The Washington Department of Revenue’s Administrative Review and Hearings Division recently issued a holding that sales of services were correctly sourced to Washington.1
The taxpayer was an out-of-state corporation providing credit card account-related services to its out-of-state affiliates. The affiliates issued credit cards to their customers, some of which had billing addresses in Washington. The taxpayer’s revenue was generated by a flat monthly fee charged to its affiliates for providing credit card statements to the affiliates’ card holders. Upon audit, it was determined that Washington income should be attributed to the taxpayer based on the number of Washington credit card billing addresses receiving statements from the taxpayer, as the benefit was received at the card holders’ addresses. The taxpayer disagreed, claiming it had no income sourced to the state as the affiliates received the benefit of its services at their corporate headquarters out of state, not at the credit card holders’ addresses.
It might have been possible for some of the taxpayer’s services to qualify as back-office services rather than credit card services, which would allow the sourcing to follow the affiliates’ corporate headquarters, but the taxpayer could not provide sufficient details to make that determination. The taxpayer did not charge separate fees for different services but provided general assistance to the affiliates, including soliciting customers, processing credit applications, billing customers, and providing customer support. It was not possible to access the data required to separate the different services provided by the taxpayer.
The hearing determined that the taxpayer’s services should be sourced based on the billing addresses of the credit card holders, in essence, following a growing trend of states that seek to source sales of services to the “customers’ customer.” Rule 19402(305) requires that receipts be sourced to the billing address of cardholders when a nonfinancial institution provides credit card services.
This determination points out the importance of tracking each business activity in great detail for purposes of the numerous tax rates, exemptions, and exclusions that the Washington Business and Occupation Tax imposes on taxpayers operating within the state. Ryan tax professionals can assist taxpayers to appropriately identify and source each stream of revenue to ensure the situation faced by the taxpayer in this case does not result in inappropriate taxation of a stream of revenue. Please contact any of the Ryan tax experts listed below to assist in bifurcating and appropriately apportioning your streams of revenue.
1 Washington Tax Det. No. 20-0165, 41 WTD 160 (2022).
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