Taxpayer’s Gross Receipts from Colocation Services are Subject to Washington B&O Tax

March 30, 2022

By: Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: The distinction between a taxpayer licensing the use of real estate versus leasing or renting real estate can result in different state tax treatment.
  • Assess the impact: The Washington Department of Revenue’s ruling on a taxpayer’s gross receipts could impact businesses providing colocation services to clients.
  • Take the next step: Aprio’s State and Local Tax (SALT) Team can help you identify the lease and license distinctions in various states to ensure compliance with state tax obligations.

Schedule a free consultation today to learn more!

The full story:

The Washington Dept. of Revenue (DOR) recently issued a tax determination in which it concluded that a taxpayer’s gross receipts from providing colocation services was subject to the state’s Business & Occupations (B&O) Tax.[1] Colocation services generally involve providing space in data center facilities, including supplying power, cooling and physical security for its customers’ data center equipment. 

The B&O Tax is a gross receipts-based tax that provides an exemption for the sale and rental of real estate. The regulations distinguish between exempt leases or rentals of real estate and taxable licenses to use real estate.[2] As it relates to this case, Washington concluded that the taxpayer’s colocation services constituted a license to use real estate as opposed to a lease or rental of real estate.

The taxpayer’s agreement, called a Cage Facility License, between itself and a customer (Licensee) includes the following provisions:

  • Taxpayer owns or leases premises within the building at issue, and the taxpayer agrees to license the right to use a certain space (referred to by a specific cage number) located on such premises.
  • Licensee is permitted to install and operate the Licensee’s telecommunications equipment for purposes of connecting to the taxpayer’s network in the building and no other uses.
  • Licensee is granted non-exclusive access to the licensed premises and is required to limit its presence only to those areas where it has “legitimate business-related activities.”
  • Taxpayer agrees to provide HVAC, lighting and electricity to the licensed premises. In addition, taxpayer will maintain the premises and the building, including the fire suppression system, HVAC and electrical and mechanical systems.
  • Taxpayer is permitted to make periodic inspections of the licensed premises with due notice.

For B&O tax purposes, when differentiating between an exempt lease or rental of real estate versus a taxable license to use the real estate, Washington courts have focused on exclusivity as a central element. Specifically, regulations describe a lease or rental of real estate as conveying an exclusive right in the continuous possession against the world, including the owner, and grants the lessee the absolute right of control and occupancy during the term.[3] Conversely, regulations describe that a license to use real estate does not confer exclusive control or dominion over the real estate, and the owner controls such things as lighting, heating, cleaning, repairing and opening and closing the premises.[4]

Based on that guidance from the Washington courts, the DOR concluded that the taxpayer’s Cage Facility License does not convey the exclusive rights necessary to treat the arrangement as a real estate lease. The agreement contemplates a very limited use of the real estate as opposed to the broader bundle of rights typically conveyed in a landlord-tenant relationship. For example, the Licensee is required to allow the taxpayer to make periodic inspections and limits the Licensee’s presence to those areas where it has “legitimate business-related activities.” Notably, the Licensee’s use of the premises is limited to the installation and operation of the Licensee’s telecommunicates equipment for purposes of connecting to the taxpayer’s network in the business, “and no other uses.” Additionally, the taxpayer provides electricity, heating and HVAC, and maintains the premises and the building, which are all identified in the tax regulations as factors indicative of a license to use real estate.

The bottom line

While the case at issue addresses the implications of a lease versus a license of real estate for purposes of Washington’s B&O tax, the lease/license distinction can have implications in other state tax areas. For example, a lessee of real estate would typically be required to include eight times its annual rental payment in its property factor, whereas a license to use real estate would not be included in the property factor. Aprio’s SALT team has experience with these issues and can assist your business to make sure that you are treating your transactions under the appropriate rules for state tax purposes. This ensures that you remain in compliance with your state tax obligations (i.e., you do not overpay nor incur unexpected tax liabilities and penalties). We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

This article was featured in the March 2022 SALT Newsletter.

For more information contact Jess Johannesen at or call 770-353-2817 or contact Jeff Glickman at or call 770-353-4791.

[1] Washington Department of Revenue, Det. No. 20-0041, 41 WTD 37, February 4, 2022.

[2] WA Admin. Code §458-20-118(1)

[3] WA Admin. Code §458-20-118(2)

[4] WA Admin. Code §458-20-118(3)


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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