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What To Know About Intercompany Service Receipts In Washington

What To Know About Intercompany Service Receipts In Washington

Washington state is known for its evergreen forests, beautiful mountains and for being the home of Starbucks. That said, for remote retailers, it should also be known as a state with several unique tax situations, one of which is its treatment of intercompany service receipts.

In general, the Washington Department of Revenue (DOR) takes a fairly aggressive stance in regards to the taxation of remote companies providing services to customers within the state.

However, companies have several avenues that could provide potential relief for these tax burdens.

Taxation Of Services Within Washington State

As previously mentioned, Washington state is aggressive in its approach to the taxation of remote companies. In regards to economic nexus, Washington was among the first to enact it, with a version of it being implemented on Oct. 1, 2018. The state also enforces economic nexus for its business and occupation (B&O) tax on gross receipts.

Washington state is also proactive when it comes to the taxation of technology products, which makes sense given the number of technology companies that have headquarters within the state, including giants such as Microsoft, Amazon and Nintendo of America. In short, all digital products are taxable. Prewritten computer software that is electronically downloaded is taxable. However, custom computer software that is electronically downloaded is exempt. Lastly, Software as a Service (SaaS) is also taxable.

Taxation Of Intercompany Service Receipts

When it comes to intercompany services receipts, the location of the main beneficiary of the services is a primary factor in determining the sourcing of those receipts, as opposed to where the services are performed. According to ReedSmith, businesses that perform support or management services, such as human resources or accounting, for an affiliate that is a wholesaler or retailer of tangible personal property often get caught by Washington’s nexus web.

Specifically, “Both [companies] are based outside Washington and may have little or no property or payroll in the state. [The affiliate and operating company] makes sales nationwide and pays B&O tax, while [the service provider] has no filing history in Washington prior to being audited by the [DOR]. On audit, the Department sources a portion of [the service provider’s] intercompany receipts from [the affiliate] to Washington, resulting in B&O tax liability for [the service provider].”

According the ReedSmith, a recent Washington state Court of Appeals decision on LendingTree, LLC v. Department of Revenue provides guidance in regards to these situations. In the opinion, the court determined, “the benefit of LendingTree’s services were received at the location where its customers were physically located, not at the location of its customers’ market (the borrower location).”

Depending on how the sourcing of receipts is determined, the B&O tax liabilities of the provided services can be mitigated, providing relief to companies providing services and with nexus in Washington state.

Do You Need Help Dealing With Washington Tax Liabilities?

Contact Monika Miles And Team, Miles Consulting.

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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