WAC 109

Taxability of Investment Income Cancelled 06/30/02

Tax on selected business services, financial businesses, or other business or service activities.

Deductions--Investments--Dividends from subsidiary corporations.

Definitions.

Finance charges, carrying charges, interest, penalties. Effective 1/1/92

FINANCE RESERVE CREDITS AND GROSS INCOME OF THE BUSINESS Cancelled effective 02/28/07 This document explains that amounts a vendor receives from a financial institution for arranging financing in connection with the vendor’s sales is subject to service B&O tax. This issue is adequately addressed in Det. No. 90-205, 11 WTD 55 (1990).

Cancelled 6/30/2002 - ETA 165 explains the Department’s position on interest received for loans made to affiliated companies when the business making the loans has procured these funds from a third-party lending source. ETA 571 provides guidance on the B&O tax deduction provided by RCW 82.04.4281, which provides a deduction for amounts received from investments or the use of money as such for taxpayers not engaged in banking, loan, security, or other financial business. These documents are being cancelled because the information is out-of-date.

Amounts awarded for costs not included in the contract

Amounts paid under a penalty clause

AMOUNTS AWARDED FOR COSTS NOT INCLUDED IN THE CONTRACT Revised 2/2/09. See ETA 3061.2009

AMOUNTS PAID UNDER A PENALTY CLAUSE Revised 2/2/09. See ETA 3062.2009

Corporate distribution of stock dividends This document does not recognize the specific tax-reporting instructions for financial businesses provided in ETA 571.04.169 (Taxability of investment income). In addition, ETA 019.04.194 (Engaging in business within the state) also explains that a person is not required to hold itself out to the public as a prerequisite to be considered "engaging in business." Cancelled by ETA 2003 -2s 6/30/00.

INVESTMENT INCOME--DEFERRED PAYMENT - ACCOUNTS RECEIVABLE. Cancelled 12/29/2006

Cancelled 7/2/2002 - ETA 165 explains the Department’s position on interest received for loans made to affiliated companies when the business making the loans has procured these funds from a third-party lending source. ETA 571 provides guidance on the B&O tax deduction provided by RCW 82.04.4281, which provides a deduction for amounts received from investments or the use of money as such for taxpayers not engaged in banking, loan, security, or other financial business. These documents are being cancelled because the information is out-of-date.

SERVICE BUSINESS & OCCUPATION TAX -- INTEREST DEDUCTION -- "FINANCIAL BUSINESSES" -- INVESTMENTS -- LOANS TO SUBSIDIARIES -- SURPLUS FUNDS -- ANALYTICAL STEPS FOR DETERMINING DEDUCTION . A large manufacturing company which made loans of surplus funds held not to be "ejusdem generis" with banking, loan, security businesses and was therefore not a "financial business" within the intent of RCW 82.04.4281. It was therefore entitled to a refund of Service business tax paid upon interest received from its various subsidiaries.

B&O TAX -- WHOLESALE SALES CONTRACT -- IMPUTATION OF INTEREST. Under RCW 82.04.270, .290 and implementing regulations, which provide for an excise tax on wholesaling at a rate different from the tax rate on interest, a wholesale installment sales contract which does not provide for interest is not subject to an imputation of interest for excise tax purposes. The fact that the wholesaler computes an interest component of the sale for its internal bookkeeping does not justify the State's imputation of interest for tax purposes. WAC 458-20-109.

B&O TAX -- INTEREST ON LOANS TO RELATED CORPORATIONS. A company which conceded that service B&O tax was due on interest income from regular loans to subsidiaries and affiliates was engaged in a financial business and therefore could not separate for exemption under RCW 82.04.4281 loans made to two Canadian affiliates on a one time basis.

B&O Tax - Income From Vendor's Interest In Real Estate Contract Where Realty is Out Of State - Apportionment. A corporation receiving interest from a vendor's interest in a real estate contract respecting property located outside the state of Washington realized income taxable in Washington because the vendors interest was intangible property taxable at the domicile of the owner which is the state of Washington; and the interest income was not subject to apportionment under RCW 82.04.460.

B&O TAX -- INTEREST -- DEDUCTION -- "INCIDENTAL INVESTMENT OF SURPLUS FUNDS" -- SALE OF INVENTORY WITH EXTENDED TIME FOR PAYMENT. A sale of inventory to an affiliate with an extended time for payment is not an "incidental investment of surplus funds." Sellen cited.

B&O TAX -- INTEREST -- IMPUTED -- ECONOMIC SUBSTANCE -- BURDEN OF PROOF. When a taxpayer records in its books interest required to be imputed by federal tax law, this interest is taxable by the Department (absent an otherwise valid exclusion or deduction) unless the bookkeeping entry has no financial substance - i.e., if it does not reflect a true economic liability/asset. The burden of proof in this regard is on the taxpayer.

B&O TAX -- INTEREST -- DEDUCTION -- "INVESTMENT" V. CUSTOMER CREDIT. When a taxpayer extends credit to an affiliate which buys its product, resulting in the payment of interest, the taxpayer is not making an "investment" eligible for the RCW 82.04.4281 deduction.

B&O TAX -- EXEMPTION -- CASH MANAGEMENT -- NO INTEREST CHARGED. Money management activity by a taxpayer without any nonfinancial business activity may be exempt only if interest is not charged. 4 WTD 341 (1987) cited. Accord: Det. No. 86-309A, 4 WTD 341 (1987). THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- EXEMPTION -- CASH MANAGEMENT - LOAN FROM TAXPAYER. An otherwise exempt cash management activity will not be rendered taxable merely because the managing taxpayer borrows money in its own name in order to maintain a minimum balance in the cash management account, and then repays the loan from the money management account when funds over the minimum balance are available. THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- DEDUCTION -- THIRD PARTY LOANS -- INTEREST -- TAXPAYER ACTING AS CONDUIT. When a taxpayer acts as a conduit in procuring a loan from a third party lending source for the benefit of a related company on a straight pass-through (conduit) basis, and all interest charged and received by the taxpayer from the related company is repaid to the taxpayer's third party lender, tax is not due on such interest income. Howard S. Wright cited. Accord: Det. No. 88-246, 6 WTD 89 (1988), Det. No. 89-88, 7 WTD 185 (1989).

B&O TAX -- EXEMPTION -- CASH MANAGEMENT ACCOUNT -- INVESTMENT OF SURPLUS FUNDS.

(3) the affiliates for whose benefit the fund is managed are not "security, investment, or financial business(es) and (4) interest derived on the fund's behalf is incidental and de minimis when compared with the participating affiliates' gross income. THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- INSTALLMENT SALES -- INTEREST INCOME FROM -- APPORTIONMENT. That portion of income derived from interest on installment sales which is attributable to business activities within the state other than the sale itself is subject to Service B&O tax. Where no credit activities take place at taxpayer's out-of-state locations, credit interest derived from installment sales made to out-of-state buyers or at out-of-state locations need not be apportioned. Accord: Rena-Ware v. State, 77 Wn. 2d 514 (1970) and ETB 270.04.194.

B&O TAX -- REAL ESTATE CONTRACTS -- INTEREST FROM -- ENGAGING IN BUSINESS. A taxpayer whose contract sale of real property is subject to B & O tax on interest derived therefrom does not cut off his liability for same by simply declaring his retirement. Interest payments earned from sales of business property which continue beyond his cessation of conventional business operations are B&O taxable as well.

B&O TAX -- INTEREST INCOME -- EXCHANGE FACILITATOR. Interest earned on funds held to purchase property for an I.R.C. §1031 transaction may be exempt from B&O tax if it meets the requirements in ETB 505. However, if the interest is in lieu of a fee paid to the facilitator, it will be subject to tax as a retail sale. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- INTEREST -- SALE OF LOAN -- INTEREST V. PREMIUM. If a portion of interest is paid over to the seller of a loan by the buyer of the loan -- even though no portion of the loan has been retained by the seller -- that interest is a premium properly taxable to the seller of the loan as a gain. The buyer of the loan is taxable - absent a deduction - on that portion of the interest retained by or paid over to the seller of the loan. Accord: Det. No. 90-141, 9 WTD 280 (1990).

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- INVESTMENT V. LENDING ACTIVITY. "Investments or the use of money as such" encompasses not only investment activity, but also lending activity, or a combination of both lending and investment activities. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST INQUIRY. The first inquiry for determining when a taxpayer's activities constitute a "financial business" involves whether the "primary purpose and objective [of the taxpayer's financial activities] is to earn income through the utilization of significant cash outlays", or whether these activities are merely "incidental" to the taxpayer's other nonfinancial business activities.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- SECOND INQUIRY -- EJUSDEM GENERIS -- SIMILAR OR COMPARABLE. The second inquiry for determining when a taxpayer's activities constitute a "financial business" involves whether, under the rule of financial business" involves whether under the rule of ejusdem generis rule of statutory construction, the taxpayer's activities are similar to, or comparable to, those of "banking, loan, {or} security businesses", even though the taxpayer might not technically fall within one of those three categories.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST PART OF INQUIRY -- PERCENTAGE TEST. Although the Court did not adopt a percentage test in either Sellen or Rainier, the Department of Revenue, as an administrative agency, will consider financial income of five percent or less of a taxpayer's annual gross income to be "incidental" and the taxpayer not to be a financial business. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- SECOND INQUIRY -- EJUSDEM GENERIS -- SIMILAR/COMPARABLE TO -- INDICIA. For a business activity to be considered "similar" and "comparable" to "banking, loan, [or] security" businesses, the activity must be regular and recurrent. Indicia of regular and recurrent activities "similar or comparable" to those of a "banking, loan {or} security business" include, but are not limited to: (1) For a bank and loan business: the making of loans.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- TWO PART INQUIRY. A two-part inquiry is required to determine whether a taxpayer is a "financial business" and therefore ineligible for RCW 82.04.4281 deduction. Sellen and rainier bancorporation, cited. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST INQUIRY -- PERCENTAGE TEST -- CALCULATION. To determine whether a taxpayer's financial income is incidental, the percentage of financial income will be computed by including all calendar or fiscal year financial income from "loans and investments or the use of money as such" in the numerator, whether taxable., exempt, or deductible, and including all calendar or fiscal year revenues as normally measured by the B&O tax, including all revenues otherwise exempt or deductible, in the denominator.

B&O TAX -- EXEMPTION -- CASH MANAGEMENT -- INTEREST CHARGED. In accordance with the requirements of 1.a. of the "bright line test" under Final Det. 86-309A, 4 WTD 341 (1987), a taxpayer may not retain interest earned on the investments of other entities for exemption of the cash management interest per Det. No. 91-096, 11 WTD 123 (1991). See also Final Det. No. 88-246, 6 WTD 89 (1988); Det. No. 93-324.

B&O TAX -- INTEREST EXEMPTION -- CASH MANAGEMENT -- AFFILIATES. The second inquiry of ETB 571 is not met when all of a taxpayer's income is from investments and a substantial portion of that income is derived from regular investment activities.

B&O TAX -- INTEREST EXEMPTION -- CASH MANAGEMENT -- AFFILIATES. To determine the relative significance of investment earnings compared to a taxpayer's nonfinancial earnings in order to satisfy the first inquiry of ETB 571, a holding company may not include the revenue of separate affiliates in its percentage calculation.

FINANCE CHARGES -- CARRYING CHARGES -- USED CARS -- INSTALLMENT SALES -- SERVICE B&O. A used car dealer who charged installment buyers amounts that were disguised as insurance premiums was liable for service business and occupation tax because the amounts actually were payments for the right to purchase the vehicles over time.

INVESTMENTS. Only earnings from incidental investments of surplus funds by a qualifying business are eligible for the RCW 82.04.4281 deduction. Citing: O'Leary v. Department of Rev., 105 Wn.2d 679, 717 P.2d 273 (1986).

B&O TAX -- OTHER FINANCIAL BUSINESS. Where (1) a taxpayer's financial income and securities business-like fees constitute over 87% of its gross income; (2) the taxpayer is involved in regular and recurrent trading; and (3) the taxpayer has no business purpose other than the investment of money, the taxpayer is similar or comparable to a securities business and the RCW 82.04.4281 deduction is not available to it.

B&O TAX -- GROSS INCOME OF THE BUSINESS. Generally, the measure of the business and occupation includes interest, dividends, and gains on the sale of investments.

B&O TAX -- OTHER FINANCIAL BUSINESS. A person is engaged in an "other financial business" if the business is similar or comparable to a banking, loan, or security business.

B&O TAX -- OTHER FINANCIAL BUSINESS. Persons, other than banks, loan businesses, security businesses, and "other financial businesses", are allowed a deduction for interest, dividends, and gain on sale of investments. The determination whether a business is an "other financial business" is made by applying the test stated in Excise Tax Bulletin 571.

B&O TAX -- INVESTMENT INCOME -- DEFERRED PAYMENT - ACCOUNTS RECEIVABLE. Income earned from investments, rather than for deferral of payment on accounts receivable, may be excluded from the measure of tax.

B&O TAX & RETAIL SALES TAX - FINANCING LEASE - INSTALLMENT SALE & FINANCE CHARGES. A leasing company that purchased equipment, resold the equipment to a customer on an installment basis and also received finance charge income was engaged in two separately taxable business activities.

RETAIL SALES TAX -- SPECULATIVE BUILDER - JOINT VENTURE - PROFIT AND LOSS. Joint ventures can be taxed as speculative builders provided the parties meet the joint venture requirements including the right to share profits and losses as well as control. If one party agrees to be liable to the other party for all of the losses, they are not sharing losses, and not operating as a joint venture.

B&O TAX -- SERVICE -- DEDUCTION -- INTEREST -- PRESERVATION AND DEVELOPMENT AUTHORITIES LOANS. Interest income derived from loans to PDAs created by cities is not entitled to B&O tax deduction under RCW 82.04.4293 (see Determination 85-117 for substantive treatment of merits).

RETAIL SALES TAX -- SELLING PRICE -- SEPARATELY STATED. As proof that retail sales tax was collected on rental payments, the invoices or lessor's records must show the sales tax separately stated from the payment for the rental.

B&O TAX -- SERVICE -- INTEREST CASUAL SALE. The purchase of items for resale falls within the definition of a business activity, even if a taxpayer's primary business is not buying and selling inventory. Sales of items that were purchased for resale are not casual and isolated sales, and the interest earned from the sale of such items is subject to the Service business and occupation tax.

B&O TAX -- INVESTMENT INCOME -- REAL ESTATE CONTRACT. Interest received by a vendor under a real estate contract may not be deducted from gross income when computing the B&O tax under RCW 82.04.4281 unless the real estate contract is an investment incidental to the main purpose of the taxpayer's business.

B&O TAX -- APPLICATION -- INTEREST INCOME DERIVED FROM SALES OF REAL ESTATE. Under RCW 82.04.390 and 82.04.4281, interest income received from the sale of moorage slips in a marina was part of the gross income of the marina's business and thus subject to the B&O tax. It was not investment income exempted from the tax, even if the taxpayer did not originally intend to sell real estate or engage in financial transactions in order to make his investment in the marina profitable.

B&O TAX --SERVICE -- EXEMPTION -- INTEREST -- INTERCOMPANY LOANS --OTHER FINANCIAL BUSINESS. Interest earned from loans to subsidiaries is subject to the Service business tax where the loans are regular, recurrent, and a normal part of the taxpayer's business operations. By making loans to its subsidiaries, the taxpayer engaged in business activities comparable to those of banks, loan companies, or similar financial businesses; thus the taxpayer held not entitled to deduction provided by RCW 82.04.4281. (Rainier 82.04.4281. (Rainier Bancorporation v.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

GROSS INCOME -- INTEREST -- PERCENT OF GROSS INCOME. The percentage of a taxpayer's gross income which the interest represents is only one of the many factors to use in determining whether a taxpayer is in a "financial business." To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

DEDUCTION -- INTEREST -- INVESTMENTS OR USE OF MONEY AS SUCH. To be deductible under RCW 82.04.4281, the interest earned from loans must be from incidental investments of surplus funds. Interest earned from regular, recurrent loans to affiliates is not income from incidental investments of surplus funds. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

DEDUCTION -- DIVIDEND -- DISTINGUISHED FROM INTEREST. Amounts earned from charging affiliates for the use of money falls within the definition of interest rather than the definition of a dividend. Interest earned by a parent from loans to a subsidiary is not deductible under RCW 82.04.4281 as "amounts derived as dividends." parent from loans to a subsidiary is not deductible under RCW 82.04.4281 as "amounts derived as dividends."

B&O TAX -- LOANS -- CASH DISCOUNTS. Discounts given by a Taxpayer on loans it sells to investors, to increase the attractiveness of the investment's yield, are not allowable cash discounts.

SERVICE B&O -- INTEREST -- REAL ESTATE CONTRACTS -- SELLER FINANCED MORTGAGES. The taxpayer was engaged in the business of buying and selling apartment buildings. Interest payments received through real estate contracts are part of the gross income of the business and subject to Service B&O, unless the real estate contracts constitute investments and the taxpayer is not engaged in a financial business. O'Leary v. Department of Revenue, 105 Wn 2d 679 (1986).

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- SERVICE -- GROSS INCOME -- INTEREST -- LOANS TO EMPLOYEES. Interest derived from loans to employees is subject to tax. The making of loans is a financial business. Therefore, the deduction provided by RCW 82.04.4281 is not available. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- EXEMPTION -- "FINANCIAL BUSINESS" -- USE OF MONEY AS SUCH. The centralized management of corporate funds between a parent corporation and its wholly owned subsidiary companies constitutes the "use of money as such" by a person not otherwise engaged in a "financial business." Booked amounts which represent interest expense connected with such established money management activities, when paid, are exempt of B&O tax.

B&O TAX -- GROSS INCOME -- BUSINESS ACTIVITY -- VALUE PROCEEDING OR ACCRUING -- INTEREST -- USE OF MONEY -- MONEY MANAGEMENT -- FINANCIAL BUSINESS. Cost control accounting by a parent corporation which reflects "interest" accruals related to internal, centralized money management systems through which money is routinely transferred back and forth between the parent and its wholly owned subsidiary corporations does not result in value proceeding or accruing to the parent where the booked "interest" is not paid and is not an enforceable obligation.

B&O TAX -- INTEREST -- REAL ESTATE CONTRACTS -- LOANS -- ETB 505.04.109. Interest received from real estate contracts is subject to Service B&O tax. A real estate contract, even if assigned to a taxpayer as repayment of a loan, does not qualify as an "investment" for purposes of RCW 82.04.4281. Sellen Construction and O'Leary cases cited. Detlefsen v. Dept. of Revenue, Board of Tax Appeals Docket No 84-38 cited.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

ETB 368 -- ETB 505 -- B&O TAX -- DEDUCTION -- INTEREST -- LOANS TO AFFILIATES -- FINANCIAL BUSINESS. Interest earned from loans to subsidiaries is not deductible under RCW 82.04.4281 where the loans are a regular and normal part of the taxpayer's business activities; activity which is in competition with a financial business constitutes a financial business.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- INTEREST -- LOANS TO AFFILIATES -- INSURANCE COMPANY. Interest received by an insurance company from loans to affiliates is not income received from the insurance business; thus the assessment of B&O tax on the interest income is not prohibited by RCW 48.14.080 or RCW 82.04.320.To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- INTEREST -- INVESTMENT DEDUCTION -- WEATHERIZATION LOANS. The deduction for interest authorized by RCW 82.04.4281 does not apply to interest derived from weatherization loans. These loans are a regular part of the taxpayer's business.

B&O TAX -- INTEREST -- REAL ESTATE TRANSACTION -- DEED OF TRUST -- INVESTMENT OF MONEY -- LOAN -- PURCHASE MONEY NOTE. Where taxpayer, in the construction business, sells real estate and its construction services, and is paid in part with an interest-bearing purchase promissory note secured by a deed of trust, the interest income is a taxable financing charge and does not meet the test of an investment nor loan of money for purposes of RCW 82.04.4281. The taxpayer made no actual loan of money to the person paying interest. Detlefsen v. State Dept. of Revenue, BTA case cited.

B&O TAX -- INTEREST -- PURCHASE MONEY NOTE -- REAL ESTATE -- CONSTRUCTION SERVICES -- INTEREST PAID TO CONSTRUCTION LENDER. The statutory definition of "gross income of the business" includes interest received without any deduction for interest paid out as an expense. Where taxpayer, in the construction business, sells real estate and its construction services, and is paid in part with an interest-bearing purchase money promissory note, the interest received is not offset by the taxpayer's payment of interest on its loan from a construction lender.

B&O TAX -- DEDUCTION -- INTEREST INCOME -- MONEY MANAGEMENT -- EVIDENCES OF INDEBTEDNESS -- GRID NOTES. The third prong of the test to determine if a parent company's funding of its subsidiary company's daily operations constitutes a tax deductible "money management system" requires that there be no written evidence of indebtedness between the parties. Term obligations requiring periodic repayment of principal and interest are outright loans and are not qualified for tax exemption as " money management." Accord: Final Determination 88-246, ____ WTD ____ (1988).

B&O TAX -- DEDUCTION -- INTEREST -- MONEY MANAGEMENT -- BRIGHT LINE TEST -- OBJECTIVE STANDARDS.

3) There are no written evidences of indebtedness memorializing the funding activity and purporting to create any creditor-debtor relationship between the parties, on either a demand or term payment basis; 4) The functions performed to accomplish the money movement between entities or accounts are the same as those performed by banks and other financial institutions, utilizing a daily targeted minimum or zero account balance method. Accord: Final Determination 86-309A, 4 WTD 341 (1987); Final Determination 88-246, ___ WTD ___ (1988).

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- DEDUCTION -- INTEREST INCOME -- LOANS -- LOAN BUSINESS. Interest income derived from regular and recurrent loans of surplus funds is not deductible for B&O tax purposes under RCW 82.04.4281. Persons who make such income producing loans on a regular basis are engaged in the loan business and are expressly excluded from taking the statutory deduction. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- DEDUCTION -- INTEREST INCOME -- MONEY MANAGEMENT -- EVIDENCES OF INDEBTEDNESS -- GRID NOTES. The third prong of the test to determine if a parent company's funding of its subsidiary company's daily operations constitutes a tax deductible "money management system" requires that there be no written evidence of indebtedness between the parties. Where grid notes are used to create an enforceable creditor-debtor relationship, the arrangement is not a money management system entitled to the deduction of RCW 82.04.4281 for amounts received as interest income by the parent.

B&O TAX -- DEDUCTION -- LOANS -- INTEREST -- SURPLUS FUNDS -- THIRD PARTY LOANS -- PARENT COMPANY AS CONDUIT.

B&O TAX -- DEDUCTION -- INTEREST -- MONEY MANAGEMENT -- BRIGHT LINE TEST -- OBJECTIVE STANDARDS.

3) There are no written evidences of indebtedness memorializing the funding activity and creating any creditor-debtor relationship between the parties, on either a demand or term payment basis; 4) The functions performed to accomplish the money movement between entities or accounts are the same as those performed by banks and other financial institutions, utilizing a daily targeted minimum or zero account balance method. To the extent that the above published determination is inconsistent with the rationale as set forth in 14 WTD 153, it is hereby overruled, dated 12/21/94.

B&O TAX -- SERVICE -- DEDUCTION -- INTEREST EXPENSE -- RELATED CORPORATION -- CONDUIT FOR PAYMENT TO LENDER. Interest income received by a corporation from overseas purchasers is deductible and therefore is not subject to service B&O taxation where the corporation is not competing with financial institutions but is acting as a conduit and transmitting the amount of the interest payment to the lender. ACCORD: Howard S. Wright Construction Co. et al v. Department of Rev. No. 79-2-01310-1 (1981).

B&O TAX -- DEDUCTION -- SALES OF REAL ESTATE -- INTEREST. Interest received from the sale of real estate is subject to Service B&O tax whether the sale is secured by a real estate contract, deed of trust or mortgage. Such interest is not deductible under RCW 82.04.4292 if it is not received as a result of a loan or investment made by one in a financial business.

RETAIL SALES TAX -- SERVICE B&O TAX -- LEASES REGARDED AS FINANCING ARRANGEMENTS -- ALLOCATION OF INTEREST AND PRINCIPAL -- REQUIREMENTS FOR. When a contract designated as a lease is regarded as a financing arrangement, the retail sales tax is due on the selling price in the tax period in which the sale is made. The payments may be apportioned between interest and principal if the seller complies with Rule 109 and the principal amount represents the fair market value of the property purchased.

B&O TAX -- SALE OF LOANS SECURED BY FIRST MORTGAGES -- "PREMIUM" -- INTEREST V. TRADING GAIN -- AMOUNTS DERIVED FROM INTEREST RECEIVED -- CONSTRUCTION OF. A "premium" which the taxpayer receives from the purchaser of a mortgage loan in addition to payment for the face amount of the loan is in the nature of consideration, taxable as a trading gain, and is not deductible as an "amount derived from interest received" under RCW 82.04.4292.

B&O TAX -- SALE OF LOANS SECURED BY FIRST MORTGAGES -- "PREMIUM" -- INTEREST V. TRADING GAIN -- CHARACTERIZATION BY PURCHASER AS "CONTRA-INTEREST." The nature of taxpayer receipts is not governed by how the payor accounts for the expenditure, but is classified on its own merits with respect to the nature of the taxpayer's activities.

B&O TAX -- SALE OF LOANS SECURED BY FIRST MORTGAGES -- "PREMIUM" -- RETAINED INTEREST ELEMENT -- AMOUNT DERIVED FROM INTEREST RECEIVED. When a loan is sold for the face amount of the loan and an additional "premium" based on the spread in interest rates, such "premium" is a trading gain and cannot properly be considered the receipt of deductible interest.

B&O TAX -- INTEREST -- IMPUTED. When interest is not specifically provided for in a contract, but is imputed merely for bookkeeping purposes by a taxpayer, excise tax will not be due at the service rate as if it were interest absent statutory or regulatory authority. Weyerhaeuser Company v. Department of Revenue cited.

INVESTMENTS -- INTEREST -- "INCIDENTAL INVESTMENT OF SURPLUS FUNDS" -- SALE OF ASSET. Receiving interest as a result of a decision to allow payments to be made over time is an not an "incidental investment of surplus funds" to qualify for the deduction available in RCW 82.04.4281. John H. Sellen Construction Co. v. Dept. of Revenue 87 Wn 2d 876 (1976); Rainier Bancorporation v. Dept. of Revenue, 96 Wn.2d 669 (1982); and O'Leary v. Department of Revenue, 105 Wn. 2d 679 (1986); Browning v. Department of Revenue, 47 Wn. App. 55 (1987); Donald F. Detlefsen v. State, Docket No.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- DEDUCTION -- INTEREST -- MONEY MANAGEMENT -- OBJECTIVE STANDARDS. Interest earned on loans to affiliates is not deductible under RCW 82.04.4281 where the loans are a regular and normal part of the taxpayers' business activities.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- INTEREST -- SALE OF LOAN -- "RETAINED INTEREST" -- INTEREST V. PREMIUM. Only the owner of a first mortgage home loan may report and then deduct interest received on that loan. If the entire loan is sold to another, only the new owner may report and deduct the interest received, since only the new owner's money is being used by the borrower (the "old" owner having been repaid by the "new" owner).

B&O TAX -- DEDUCTION -- INTEREST -- MONEY MANAGEMENT -- BRIGHT LINE TEST -- OBJECTIVE STANDARDS.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

B&O TAX -- DEDUCTION -- LOANS -- INTEREST -- THIRD PARTY LOANS -- COMPANY ACTING AS CONDUIT. When a taxpayer acts as a conduit in procuring a loan from a third party lending source for the benefit of a related company on a straight pass-through (conduit) basis, tax is not due on interest income paid to the taxpayer when interest received from the related company is in turn repaid to the taxpayer's third party lender. Howard S. Wright cited.

B&O TAX -- INVESTMENT DEDUCTION -- JOINT VENTURER/LIMITED PARTNER -- BUSINESS ACTIVITY -- DETERMINATION OF. For purposes of RCW 82.04.4281, mere financial participation in a project as a joint venturer/limited partner will not result in a taxpayer being considered to engage in the business activities conducted by the joint venture or partnership.

B&O TAX -- DEDUCTION -- INVESTMENT -- "FINANCIAL BUSINESS." A "financial business" is a business whose primary purpose and objective is to earn income through the handling and investment of a significant amount of funds, whose activities are essentially in competition with other financial businesses and are a regular part of the taxpayer's normal business practice. Sellen and Rainier Bancorporation cited.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).