Gross Receipts:
Washington Board of Tax Appeals Addresses B&O Tax Sourcing Methodology for IT Service Company

Docket No. 19-156, Wash. Bd. of Tax App. (10/27/23). The Washington Board of Tax Appeals (Board) recently examined the appropriate Washington business and occupation (B&O) tax sourcing methodology for an in-state company providing information technology (IT) services that primarily involve “translating client websites into foreign languages, creating and updating customer-facing websites, providing support for product launches in foreign markets, merchandising support, and website management,” and held that for periods prior to June 12, 2014 (i.e., for periods prior to certain B&O tax law sourcing changes), the IT company failed to show:

1. The Department’s sourcing methodology was erroneous, and
2. The company’s primary customer received the benefit of its localization services in a specific other state (or foreign country), or primarily in a specific other state (or foreign country).

Among its arguments, the IT company unsuccessfully claimed that all the localization services for its primary customer must be sourced zero percent to Washington as the underlying benefits were received in the market for which the content was localized (which, in this case, was often in foreign countries). In ruling against the IT company, the Board also explained the company failed to show it had nexus in any state or country other than Washington or California, and thus the “throwout” rule applied in many instances. For the B&O tax periods at issue on and after June 12, 2014, the Board held that Washington’s proportional attribution rules apply and that the company has 30 days to provide evidence supporting its claims that the benefits of its IT services were received in multiple states and/or outside Washington. Please contact us with any questions.