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What’s Happening
Washington is making important changes to its apportionment rule scheduled to become permanent in June of 2024. Taxpayers will want to understand how these changes impact their tax filing obligations in Washington in 2024 and into the future.
Background
Washington’s 2010 implementation of its single factor receipts sourcing regime based on the “benefit of the service” has been difficult for the Department and taxpayers to navigate.
One of the challenges involves subsection 303(c) of current WAC 458-20-19402 (“Rule 19402”), addressing sourcing of receipts from business services. For example, the Department and taxpayers often disagree about what the customer’s related business activities are and where those activities occur.
To address this challenge, the Department developed a new analytical framework. This framework uses several questions designed to determine the nature of the customer’s related business activity.
Noteworthy Changes
The new Rule19402(303)(c) states:
A customer’s related business activities will generally occur either in the customer’s market or at the customer’s business location(s).
Thus, receipts will be sourced to either the customer’s market, or to a non-market business location(s). If the taxpayer is providing services related to the customer’s activities in its market, the service receipts will be attributed to that market location. To determine whether the taxpayer’s service is related to the customer’s activities in its market, new Rule 19402 asks the service provider to determine if their services are:
- Promoting the customer’s products?
- Engaging in or completing the customer’s product sales?
- Obtaining or facilitating amounts owed to the customer from the sale of its products?
- Establishing or maintaining the customer’s market?[1]
If the taxpayer answers “yes” to any of those questions, then the customer’s related business activities occur in the customer’s market, and receipts are sourced to the corresponding market location.
However, if the taxpayer answers “no” to all four questions, receipts are sourced to the customer’s “business location(s).” In new Rule 19402, the customer’s business location(s) are determined in a cascading hierarchy as follows:
- Physically present: If the taxpayer’s service requires the customer to be physically present, then the customer’s business location(s) is where the customer is located when the taxpayer provides the service.
- Specific, known business location(s): If the taxpayer’s service does not require the customer to be physically present, and the taxpayer’s service relates to a specific, known business locations, then the customer’s business location(s) is that specific, known business location(s).
- Principal place of business or commercial domicile: If the steps above do not apply, then the customer’s business location is the customer’s principal place of business or commercial domicile.[2]
Next Steps
Businesses should evaluate their current sourcing methods implemented under the current Rule 19402 in preparation for the annual apportionment reconciliation due later this year, on October 31st, 2024. At KOM, we have extensive experience in this process, and can help you understand how the rule will impact your business.
Contact
Please contact mike@komconsulting.com, caleba@komconsulting.com, or johnk@komconsulting.com for more information.
[1] Wash. Admin. Code §458-20-19402 (303)(c)(i)(A)-(C).
[2] Wash. Admin. Code §458-20-19402(303)(c)(ii), (iii)(A) – (C).