The Washington Department of Revenue determined that a taxpayer did not qualify for the B&O tax deduction for payments made to an affiliate for the provision of “paymaster services” under R.C.W. § 82.04.43393. The paymaster services deduction did not apply to the taxpayer, which provided payroll services to affiliate restaurant employers, because the taxpayer had a “functional employment relationship” with the affiliates’ employees. Washington allows taxpayers that are “qualified employers of record” to deduct amounts received for the provision of paymaster services to cover the costs of a “qualified employee,” i.e., the employee of an affiliate. To qualify for the deduction, the taxpayer must limit its relationship with its affiliate’s employees and may only provide payroll services on behalf of the affiliate. The deduction does not apply if the taxpayer has a functional employment relationship with such affiliate’s employees, including control over the employee’s work schedule, salary, discipline, hiring and termination.

The Department found that the taxpayer had control over certain decisions relating to its affiliate’s employees, such as the provision of health insurance plan options and qualifications for a full-time employee because the taxpayer provided its affiliate’s employees with a handbook that outlined policies and conditions of employment. Further, the taxpayer did not have any documentation or agreements with its affiliates that stated the relationship between the taxpayer, its affiliates and its affiliates’ employees. The taxpayer has the burden of showing that they qualify for a tax deduction and was required to keep records to demonstrate that the taxpayer had no functional employment relationship with the employees. Because the taxpayer did not meet this burden, the Department determined that it did not qualify for the deduction for paymaster services.


Washington Tax Det. No. 18-0184, 38 WTD 242 (2019).