Washington Court Holds that Lending Marketplace Sources Revenue to Lender’s Location, Not Borrower’s
May 28, 2020
State apportionment rules that source service revenues to the state where the customer receives the benefit of the service are subject to different interpretations, as illustrated by this Washington Court of Appeals case applying its rule to revenues received by an online lending marketplace.
By: Jeff Glickman, SALT Partner
For service companies, the revenue sourcing rules for apportionment purposes are not as easy to apply as those for businesses that sell tangible personal property. States generally source sales of tangible personal property based on where the property is delivered to the purchaser, which is identified by the shipping address. For service revenue, while states use somewhat different terminology, the basic principle is that the revenue is sourced where the customer receives the benefit of the service; but what does that actually mean? A recent Washington Court of Appeals decision sheds some light on how the state applies that rule in the context on an online lending marketplace.
The taxpayer, LendingTree, LLC, operates an online lending marketplace that matches borrowers with lenders. Prospective borrowers can access resources regarding the loan process, varieties of loans, as well as tools to evaluate the type and amount of credit that they may want. If a borrower would like to pursue a loan, they complete an online “Qualification Form” (“QF”) which LendingTree’s proprietary software analyzes to refer the borrower to as many as five potential lenders. These services are free to borrowers, but lenders pay LendingTree a “QF Match Fee” for each referral as well as a “Closed Loan Fee” if that referral results in a closed loan.
On LendingTree’s Washington Business & Occupation (“B&O”) tax return, it documented sourced revenue from lenders based on where the lender is located. Upon audit, the Department of Revenue (“DOR”) concluded that LendingTree should have sourced revenues based on where the borrower is located and was assessed additional tax. LendingTree lost its challenge case in the lower court and appealed to the Court of Appeals.
Washington’s B&O tax is a gross receipts tax imposed on businesses based on their activity classification. For service companies, gross income is multiplied by a receipts factor, the numerator of which is the gross income of the business attributable to this state, and the denominator of which is the gross income of the business everywhere. Business activity from services is attributable to the state “[w]here the customer received the benefit of the taxpayer’s service,” which is “where the customer’s related business activities occur.”
LendingTree argued that the lenders receive the benefit of its service at the lenders’ business locations where they receive and evaluate the QF referrals. The DOR contended that the lenders receive the benefit of LendingTree’s services based on where the consumer seeking the information is located, focusing on LendingTree’s marketing and outreach to borrowers.
The Court disagreed with the DOR’s characterization of LendingTree’s business, noting that LendingTree does not provide marketing services to lenders, but instead provides a referral service as evidenced by the contractual payment structure by which lenders pay LendingTree a QF Match Fee for referrals, not marketing services. Therefore, the Court sided with LendingTree that the proper sourcing of revenues is the lender’s location where they receive and evaluate the QF referrals.
Several points to consider from this case:
- Applying these rules to service providers where there is more than one potential “customer,” such as the lender and the borrow in this case, can be more difficult and open to different interpretations since there are arguably two locations where someone is receiving a benefit.
- How the taxpayer structures their business and revenues can impact the analysis. For example, if LendingTree received subscription fees from lenders to be part of its network, the state may have had a better argument in favor of a marketing service.
- Other similar service providers that match a buyer and seller, such as Angie’s List, may apply the analysis in this case to their own Washington B&O tax filings.
Aprio’s SALT team has deep experience with state apportionment rules and can assist businesses with applying them as well as structuring their transactions and operations to minimize their multistate income tax liability. 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 May 2020 SALT Newsletter.
 LendingTree, LLC v. State of Washington, Department of Revenue, No. 80637-8-I, (Wash. Ct. App. Div I, March 30, 2020).
 Rev. Code Wash. § 82.04.462(2), (3)(a).
 Rev. Code Wash. § 82.04.462(3)(b)(i) and Wash. Admin. Code § 458-20-19402(303)(c).