The Washington Court of Appeals held that a Washington-based consulting firm was not entitled to a refund of Washington Business and Occupation (B&O) Tax because the taxpayer failed to show that the benefit of services provided to its client were received outside of Washington.
The taxpayer provided technology information services to a number of software companies, such as “translating client websites into foreign languages, creating and updating customer-facing websites, providing support for product launches in foreign markets, merchandising support, and website management.” During the tax years at issue, over 85% of the taxpayer’s gross income was attributable to services performed for one client. The taxpayer and its client entered into a contract outlining their business relationship; however, certain assignments were specified in statements of work. For taxable years beginning January 2011 through March 2015, the taxpayer remitted nearly $455,000 in B&O Tax. The taxpayer sought a nearly $404,000 refund, arguing that for the taxable years at issue, the Department failed to apportion its gross income properly. The taxpayer based its refund claim on the “reasonable proportional method” of attributing receipts under Washington Admin. Code 458-20-19402, which treats Washington’s single sales factor apportionment statute, Wash. Rev. Code Ann. § 82.04.462. On this basis, the taxpayer apportioned its revenue based on internet usage data.
The Audit Division for the Washington Department of Revenue requested and obtained further information on the statements of work, concluding that the taxpayer’s services rendered to its client related to “localization services” provided to a specific team located in Washington. The auditors determined that the taxpayer’s client received the benefit of such localization services in Washington, and, as a result, the services rendered were subject to tax in Washington. The taxpayer sought review at the Washington Board of Tax Appeals, which deemed most of the localization services taxable in Washington. The taxpayer sought review at the Washington Court of Appeals.
On Appeal, the taxpayer argued that its client did not receive the benefit of the services provided in Washington, but, instead, received such benefit in every country where the client’s products were marketed, and, therefore, its numerator for Washington purposes should have been zero. The taxpayer further asserted that the Department incorrectly calculated its sales factor denominator, arguing that it had no throw out income. Note, for state corporate tax purposes, certain states may opt to “throw-out” or remove income from the sales factor denominator when such income is not subject to tax in another state, which, in effect, operates to increase a taxpayer’s apportionment percentage as a whole.
Ultimately, the Washington Court of Appeals affirmed the Board of Tax Appeal’s decision, holding that 1) the taxpayer failed to show where its client received the benefit of its services, and, in the alternative, if the client received the benefit of the taxpayer’s services in more than one state, the taxpayer also failed to show where the client primarily received the benefit of the taxpayer’s services; and 2) the taxpayer failed to demonstrate that service receipts included in its denominator were subject to tax in another state.