Washington Addresses Nexus and Sourcing of Service Revenue in Two Recent Determinations

December 15, 2022

By: Aspen Fairchild, SALT Senior Associate

At a glance

  • The main takeaway: Two Washington tax determinations provide guidance on the issue of sourcing service revenues for Business & Occupation Tax apportionment purposes.
  • Assess the impact: How service revenue is sourced may have a direct impact on whether your business has nexus and a corresponding tax filing obligation.
  • Take the next step: Aprio’s State and Local Tax (SALT) team understands the complexities surrounding the sourcing of service revenue and can help your business stay in compliance, so you do not incur unexpected liabilities and penalties.

Schedule a free consultation today to learn more!

The full story:

The Washington Department of Revenue (Department) addressed the issue of service revenue apportionment for Business and Occupation (B&O) tax purposes in two recent determinations. Like some other states’ business taxes, Washington’s B&O tax has an economic nexus rule, so the proper sourcing of service revenue has a direct impact on whether a business has nexus and a corresponding tax filing obligation. 

Determination #1

The taxpayer is a law firm specializing in assisting its clients to obtain patents. The taxpayer is located outside Washington state and has customers headquartered both within and outside the state. In response to a Washington Business Activities Questionnaire, the taxpayer explained that the patent procurement services it provides allows its clients to obtain patent protection in all sixty-four US states, territories and possessions (i.e., where it sells or may sell its product). Therefore, it apportions its legal services revenue equally among those jurisdictions, and Washington’s 1/64th share is not high enough to meet the state’s economic nexus threshold. 

The Department countered that the taxpayer’s gross receipts should be apportioned to the customer’s headquarters instead, and by doing so, the taxpayer exceeded the nexus threshold.

Washington’s regulations provide that apportionable receipts should be attributed to the location where a taxpayer’s customer received the benefit of the taxpayer’s services.[2] If the taxpayer’s service does not relate to real or tangible personal property, is provided to a customer engaged in business and the service relates to the customer’s business activities, then the benefit is received where the customer’s related business activities occur.[3]

The state distinguished the legal service of enforcing patents through litigation, which the taxpayer does not provide, with acquiring patents, which is not related to the customer’s selling activity. Based on this distinction, the state reasoned that the benefit of the legal services for acquiring patents related to the customers’ strategic planning activities that are initiated by management and corporate legal counsel, presumably working at the customer’s corporate headquarters. Accordingly, the determination concluded that the customer received the benefit of the taxpayer’s services at the location of its headquarters.

Determination #2

The taxpayer is a genealogy research company that performs online services for individuals that are conducted by researchers located outside of Washington state. During an audit, the Department reviewed the taxpayer’s records and concluded that the taxpayer had established substantial nexus based on gross receipts when apportioned to the customer’s residence. The taxpayer disagreed, arguing that the benefit of its research services is received at the location of the items or ancestors researched for the customer (i.e., the location to where the taxpayer’s research is directed) and gross receipts should be apportioned accordingly.

Under the state’s regulation, when the service (i) does not relate to real or tangible personal property, (ii) is provided to individual customers not engaged in business, (iii) does not require the customer to be physically present and (iv) relates to “specific, known location(s),” then the benefit of the service is received at those location(s).[5] Otherwise, the benefit of the service is received where the customer resides.[6]

The taxpayer’s position was that its research was directed to the “specific, known locations” of its research subjects. However, the state looked at the examples in the regulations of services that meet this rule, such as wedding planning, receptions, party planning, travel agent and tour operator services, and preparing and/or filing state and local tax returns. Based on these examples, the state determined that this rule did not apply to the taxpayer since, unlike in those examples, the customer received no discernable benefit at the specific location to which the taxpayer’s genealogical service relates. Instead, the taxpayer’s services are directed at uncovering customer’s ancestry, and the research into a known location only occurs because the location plays a role in such ancestry. Thus, the state concluded that the benefit of the taxpayer’s services was received at the customer’s residence.

The bottom line

In states that have a bright-line economic nexus rule for business taxes, such as income and gross receipts taxes, the sourcing of revenues can take on added significance since it directly impacts nexus.  Aprio’s SALT team has experience with and understands the complexities surrounding the sourcing of service revenue and can assist your business in applying these rules to ensure that you are in compliance with your state tax obligations and do not incur unexpected 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.

Contact Aspen Fairchild, SALT Senior Associate, at aspen.fairchild@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the December 2022 SALT newsletter.

[1] State of Washington Department of Revenue, No. 21-0044, 41 WTD 355 (October 26, 2022).

[2] Wash. Admin. Code 458-20-19402(301)(a).

[3] Wash. Admin. Code 458-20-19402(303)(c).

[4] State of Washington Department of Revenue, No. 21-0055, 41 WTD 371 (October 26, 2022).

[5] Wash. Admin. Code 458-20-19402(303)(d)(i)-(ii).

[6] Wash. Admin. Code 458-20-19402(303)(d)(iii).


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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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.