reportable with respect to tax liability beginning on and after June 1, 2010, and before January 1, 2016.
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