The Washington Administrative Review and Hearings Division (the Division) of the Department of Revenue held that payments between affiliated entities could not be deducted from “gross income” subject to the business and occupation tax (B&O Tax). Each of the taxpayers, three affiliated entities falling under the same parent company umbrella with each providing investment management services (the Taxpayers), sought to offset revenue received pursuant to customer contracts by deducting payments made to affiliated entities that performed some of the services provided under the contract. The Department audited the Taxpayers and issued an assessment, disallowing any gross income deduction attributable to payments made to affiliates in exchange for investment management services. In response, the Taxpayers filed a petition for review, asking the Division to determine whether monies transferred between affiliated—but separate—legal entities constitute gross income subject to the B&O Tax.

The Division, citing RCW 82.04.220 and RCW 82.04.290, stated that the B&O Tax is a gross receipts tax that includes gross proceeds from sales without any deduction for expenses. The Division found that there is no specific authority in Washington that allows a transfer pricing deduction.

The Division further determined that the Taxpayers provided no evidence to show that an agency relationship was in place, which could have qualified the payments as advances or reimbursements that are excludable from the gross income computation. Instead, the Division held that the provisions of services included two transactions: first, sales between a Taxpayer to its customer, and second, between such Taxpayer and its affiliate. Thus, the Division ultimately upheld the Department’s assessment.

Det. No. 19-0201, 40 WTD 242 (2021).