As mentioned in earlier posts, Washington has enacted economic nexus standards and single sales factor apportionment for its Business and Occupation Tax (B&O Tax) beginning June 1, 2010.
Economic Nexus Standard
Under the new standard, a nonresident individual or business is deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state
Single Sales Factor Apportionment
The numerator of the receipts factor is the total gross income of the business of the taxpayer attributable to Washington during the calendar year from engaging in an apportionable activity.
The denominator of the receipts factor is the total gross income of the business of the taxpayer from engaging in an apportionable activity everywhere in the world during the tax year, less amounts that are attributed to states where the taxpayer is not taxable and at least some of the activity is performed in Washington. This last line is known as a throwout rule" and could cause some confusion or conflict.
Example #1 - Facts: XYZ Corp. is a Washington business, has no property or payroll outside of Washington, and performs all of its services inside this state. XYZ Corp. has gross income from apportionable activities as follows: Washington $500,000; Idaho $200,000; Oregon $100,000; and California $300,000. XYZ Corp. is subject to Oregon corporate income tax, but does not owe any California or Idaho business activities taxes.
Example #1 - Conclusion: The $200,000 that would be attributed to Idaho is excluded from the denominator because XYZ Corp. performs the services in Washington, and it is not subject to actual Idaho business activities taxes and does not have substantial nexus with Idaho under Washington thresholds. Although California does not impose a business activities tax on XYZ Corp., XYZ Corp. does have substantial nexus with California using Washington thresholds (more than $250,000 in receipts). Therefore, the California attributed income is not excluded from the denominator. The Oregon receipts remain in the denominator because XYZ Corp. is subject to Oregon corporate income taxes. The receipts factor is 500,000/900,000 or 55.56%.
Example #2 - The same facts as Example #1, except all of XYZ’s property and payroll are located in Oregon, and XYZ Corp. performs no activities in Washington related to the $200,000 attributed to Idaho. In this situation, the $200,000 is not excluded from the denominator. The receipts factor is 500,000/1,100,000 or 45.45%.
Sales of Services - Benefit Derived
Under the single sales factor, sales of services are NOW apportioned based on where the customer receives the benefit. The location of the benefit of the service or services is determined on an activity by activity basis. A taxpayer receives the benefit of a service in Washington when:
- The service relates to real property that is located in Washington;
- An apportionable service relates to tangible personal property that is located in Washington at the time the service is received; or
- The service does not relate to real or tangible personal property, and:
- The service is provided to a person not engaged in business who is physically present in Washington at the time the service is received; or
- The service is provided to a person engaged in business in Washington, and the service relates to the person’s business activities in Washington.
Example #1: Director serves on the board of directors of DEF, Inc. DEF, Inc. is commercially domiciled in State Z. DEF, Inc. is Director’s customer. DEF is engaged in business in State Z, and the director’s services relate to the management of DEF, Inc. Therefore, DEF, Inc. receives the benefit of Director’s services in State Z.
Example #2: ABC is headquartered outside of Washington and provides retail services to customers in Washington, Oregon, and Idaho. When those customers fail to pay ABC for its services, ABC contracts with Debt Collector located outside of Washington to collect the debt. ABC pays Debt Collector a percentage of the amount collected. ABC is engaged in business in Washington and the activities of Debt Collector relate to that business, therefore the benefit of the service is received by ABC in Washington when Debt Collector obtains payment from debtors located in Washington.
If the customer received the benefit of the service in more than one state, gross income of the business must be attributed to the state in which the benefit of the service was primarily received.
The bottom line result of these changes is that most out of state taxpayers will pay more Washington B&O tax.
Out of state companies and board of directors will obtain economic nexus very easily; thus, creating new B&O tax liabilities.
Service companies who perform services outside Washington, but have a large number of Washington customers will now be apportioning those sales to Washington; thus, increasing the amount of Washington tax they pay.
Please contact me at email@example.com for assistance in determining how these changes will affect your company and if any planning can be done to minimize the impact.