WAC 194

Rule 194 Cost Benefit Analysis

Tax on international investment management services or other business or service activities.

Business within and without state-Apportionment.

Use tax imposed.

WAC 458-20-194 (Rule 194) explains the apportionment requirements of persons entitled to apportion income under RCW 82.04.460(1). It also describes Washington nexus standards for business activities subject to apportionment under RCW 82.04.460(1). Rule 194 applies to persons subject to the service and other activities, international investment income, licensed boarding home, and low-level radioactive waste disposal business and occupation (B&O) tax classifications, and who are not required to apportion their income under another statute or rule.

Doing business inside and outside the state. Effective 1/1/06.

WAC 458-20-194 (Rule 194) explains the apportionment requirements of persons entitled to apportion income under RCW 82.04.460(1). It also describes Washington nexus standards for business activities subject to apportionment under RCW 82.04.460(1). Rule 194 applies to persons subject to the service and other activities, international investment income, licensed boarding home, and low-level radioactive waste disposal business and occupation (B&O) tax classifications, and who are not required to apportion their income under another statute or rule.

ENGAGING IN BUSINESS WITHIN THE STATE - Cancelled effective 1/30/06

Cost Apportionment - Treatment of Costs Incurred for Multiple Purposes Revised 10/19/06.

Cost Apportionment - Treatment of Costs Incurred for Multiple Purposes (First Revision) Revised 2/2/09 See ETA 3110.2009

OUT-OF-STATE ENGINEERING FIRM PERFORMING SERVICES IN THIS STATE WHICH ARE INCIDENTAL TO THOSE PERFORMED BY ITS OUT-OF-STATE OFFICE - Cancelled effective 1/30/06

TESTING AND ENGINEERING SERVICES BY AN OUT-OF-STATE CORPORATION - Cancelled effective December 29, 2006 This document addresses a situation where a business located outside Washington has employees permanently assigned to a Washington location and also has teams of employees come into the state to perform engineering and testing services. It explains that amounts received for services rendered in this state are subject to B&O tax, notwithstanding that no profit is realized. There is no longer any need for this document.

INTEREST INCOME DERIVED FROM THE EXTENSION OF CREDIT TO A PARTY IN ANOTHER STATE BY A WASHINGTON TAXPAYER WITH BUSINESS SITUS IN BOTH STATES - Cancelled effective 1/30/06

COMMISSIONS EARNED ON INTERSTATE SALES - Cancelled effective 1/30/06

Cost Apportionment -- Treatment of Costs Incurred for Multiple Purposes

APPLICATION OF BUSINESS AND OCCUPATION TAX TO ROYALTY INCOME EARNED THROUGH GRANT OF PATENT PRIVILEGES - Cancelled effective 1/30/06

New "Economic Nexus" in Washington State May Impact Advertising Agencies Located Elsewhere

B&O Tax Reporting Requirement Continues After Business Activity Stops (Trailing Nexus)

Registered Out-of-state Businesses Currently not Reporting Income from Service Activities - New Apportionment for Certain Income

New "Economic Nexus" in Washington State May Impact "Foreign Corporations"

New "Economic Nexus" in Washington State May Impact Franchisors

New Apportionment Method

Tax Attorneys and CPAs New "Economic Nexus" in Washington State May Impact Your Clients

New Apportionment Method

Apportionment - Approved Methods

New "Economic Nexus" in Washington State May Impact Businesses Receiving Royalty/Licensing Income from Patents

NEXUS. Person with no place of business or employees and engaging in no business activities in this state is not taxable with respect to interest on loan payments the right to which was purchased from a Washington bank, despite the presence of the buyers and loan collateral in this state.

SERVICE B&O TAX -- "SAFE HARBOR" ASSETS -- APPORTIONMENT OF SALES -- SITUS. Amounts derived from outright sales of tax credits and benefits provided by ERTA 1981 are not from any services rendered and are not apportionable between states. Such sales of intangible rights are fully taxable by the state where such rights have their situs.

B&O Tax -- Disc Commissions -- Apportionment. Commissions allocated to a DISC subsidiary by its parent in accordance within federal tax law constituted taxable gross income within the meaning of RCW 82.04.080 notwithstanding that the DISC lacked employees or property with which to conduct business and the income was not subject to apportionment under RCW 82.04.460 by reason of export sales from California because the DISC maintained no place of business outside of Washington.

B&O TAX -- APPORTIONMENT -- BANK -- INTEREST COSTS -- CLARIFICATION. Under the cost method of apportionment, interest costs incurred by a bank are apportioned, in the same manner as all other expenses, to the location were services associated with that expense were performed. Interest expenses are apportioned to the location that incursthe payroll and property expenses in managing the borrowing activities that give rise to the interest expense.

This determination has been overruled or modified in whole or part by Det.No. 01-006, 20 WTD 124 (2001).

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) & ETB 270.04.194.

B&O TAX -- SERVICES-- ERISA PREEMPTION OF STATE LAW.The Employee Retirement Income Security Act broadly preempts any state laws deemed to "relate" to qualified benefit plans.The activity of contributing to or receiving benefits from plans is not subject to Washington's B&O tax.However, income received by a plan administrator for its management activity is subject to service B&O tax.Applied to that activity, the B&O tax is a tax on the activity of administering the plan and is calculated on the gross income of the plan administrator only.As such, it is distinguishable from ta

B&O TAX -- SERVICE -- APPORTIONMENT.The situs of a royalty payment is the situs of the royalty owner.Authors who operate their corporation solely from their Washington residence and who sold both books in question after they moved to Washington are not entitled to apportion income notwithstanding the fact that incidental promotional services are rendered elsewhere.ACCORD:Det. No. 88-233, 6 WTD 59 (1988); Det. No. 87-186, 3 WTD 195 (1987); 88-233, 6 WTD 59 (1988).

B&O TAX -- ALLOCATION -- THIRD -- PARTY COSTS. Third-party costs in the nature of commissions to out-of-state independent salespersons held not to be allocable to another state when they were not incurred because of taxpayer's out-of-state activities. Costs properly attributable to the Washington office from which expenses were incurred. Accord: Det.No. 89-448, 8WTD 189 (1989).

This determination has been overruled or modified in whole or part by Det.No. 01-006, 20 WTD 124 (2001).

SERVICE B&O -- APPORTIONMENT -- THIRD PARTY COSTS. Payments to a foreign subsidiary to provide services from an out-of-state facility for the benefit of the overall operation of a corporation domiciled in Washington are included in the numerator as the cost of doing business within the state when apportioning income under the cost method. Accord: Det. No. 89-448, 8 WTD 189 (1989).

APPORTIONMENT. A taxpayer is entitled to apportion its gross receipts between Washington and other state(s) only if the taxpayer is directly and actively engaged in business in the other state(s) and from such activity it derives some part of its gross receipts.

FAIR APPORTIONMENT -- COMPLETE AUTO TRANSIT.An apportionment formula is required only when another state may constitutionally impose a tax.When no other state may constitutionally tax the activities of a Washington business, the state of Washington may tax 100% of its gross receipts.

APPORTIONMENT -- INTERNAL CONSISTENCY.

APPORTIONMENT -- NEXUS.When a Washington taxpayer contracts with independent businesses in other states to perform services in those states for the taxpayer's purpose of realizing or continuing valuable contractual relationships there, nexus may be found.However, when the independent businesses are not chosen because of their location or to enter and maintain a place in the market of the other state, but rather for their independent expertise, then nexus is not created.Citing: Standard Pressed Steel Co. v. Dept. of Rev., 419 U.S. 560 (1975),Scripto, Inc. v. Carson, 362 U.S.

APPORTIONMENT. When a taxpayer's sole connection with another state is the payment of third party service provider costs, the taxpayer is not entitled to apportion out the costs associated with that service provider. PARTIAL ACCORD: Det. No 89-448, 8 WTD 189 (1989).

SERVICE B&O TAX -- APPORTIONMENT -- COSTS -- COMPUTATION -- COSTS GENERATING INCOME. Costs attributable to a. . . facility located [out-of-state] were correctly excluded from the apportionment formula, where the facility did not contribute to generating the income sought to be apportioned. Accord: Det.No. 89-448 8 WTD 189 (1989).

APPORTIONMENT -- COST METHOD -- SEPARATE BUSINESS ACTIVITY. Income from a separate business activity is apportioned using only the costs related to that business activity.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 01-006, 20 WTD 124 (1999).

APPORTIONMENT -- SEPARATE ACCOUNTING METHOD. Separate accounting methods must accurately reflect that portion of gross receipts from services rendered in Washington by using the same standards to determine whether the receipts generated are from out-of-state services or are from services performed in Washington when apportioning income. Deductions are not allowed for out-of-state employees and subcontractors unless amounts are included for Washington employees and subcontractors.

BUSINESS AND OCCUPATION TAX -- OUT-OF-STATE SERVICES -- APPORTIONMENT. A taxpayer that does not maintain a place of business outside Washington is entitled to apportion service income when the out-of-state services performed are more than incidental.

PUBLIC UTILITY TAX -- MOTOR TRANSPORTATION -- PLACE OF SERVICE -- INTERSTATE COMMERCE INTERSTATE BILL OF LADING -- ABSENCE THEREOF.When a taxpayer is paid for hauling entirely within Washington absent an interstate bill of lading, it is subject to motor transportation (or Urban Transportation) public utility tax. Proof that the property itself is the subject of an interstate or foreign transaction, absent a through bill of lading across state lines, does not qualify for deduction.

SERVICE B&O TAX -- COMMISSIONS -- OUT-OF-STATE SERVICES -- APPORTIONMENT. A taxpayer was allowed to apportion commission income earned by its traveling sales staff where the out-of-state services being performed by that staff involved out-of-state solicitations for advertising placed into out-of-state directories.

SERVICE B&O TAX -- APPORTIONMENT -- COMPUTER SERVICES. Out-of-state corporation may apportion monthly fees it receives from Washington subscribers who pay for the right to access its out-of-state computer facilities in case of failures of the subscriber's own computer systems. The apportionment of gross income is to occur between Washington and other states where it has places of business which contribute to the performance of services rendered in Washington.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 01-006, 20 WTD 124 (1999).

APPORTIONMENT -- OUT-OF-STATE SERVICES -- PLACE OF BUSINESS. Apportionment may not be denied solely because a taxpayer does not maintain a place of business outside this state if it performs substantial services outside Washington for out-of-state customers.

B&O TAX -- APPORTIONMENT OF SERVICE INCOME. A taxpayer may use separate accounting to apportion its gross income to Washington if that accounting is accurate or clearly reflects services performed in Washington.

SERVICE B&O TAX – COPYRIGHTS – ALLOCATION -- COMMERCIAL DOMICILE.Fee income from licensing the use of copyrighted material in this state by a corporation with its commercial domicile located outside Washington is not subject to B&O tax.In general, intangible rights follow the situs of the commercial domicile of the owner.

SERVICE B&O TAX -- APPORTIONMENT -- SEPARATE ACCOUNTING METHODS -- COST OF DOING BUSINESS -- CLIENT BILLING.A separate accounting method, based upon the location of services billed to clients, accurately apportioned service income.Analysis of costs was unnecessary.

SERVICE B&O TAX – ROYALTY CONTRACT --ASSIGNMENT OF DUTIES AND OBLIGATIONS – CONSIDERATION.Royalty payments received by Taxpayer for assuming Parent’s rights and obligations under a licensing contract with a third-party licensee are subject to Washington’s B&O tax.

B&O TAXES – SOFTWARE – ROYALTIES/LICENSING FEES – APPORTIONMENT.Amounts received for the payment of software royalties or licenses are allocated to the domicile of the software owner and are not apportioned.

SERVICE B&O TAX –APPORTIONMENT.A joint venture may apportion its gross revenues where it maintains places of business both within and without Washington that contribute to the rendition of service within Washington.

B&O TAX – APPORTIONMENT – OUT-OF-STATE BROKERS – SOLICITING BUSINESS & COORDINATION FINANCING ARRANGEMENTS.A leasing company that utilized out-of-state brokers to solicit business, arrange and coordinate financing activities, and write up financing contracts was entitled to apportion its income.

SERVICE B&O - NEXUS APPORTIONMENT - SECURITIES DEALER.A Washington-based securities dealer is entitled to apportion its gross receipts between Washington and the numerous other states in which it markets securities through independent sales representatives that own and operate their own offices.The securities dealer has taxable nexus with those other states by entering their marketplaces to sell its services and products to customers in those states.Such out-of-state activities are more than incidental.

B&O TAXES-- SERVICE & OTHER ACTIVITIES TAX – SERVICES PERFORMED PRIOR TO ENTERING THE STATE – MANAGEMENT.A Washington resident may exclude from B&O taxes receipts derived from management services performed at an out-of-state customer’s location prior to entering Washington.

B&O TAXES – SERVICE & OTHER ACTIVITIES TAX – SALE OF INTANGIBLE ASSET – SITUS.Amounts received by a Washington resident from the sale of an intangible asset are allocated to the commercial domicile of the owner.

B&O TAX -- MULTI-LEVEL MARKETING NETWORK; COMMISSIONS ON OUT-OF-STATE SALES BY DOWN-STREAM DISTRIBUTORS -- APPORTIONMENT.A taxpayer who is engaged in business only in Washington, who derives commission income from out-of-state sales by down-stream distributors in a multi-level marketing network by virtue of his recruitment, training, and motivational activities performed entirely in Washington, may not apportion the commission income between Washington and other states where sales occur.

B&O TAX – NEXUS – TRAINED CLIENT EMPLOYEES – AGENTS-- CONTRACTUAL RESPONSIBILITIES.Where a management consultant firm trains client employees to train other client employees on management . . . concepts and also enters into a written agreement with those Trainers, conferring upon them certain rights and responsibilities, the training activities of the Trainers is sufficient to establish nexus between Washington and the out-of-state firm.

SERVICE B&O TAX – PASS-THROUGHS – APPORTIONMENT – PROPERTY MANAGEMENT SERVICES.A foreign corporation/taxpayer providing real property management services was subject to service B&O tax on its gross income without the right to deduct reimbursements it received from the owners for on-site personnel salaries and other expenses.The taxpayer did not meet all requirements of Rule 111 and ETA 90-1.However, the taxpayer was entitled to apportion its gross income because the taxpayer maintained places of business both within and without Washington that contributed to the rendition of service

This determination has been overruled in whole or part by 20 WTD 124 (2001)

B&O TAX -- APPORTIONMENT -- MAGAZINE -- SALES -- OUT-OF-STATE PLACE OF BUSINESS. Apportionment under RCW 82.04.460 is proper only if the taxpayer maintains a place of business outside of the state of Washington.Where a magazine subscription business terminated its out-of-state office, apportionment no longer applied.

BUSINESS AND OCCUPATION TAX -- NEXUS -- SERVICES PERFORMED FOR OUT OF STATE CLIENTS BY IN-STATE OFFICES OF A BUSINESS BASED OUT OF STATE. An out-of-state audience research firm is subject to tax on activities attributable to its in-state offices. This firm set up temporary offices in Washington from which it conducted telephone surveys for an out-of -state client. The data from the surveys was sent to the firm's home office for compilation, analysis and preparation of a report. The activities taking place in Washington are business and are sufficient nexus to tax.

Notice is hereby given that the findings and conclusions of Determination No...., issued May 29, 1986 relating to apportionment of commissions income earned by a Domestic International Sales Corporation have been effectively overruled by Order of the State Board of Tax Appeals, Docket No. 30192C, issued November 5, 1986, Simpson Export Sales Company v. Department of Revenue.A copy of the Board's Order is attached hereto. 1WTD 445. Accordingly, the findings and conclusions of Determination No. ... concerning apportionment of ...

B&O TAX -- SERVICES -- APPORTIONMENT -- COST METHOD -- OUT-OF-STATE.Under the cost of doing business for the cost apportionment formula under Rule 194, a taxpayer’s out-of-state travel costs should be included in the denominator and excluded from the numerator.

B&O TAX – APPORTIONMENT – INTERIM APPORTIONMENT METHOD – FINANCIAL INSTITUTION.The decision in Det. No. 89-459A, 11 WTD 17 (1991) was intended to be an interim method of apportionment applicable only to financial institutions pending the adoption of a uniform rule.Det. No. 89-459A was overruled by Rule 14601, which became fully effective as of January 1, 2000.

B&O TAX – APPORTIONMENT –COSTS USED TO CALCULATE COST APPORTIONMENT PERCENTAGE.The denominator of the cost apportionment formula is the total costs attributable to the related business activities partially performed in Washington.The numerator is the cost of doing the related business activities in Washington.The cost of doing business in Washington is not costs incurred in Washington, rather it is any cost, regardless of where incurred, that relates, directly or indirectly, to the Washington activities.OVERRULING: Det. No. 89-459, 8 WTD 227 (1989); Det. No.

B&O TAX – APPORTIONMENT – SEPARATE ACCOUNTING PREFERRED.Separate accounting is the preferred method of apportioning income.However, if separate accounting is not accurate, then cost apportionment (formulary apportionment) shall be used.

B&O TAX – APPORTIONMENT – INCOME SUBJECT TO COST APPORTIONMENT.When a bank, engages in lending activities and, related to that activity, it also engages in short-term and long-term interest rate swaps, servicing of loans, and sales of loans as well as receiving up-front fees, late-payment penalties, pre-payment payments, and interest, the income from these activities is related to the lending activity and is subject to apportionment.

B&O TAX – APPORTIONMENT – WHEN AVAILABLE.When a taxpayer renders services taxable under RCW 82.04.290, maintains places of business both within and without the state, and those places of business contribute to the rendition of those services, the taxpayer shall apportion to Washington the portion of its total income derived from services rendered in Washington.

B&O TAX – APPORTIONMENT – SEPARATE ACCOUNTING DISTINGUISHED FROM COST APPORTIONMENT.Cost apportionment is the formulary apportionment method used by Washington.Cost apportionment focuses on costs and uses a formula based on those costs to determine the income from Washington activities.This is distinctly different from separate accounting, which focuses on income.Therefore, separate accounting concepts are not applicable to cost apportionment.

B&O TAX – APPORTIONMENT – INCOME SUBJECT TO COST APPORTIONMENT -- RELATED BUSINESS ACTIVITIES.Only income from related activities partially performed in Washington and subject to the B&O tax under RCW 82.04.290 is apportionable under RCW 82.04.460.When a taxpayer engages in related business activities subject to the B&O tax under RCW 82.04.290, the total income from the related business activities is subject to apportionment.However, if a taxpayer engages in an unrelated, discreet, out-of-state business activity, then the income from that discreet, out-of-state business activity

B&O TAX – APPORTIONMENT – PLACE OF BUSINESS.For the purposes of RCW 82.04.460(1), a place of business does not mean a physical location.Rather, if a taxpayer conducts activities in a state sufficient to create nexus under Washington standards, then the taxpayer is deemed to have a "place of business" in that state for apportionment purposes.OVERRULING: Det. No. 86-297, 2 WTD 23 (1986); Det No. 92-117, 12 WTD 147 (1993).

B&O TAX – APPORTIONMENT – FINANCIAL INSTITUTION.Because the location where a financial institution manages its borrowing activity is not indicative of the cost of doing business at that location, Det. No. 89-459A did not express a proper cost apportionment method under RCW 82.04.460(1) and is OVERRULED.

IN-STATE ALARM MONITORING – OUT-OF-STATE CUSTOMERS.Taxpayer’s activity of providing monitoring services to its out-of-state customers does not fall within the description of “interstate commerce.”Although the services provided by Taxpayer to its out-of-state customers are performed both in and out-of-state, these services do not constitute commercial trading or the transportation of persons or property across state lines.

RCW 82.04.290, RCW 82.04.250, RCW 82.04.050, RCW 82.08.020:RETAIL SALES TAX – RETAILING B&O TAX – SERVICE B&O TAX -- RETAIL SALE – SITTING OR SHOOTING FEES.Taking photographs for a fee, without developing or printing, is a professional and artistic service subject to service B&O tax and is not subject to the retailing B&O or retail sales tax.However, a shooting fee is subject to retailing B&O tax and retail sales tax when the shooting is directly related to subsequent printing services, is performed by the same person, and is performed under a single contract or invoice

RCW 82.04.2907: SERVICE B&O TAX -- SALES OF RIGHTS TO PHOTOGRAPHS. Prior to July 1, 1998, income derived from a transfer or sale of a copyright or other intangible property interest is subject to service B&O tax. Effective July 1, 1998, RCW 82.04.2907 created a special classification for “income from royalties or charges in the nature of royalties for the granting of intangible rights, such as copyrights, licenses, patents, or franchise fees.”

SERVICES TAXABLE UNDER RCW 82.04.290 -- NEXUS.Conducting an annual industry convention or seminar as a discrete business activity, for which the taxpayer charges attendees a fee, generally creates nexus with the host state to tax the fee income.

B&O TAX -- SERVICES TAXABLE UNDER RCW 82.04.290 -- NEXUS.Rule 194, rather than Rule 193, addresses the taxation of service-taxable income of a person doing business both inside and outside the state.Nexus examples in Rule 193 should not be relied upon to determine whether a taxpayer who engages in both sales activity and discrete service activity has sufficient nexus with a state for the state to tax its service income.

SERVICE B&O TAX – INTERNET SERVICES – APPORTIONMENT. Charges taxable under the other business or service activities classification for internet services provided from locations in Washington as well as places of business outside the state may be apportioned.

B&O TAX – APPORTIONMENT – BORROWING OF FUNDS -- DEFERRED INSTALLMENT SALES BY RETAILER.When a retailer did not lend money, but sold its products on a deferred installment basis to its credit card customers, the retailer’s costs of borrowed funds used to replace inventory constituted an expense of its retailing activity, and cannot be used in calculating cost apportion of its credit card finance charge income.

B&O TAX – ENGAGING IN BUSINESS – SOS CERTIFICATE OF AUTHORITY.Even though a foreign corporation may not be transacting business under RCW 23B.15.010, that fact has no bearing for determining whether it is engaging in business in Washington for purposes of RCW 82.04.150.

B&O TAX -- APPORTIONMENT -- An independent contractor who engages in motivational and training activities for a single company in various states during the year is entitled to apportion her income from providing those services, even when the amount of her compensation is based on factors unrelated to the length or size of specific events or her activities at specific events.

APPORTIONMENT–NEXUS—INCIDENTAL SERVICES PERFORMED OUTSIDE THE STATE.Taxpayers who provide services both within and without the state may, under certain circumstances, apportion their gross income.Maintenance of a place of business outside this state is not a prerequisite for apportionment, provided the services are more than incidental.In order for such activities to be more than incidental, the taxpayer must have taxable nexus where the services are performed.When a taxpayer incidentally works outside Washington while attending trade shows does not establish taxable nexus in such states, t

APPORTIONMENT--ROYALTIES--COMMERCE CLAUSE--MOBILIA SEQUUNTUR PRESONAM DOCTRINE.The Department allocates this state’s gross receipts tax on royalty income to a taxpayer’s commercial domicile, in accordance with the mobilia sequuntur personam doctrine.

USE TAX – APPORTIONING MEASURE OF USE TAX.A Washington consumer who leases a motor home from an out-of-state lessor for personal use in Washington and other states cannot apportion the measure of its use tax obligation between Washington and the other states where it uses the vehicle.

SERVICE B&O TAX – ENGAGING IN BUSINESS – INDEPENDENT CONTRACTORS -- NEXUS.For purposes of service B&O tax liability, an out-of-state corporation that provides independent contractor physicians to hospitals in Washington on a temporary basis is engaging in business in Washington.

APPORTIONMENT -- PLACE OF BUSINESS -- DUE PROCESS CLAUSE -- COMMERCE CLAUSE. Apportionment may not be denied solely because a taxpayer does not maintain a place of business outside this state.

RULE 194 – NEXUS FOR SERVICE PROVIDERS: Out of state continuing education provider has nexus because its independent contractor speakers who make presentations at live seminars in Washington are “representative third parties” under Rule 194(g)(i).

RCW 82.04.293 B&O TAX – INTERNATIONAL INVESTMENT MANAGEMENT SERVICES. Because a registered investment advisory firm actively managed its clients’ portfolios and had full discretion to buy and sell securities without client approval, its services have the requisite management components that qualify as “investment management services.”

RCW 82.04.293 B&O TAX – INTERNATIONAL INVESTMENT MANAGEMENT SERVICES. Registered investment advisory firm primarily provided investment management services because it actively managed client portfolios and had authority to buy and sell securities on its clients’ accounts. The firm met the “primarily” standard because a majority of its services involved those qualifying activities.

RULE 194; RCW 82.04.460: B&O TAX – APPORTIONMENT – DOMESTIC INTERNATIONAL SALES CORPORATION (DISC). A taxpayer earns “commissions” from an affiliate in exchange for the taxpayer maintaining its status as a DISC, which results in a federal tax benefit. When taxpayer’s status as a DISC is the only reason that it receives the “commissions” from its affiliate, and its affiliate receives the benefit of taxpayer’s status as a DISC in Washington, then the taxpayer must assign 100% of its costs to Washington for periods prior to June 1, 2010.

RULE 194; RCW 82.04.460: B&O TAX – SERVICE AND OTHER ACTIVITIES – COST APPORTIONMENT – COSTS ASSIGNED BY FORMULA – SPECIFICALLY ASSIGNED COSTS – CHEMICALS AND BINDING REAGENTS. Chemicals and binding reagents that are used by a taxpayer to treat hazardous waste before the waste is deposited in an out-of-state landfill are not used to “maintain” real or personal property, and are therefore not specifically assigned costs. Instead, those chemicals and binding reagents are consumables that are apportioned by formula.

RCW 82.04.460;WAC 458-20-194(4)(g) – APPORTIONMENT – THIRD PARTY COSTS: Taxpayer has the burden to demonstrate that a “representative third party” directly provides services to a taxpayer’s customers, and, in the absence of such proof, its panelists’ costs were properly classified as “other costs” for purposes of the apportionment ratio in WAC 458-20-194.

RULE 194; RULE 19402: APPORTIONMENT: Income taxable under the service and other activities B&O tax classification is apportionable using the methodology contained in Rule 194 for the period prior to June 2010 and apportionable using the methodology contained in Rule 19402 for the period beginning June 2010.

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

B&OTAX -- SERVICE -- GROSS INCOME -- APPORTIONMENT -- SERVICE PROVIDED OUT-OF-STATE BY THIRD PARTY. A taxpayer operating a hotel reservation system is entitled to apportion income it receives from customers for their proportional share of services provided to the taxpayer by a third party. The third party had a computer system which interfaced with the taxpayer's computer system, both locatedout of state . The third party billed the taxpayer who re-billed its customers. The only activity taking place in Washington was accounting by the taxpayer.

B&O TAX -- CLASSIFICATION -- SERVICE -- GROSS INCOME -- ROYALTY INCOME -- PATENTS -- DOMICILE OUTSIDE OF WASHINGTON. Royalties derived form granting the right to use a patented process are not taxable by Washington where the grantor's domicile, legal or commercial, is outside of Washington. Patents are intangible personal property whose situs is the domicile of the owner. ETB 355.04.194.

B&O TAX -- ALLOCATION -- INTANGIBLE PROPERTY -- MOBILIA SEQUUNTUR PERSONAM. Income derived from intangible property is attributed to the domicile of the owner of the property under the doctrine of mobilia sequuntur personam. Cury v. McCanless, 307 U.S. 357 (1938).

B&O TAX -- CASUAL OR ISOLATED SALE -- TYPE OF PROPERTY -- PATENT RIGHTS.One-time assignment (sale) of patent rights by a taxpayer-manufacturer to its subsidiary, when the taxpayer was not in the business of developing or selling patents, held to be a casual and isolated sale since the patent was not the "type of property" which the taxpayer held himself out as selling, and such sales were not "routine and continuous."

B&O TAX -- SALE OR LEASE -- TRANSFER OF PATENT RIGHTS. A transfer of patent rights constitutes a sale (assignment) instead of a lease, where the assignee received all substantial patent rights, has the right to assign and license the patent to others, and the right to sue for infringement of the patent. Neither the terms used in the agreement, the right of the assignee to terminate the agreement, nor the fact the agreement is not recorded is dispostive.

SERVICE B&O TAX -- INTERSTATE DEDUCTION -- SERVICES RENDERED SUBSTANTIALLY OR WHOLLY OUT OF STATE -- PLACE OF BUSINESS -- GEOPHYSICAL INVESTIGATION.

B&O TAX -- SERVICES -- APPORTIONMENT -- COST METHOD -- OUT OF STATE -- THIRD PARTY COSTS. The cost of doing business for the cost apportionment formula under Rule 194 includes third party costs which are attributed to the location of the office for which the expenses were incurred.

This determination has been overruled or modified in whole or part by Det No. 89-459A, 11 WTD 17 (1991) & Det. No. 01-006, 20 WTD 124 (2001).

B&O TAX -- APPORTIONMENT -- BANK -- METHOD. A bank which had previously requested and received Department approval to use a three factor formula to apportion income, permitted to switch to a cost method.

B&O Tax -- Apportionment -- Bank -- Interest Costs. Under a cost method of apportionment, interest costs incurred by a bank are allocated to location where funds are used; administrative cost of loan are allocated to location where costs were incurred.

B&O TAX -- APPORTIONMENT --BANK -- COST-BASIS METHOD.Under cost method, total income is apportioned by using an apportionment percentage which is obtained by dividing in-state costs by total costs.Deductions, but not exemptions, are taken after application of apportionment percentage.

PUBLIC UTILITY TAX -- MOTOR TRANSPORTATION -- PLACE OF SERVICE -- INTERSTATE COMMERCE INTERSTATE BILL OF LADING -- ABSENCE THEREOF. When a motor carrier is paid for hauling which takes place entirely outside of Washington or for hauling across Washington's boundaries,it is paid for hauling entirely within Washington absent an interstate bill of lading, it is subject to Motor Transportation (or Urban Transportation) public utility tax.It may, however, deduct amounts paid to other motor carriers subject to tax.

SERVICE B&O TAX -- SERVICES PERFORMED FOR OUT-OF-STATE CUSTOMER -- SERVICES RENDERED WITHIN WASHINGTON AND OUT OF STATE -- PLACES OF BUSINESS IN BOTH STATES -- APPORTIONMENT.Where taxpayer has places of business in Washington and Alaska which contribute to the performance of a service-selling goods on a commission basis-for an Alaskan customer, the commissions earned are taxable on an apportionment basis. The cost of business method is used unless there is a practical separate accounting.

B&OTAX -- OUT- OF - STATE INDEPENDENT SALES REPRESENTATIVE -- "PLACE OF BUSINESS" -- WASHINGTON EMPLOYEE/SHAREHOLDER -- HOME USED AS OFFICE. "Place of business" held to include the home of the Washington employee/shareholder of an out-of-state independent sales representative. Formal office not required since employee normally called on potential customers at their respective business locations and did in fact work out of his home instead of the taxpayer's Oregon office.

SERVICE B&O TAX -- APPORTIONMENT -- SEPARATE ACCOUNTING METHODS -- COST METHOD -- TOTAL INCOME. Commission income is apportioned by separate accounting methods unless it is not practical, then the cost method may be used. If the cost is used, the ratio of the cost of doing business in this state to the total cost of doing business both within and without this state is multiplied by total income.

APPORTIONMENT -- IN STATE AND OUT-OF-STATE OFFICES -- ADMINISTRATIVE OFFICES IN WASHINGTON -- SEPARATE ACCOUNTING SYSTEMS. Taxpayer received commission income from sales as manufacturer's representative both in Washington and outside Washington. It paid taxes based on a separate accounting method, although its headquarters were located in Washington. Such separate accounting is acceptable when the in-state administrative services are not rendered to the customer.

APPORTIONMENT -- SEPARATE ACCOUNTING METHODS -- WHAT CONSTITUTES. To comply with statutory requirements and to be accepted by the Department, separate accounting method must accurately show the income attributable to activities engaged in Washington.Merely separating income by where the underlying transaction occurred does not constitute separate accounting methods when in-state activities contribute to the earning of the income.

OUT-OF-STATE SERVICES -- APPORTIONMENT. A taxpayer who does not maintain a place of business outside the state is entitled to apportion service income when the out-of-state services performed are more than incidental.