Washington Ruling Explains Business & Occupation Tax Market-Based Sourcing Rules for Service Revenue
A non-Washington corporation that provides technical authoring services to a manufacturer was required to source revenues to Washington since that is the location where the services were ordered.
A recent Washington Department of Revenue Appeals Division ruling explained the application of the state’s market-based sourcing rules for service revenue under the Business and Occupation Tax (“B&O Tax”).  The taxpayer in this case argued that, since it could not access information as to the location where the benefit of its services were received, it attributed receipts to the state in which the orders were approved, which was outside the state. The Appeals Division disagreed and required that the revenues be sourced to Washington since that is the location from where the services were ordered.
The taxpayer in this case was a non-Washington corporation that provides technical authoring and publication services for an aerospace equipment manufacturer (the “manufacturer”). The taxpayer’s services resulted in the creation of manuals and instructions that were to be used alongside the equipment itself. The manufacturer had site locations in Washington, but its main office was located out-of-state. The taxpayer had six employees working from home offices in Washington, and some functioned as technical writers and illustrators.
With regard to initiating service projects with taxpayer, all of the manufacturer’s site locations may initiate orders, but the manufacturer’s out-of-state office ultimately approved such orders, monitored and managed the service contracts, and controlled all interaction with the taxpayer throughout all phases of the project. Additionally, the taxpayer sent its invoices to the manufacturer’s out-of-state office for payment. Generally, the taxpayer did not have, and the manufacturer refused to supply, information regarding the manufacturer’s customers. 
The Appeals Division applied the market-based sourcing rules for service revenue, which require that taxpayers apply the rules therein in descending order, only going to the next rule if the taxpayer is unable to attribute the revenue using the prior rule.  The order in which gross receipts should be sourced are to the state: (i) where the customer received the benefit of the taxpayer’s service; (ii) where the benefit of the service was primarily (i.e., more than 50 percent) received (if received in more than one state); (iii) from which the service was ordered; (iv) to where the billing statements or invoices were sent; (v) from where the customer sends payment to the taxpayer; (vi) where the customer is located as indicated by the customer’s address shown in the taxpayer’s books and records or obtained during the sale or contract negotiations; and (vi) of the taxpayer’s commercial domicile.
The Appeals Division noted that the sourcing rules strongly favor application of rules (i) and (ii) above by which taxpayers are expected to reasonably determine the state(s) where the benefit of the service is received. In the case of this taxpayer, since its services relate to tangible personal property (i.e., the manuals accompany the equipment to which they apply), the regulation provides that the benefit of the service is received at the location where the tangible property is located or expected or intended to be located. However, as the facts of this case presented the unusual circumstance where the taxpayer could not determine where the equipment and the accompanying manuals would be located, the Appeals Division applied rule (iii) above and looked to the state from which the manufacturer ordered the services. Even though the taxpayer argued that the orders were approved outside of Washington, the Appeals Division pointed out that approving is not the same as ordering.
Market-based sourcing rules are becoming more common among the states, and one of the difficulties in applying these rules is determining to what extent a taxpayer has (or may need to obtain) customer information, including potentially information about the taxpayer’s customer’s customers. At HA&W, our SALT team is able to assist clients in understanding the complexities of these rules and recommending practical solutions that may minimize tax liabilities. As always, we will continue to monitor these and other significant SALT tax developments and include any updates in future issues of the HA&W SALT Newsletter.
Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at [email protected] for more information.
 Det. No. 13-0319, 34 WTD 452 (2015), released Oct. 30, 2015.
 The taxpayer claimed that the manufacturer is prohibited by law from supplying such information, speculating that some of the manufacturer’s customers include contractors for the United States Department of Defense.
 RCW 82.04.462(3)(b); WAC 458-20-19402.
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