Washington Businesses: Gross Receipts May Include Customer Reimbursements, Limiting Deductions

May 27, 2021

money series

By: Tina M. Chunn, SALT Senior Manager

At a glance:

  • The main takeaway: A new ruling out of Washington suggests that customer reimbursements may be included in gross receipts.
  • Impact on your business: This case calls into question B&O tax deductibility for certain Washington-based businesses.
  • Next steps: Aprio’s State and Local Tax (SALT) team has deep expertise and knowledge of Washington’s evolving tax rules and can help you achieve the desired tax treatment.

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The full story:

On April 5, 2021, the Washington Department of Revenue (Department) issued a tax ruling that denied a taxpayer a deduction under the business and occupation (B&O) tax for certain payments it made to third-party consultants, which the taxpayer claimed were client advances or reimbursements.[1]

An overview of the ruling

The taxpayer is an international architectural services firm that serves Washington customers. The firm was selected for an audit based on a determination of economic nexus, as the result of an active non-reporting letter and questionnaire sent by the Department.

During the audit, the taxpayer provided sales data that excluded amounts paid to third-party consultants, but the Department denied those exclusions.[2] The petition for review claims that the payments received by the taxpayer from its clients for the third-party consultants were advances or reimbursements that are excludable from the B&O tax base.

Washington Rule 111 provides that taxpayers may exclude from gross income of a business any advances or reimbursements received from a client, when the money or credit is held by the taxpayer on behalf of its client.[3] Specifically, this rule recognizes that an advance or reimbursement only applies when the client alone is liable for the payment of the fees or costs to the third party and when the taxpayer making the payment does not have any liability for the payment, other than as an agent for the customer.

As previously ruled by the Department,[4] Rule 111 is meant to differentiate between expenses that pass through a taxpayer in its capacity as an agent (which are excludable) and those payments that are the taxpayer’s costs of doing business (which are not excludable). Merely employing an independent contractor does not provide for the exclusion of any income associated with work that it performed on behalf of the taxpayer.

For Rule 111 to apply, the taxpayer must not be liable for paying the contractor except as an agent of the client. To satisfy the agency requirement and prove the existence of an agency relationship, standard agency definitions must be met through supporting documentation. An agency relationship is not determined by how the parties describe themselves.

In this ruling, the taxpayer did not provide supporting contracts, invoices or proof of its agency relationship with the clients associated with the consultant payments. Therefore, the taxpayer’s payments to the consultants from client proceeds constituted its own costs and were not excludable from the gross income of the business under the B&O tax. The taxpayer also requested and was denied a waiver of penalties on this assessment, as the misunderstanding or lack of knowledge was not a circumstance beyond the taxpayer’s control.[5]

The bottom line

When dealing with gross receipts-based taxes, deductions are often limited and may require strict adherence to the specific rules. Aprio’s SALT team is experienced with reviewing income classifications and associated exemptions for gross receipts and other state taxes. We can also assist you with structuring the transactions and the documentation to support the desired tax treatment.

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 Tina M. Chunn, SALT Senior Manager, SALT Associate at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Det. No. 18-0298, 40 WTD 034 (April 5, 2021).

[2] While not specified, it is possible that as part of providing its architectural services, the taxpayer consults with and pays a local engineering firm, and that such payment is then invoiced to the taxpayer’s client.

[3] WAS 458-20-111 (Rule 111).

[4] Washington Imaging Services, Inc. v. Department of Revenue, 171 Wn.2d 548, 252 P.3d 885 (2011).

[5] RCW 82.32.105; WAC 458-20-228 (Rule 228).


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

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.