home home Find taxes & rates home Business & occupation tax home Economic Nexus and Apportionment Questions and Answers Economic Nexus and Apportionment Questions and Answers

Nexus Standard for Wholesale Sales - Effective Sept. 1, 2015

Nexus Standard for “Click-Through” Retail Sales - Effective Sept. 1, 2015

 

Table of Contents

Economic nexus
Economic nexus vs. physical nexus
Attributing income
Foreign activities
Other

 

Economic nexus


With a shorter nexus period for economic nexus, is it the intent to have two different nexus periods, one for service and one for tangible personal property?

No. Effective June 1, 2010, the one-year trailing nexus provision will apply for all business and occupation tax classifications.


Are municipal bonds and negotiable certificates of deposit considered property for the purpose of determining nexus?

Municipal bonds and negotiable certificates of deposits are not considered loans. For example, ownership of a $100,000 municipal bond issued by a Washington city will not create nexus for the out-of-state bondholder under the property threshold. Likewise, ownership of a negotiable certificate of deposit issued by a Washington financial institution will not create nexus under the property threshold. 

However, if a person invests in a non-negotiable certificate of deposit, that person has lent money to the issuer and the outstanding balance of the certificate of deposit is property attributed to the location of the issuing financial institution.

The law provides taxpayers a method to make essentially estimated tax payments throughout the year. Taxpayers are then required to reconcile those payments with their actual liability. When that reconciliation results in a refund, interest will be paid to the taxpayer and if the taxpayer owes additional taxes, interest will apply that amount as well.




NEXUS EXAMPLES


The following examples identify a number of facts and then state a conclusion; they should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances.

Example 1

Company A is domiciled (headquartered) in State X. In the previous calendar year it has $150,000 in royalty receipts attributed to Washington per WAC 458-20-19403 and $150,000 in gross income from other apportionable activities attributed to Washington per WAC 458-20-19402.

Company A has substantial nexus with Washington because it has a total of $300,000 in apportionable receipts in the previous calendar year. It does not matter that the receipts were from apportionable activities that are subject to tax under different B&O tax classifications. Substantial nexus is determined by the totality of the taxpayer’s apportionable activities in Washington.

Example 2

Company B is domiciled in state Y. In the previous calendar year it has $45,000 in property, $45,000 in payroll, and $240,000 in gross apportionable income attributed to Washington.  Its total property is valued at $200,000; its world-wide payroll is $200,000; and its total gross income is $2,000,000. Company B does not have substantial nexus with Washington during the calendar year based on the minimum nexus standards.

Example 3

Assume the same facts as Example 2 except world-wide payroll is $150,000. With the changed facts, Company B has substantial nexus with Washington because thirty percent (30%) of its payroll is located in Washington.

Example 4

Company C is domiciled in Canada. It has $200,000 of gross apportionable income attributed to Washington and $300,000 of gross apportionable income attributed to Canada. Company C has no property or payroll located in Washington. Company C has substantial nexus with Washington because forty percent of its apportionable receipts are attributed to Washington.

Example 5

Company D has no property located in Washington on January 1 and on December 31 of the previous calendar year. However, it brought $100,000 in property into Washington on January 15 and removed it from Washington on November 15 of that calendar year. The department may compute the value of Company D’s property on a monthly basis in this situation because doing so is required to properly reflect the average value of Company D’s property in Washington ($100,000 x 10 / 12 = 83,333). Company D has nexus with Washington based on the value of the property averaged over the calendar year.

Economic nexus vs. physical nexus


If a business engages in activities that fall under the service and other activities and wholesaling classifications and has economic nexus (e.g., has more than $267,000 of gross receipts from this state in the previous year) but does not have a physical presence in this state, does the business also owe wholesaling B&O tax in the current year?

Yes. A business establishes substantial nexus for wholesaling B&O tax and apportionable income by meeting the economic thresholds. Income from apportionable income attributed to Washington and wholesales sales sourced to Washington are combined in determining if the thresholds are met. See RCW 82.04.067(6).

The economic nexus standards only apply to apportionable activities (and wholesale sales beginning September 1, 2015.).

 

Attributing income

How are receipts from services attributed?

Services are attributed under the following hierarchy.

  1. Where the customer receives the benefit of the services, which may be determined by a reasonable proportional method (see note below).
  2. If the benefit is received in multiple states, then where the benefit of the service is primarily received.
  3. If 1 or 2 do not apply, then to where the service was ordered.
  4. If 1 – 3 do not apply, then to where the bill is sent.
  5. If 1 – 4 do not apply, then to where the customer sends the payment from.
  6. If 1 – 5 do not apply, then to the customer’s address maintained in the seller’s records.
  7. If 1 – 6 do not apply, then to the seller’s commercial domicile.

For financial institutions, the receipts are attributed per WAC 458-20-19404.
Note:  The department expects that most taxpayers will attribute apportionable receipts based on #1 because the department believes that either the taxpayer will know where the benefit is actually received or a "reasonable method of proportionally attributing receipts" will generally be available. See WAC 458-20-19402(301).

 


How are receipts from royalties attributed? 

Royalties are sourced under the following hierarchy.

  1. Where the customer used the taxpayer’s intangible property, which may be determined by a reasonable proportional method.
  2. If the customer used the intangible property in more than one state, then where intangible property was primarily used.
  3. If 1 or 2 do not apply, then to where royalty agreement with the taxpayer was negotiated.
  4. If 1 – 3 do not apply, then to where the bill is sent.
  5. If 1 – 4 do not apply, then to where the customer sends the payment from.
  6. If 1 – 5 do not apply, then to the customer’s address maintained in the seller’s records.
  7. If 1 – 6 do not apply, then to the seller’s commercial domicile.

Under the apportionment rules, will the taxpayer need to prove a negative (For instance: Why it would not be attributed to Washington)?

The apportionment rules specify a hierarchical method of determining where receipts should be attributed. The resolution of disputes between taxpayers and the department will be the same as other disputes. In a dispute, the taxpayer will have the burden to show that the department’s findings are incorrect. This would normally be done by demonstrating how the receipts are attributed under the statute.

Tier 1 attribution rule (where the customer receives the benefit of the service or the intangible property is used):  WAC 458-20-19402 provides a framework for determining where the benefit of a service is received. Specifically,

  1. if the service relates to real property, then the benefit is received where the real property is located;
  2. If the service relates to tangible personal property, then the benefit is received where the tangible personal property is located or will be located;
  3. If the service does not relate to real or tangible personal property and the customer is engaged in business, then the benefit is received where the customer’s related business activity occurs;
  4. If the service does not relate to real or tangible personal property and the customer is not engaged in business, then the benefit is received based on the following
    1. If the customer must be present (e.g., doctor appointments), then where the service is provided;
    2. If the service relates to a place, then that place (e.g., wedding planning); and
    3. If (a) or (b) do not apply to where the customer resides.

 

WAC 458-20-19404 provides a framework for determining where intangible is used. Specifically

  1. If the intangible property is used in marketing, then to where consumers acquire the related product.
  2. If the intangible property is used for a non-marketing purpose, then the use is where the related manufacturing, R&D or similar activity occurs.
  3. If the intangible property is used for both marketing and non-marketing uses and the fee is accurately segregated, then the department will honor the segregation and attribute the income accordingly.
If the intangible property is used for both marketing and non-marketing uses and the fee is not segregated, then the fees will be treated as marketing use.


Tier 2 attribution rule (if the benefit of the service is received in multiple states and it is not possible to attribute the receipts according to Tier 1, income is attributed to where the benefit of the service is primarily received or for royalty income to the office of negotiation):  How is “primarily” defined?

Primarily” means more than 50 percent. However, if receipts under a contract can be readily attributed to multiple states, then the appropriate amounts are attributed to each state. For example, if a single contract is entered into for the franchises in three states and the fee for each is specified in the contract, then if a franchise were located in Washington, then the receipts related to the Washington franchise would be considered Washington receipts.

Tier 3 attribution rule (income is attributed to the state from which the customer ordered the service): How is the seller going to know or confirm from where the customer ordered the service?

Examples of where the seller would know this information include when a sales person obtains an order directly from the buyer or when the seller and buyer negotiate terms. If the taxpayer does not know this information, then the taxpayer moves to the next tier.

 

Can a different attribution rule be used for each transaction within an appropriate activity or tax classification?

Generally yes. However, the Department reserves the right to question taxpayers who seem to be using this method of attribution to improperly avoid payment of taxes.


What is the Department’s thinking on internet advertising services? We know now that it is not considered a digital good, so it appears that Internet advertising is taxable under the service and other activities classification.

You will need to use the attribution hierarchy provided. Internet advertising should be attributed to where the customer’s related business activity (i.e. selling) takes place. This is generally where the customer’s product or service is received by the end consumer. (See WAC 458-20-19402 example 22). If specific information is not available, such as clicks, then the use of data such US Census Internet Usage statistics is a reasonable proportional method of attributing the receipts.

 

Foreign activities


Is foreign-attributed income included in the apportionment calculation under the single-factor sales apportionment method?

Yes. The denominator of the sales factor is the taxpayer’s total gross income from engaging in an apportionable activity everywhere in the world during the tax year. Also, under the throw-out rule, income that would be attributed to a foreign jurisdiction would be thrown out of the denominator of the sales factor if (1) the taxpayer is not subject to a business activities tax in that foreign jurisdiction and (2) the taxpayer does not have nexus with that foreign jurisdiction under Washington’s nexus standards and some of the taxpayers activity occurs in Washington. The receipts factor is multiplied by the taxpayer’s worldwide income.


Does economic nexus apply to businesses domiciled outside of the United States?

If a foreign entity meets the minimum economic presence tests in RCW 82.04.067, then Washington will impose its B&O tax on that entity unless the state is federally preempted.

 

Other


If a Washington business is not subject to tax in another state on income attributed to that state under the new single-factor apportionment law, does Washington tax that income?

A Washington business with receipts attributed both inside and outside of Washington can apportion its apportionable receipts.

However, single factor receipts apportionment has a throw-out rule. Under the throw-out rule, if a taxpayer is not taxable in the state where receipts are attributed, then the taxpayer must exclude those receipts from the denominator of Washington’s sales factor.

A taxpayer is considered not taxable in another state if:

  • It is not subject to that state’s business activity tax, and
  • The taxpayer would not be considered to have economic nexus in that state using Washington’s thresholds.

As a result of the throw-out rule, no more than 100 percent of the taxpayer’s income is attributed among the states where it is subject to tax.


Are accounts receivable to be reported as income?

If the taxpayer maintains its books and records on an accrual tax basis, then the income is reported when the income is accrued.  If the amount accrued is later treated as a bad debt, then the taxpayer gets a deduction for the amount written off. WAC 458-20-196 and 458-20-199.


Are deductions made before or after gross income is calculated?

By definition, gross income is always calculated before deductions. With respect to the $267,000 threshold for receipts, deductions are not taken into account. With respect to apportionment, the receipts factor is applied to “apportionable income,” which is gross income from engaging in apportionable activities less exemptions and deductions (other than an interstate and foreign sales – apportionment deduction) allowed under the B&O tax statutes.


Is separate accounting no longer applicable under the new apportionment rules?

Correct. Separate accounting is no longer a specifically authorized method of apportioning income for tax periods after May 31, 2010.


Concerning royalties it seems that separate accounting and apportionment based on the receipts factor would yield the same result. Consequently, for ease of administration, would DOR allow the business to report Washington royalties based on the location of the person paying the royalties?

    • For example, Washington royalties of $5 million and world-wide royalties of $100 million yield an apportionment factor of 5 percent. Income subject to apportionment of $100 million times the 5 percent apportionment factor yields $5 million, the same amount that is attributable to Washington based on the location of the person paying the royalties.

While separate accounting might have resulted in the same taxable amount as single factor receipts, there are differences.  Separate accounting is no longer an authorized method of apportioning income.  Further, the single factor receipts apportionment method includes a throw out provision that did not exist under separate accounting. Additionally, the impact of deductions and exemptions is significantly different under single factor receipts apportionment.



Does economic nexus and apportionment apply to co-ops?

To the extent that a co-op’s business activities are subject to apportionable B&O taxes and not otherwise exempt, then economic nexus and apportionment apply to co-ops.


Regarding Economic Nexus, is there an amnesty period?

No. There is no specific amnesty period written into the legislation.

However, the law does provide a great deal of flexibility with enforcement. The bill does not impact the existing voluntary disclosure provisions that will fully or partially waive penalties for qualifying taxpayers. Additionally, the new law requires an annual reconciliation that, if completed by October 31 of the following year, allows taxpayers to amend previously filed returns with no additional penalties. Interest, however, will be assessed or refunded.

 

Why is interest added to corrected returns?

The law provides taxpayers a method to make essentially estimated tax payments throughout the year. Taxpayers are then required to reconcile those payments with their actual liability. When that reconciliation results in a refund, interest will be paid to the taxpayer and if the taxpayer owes additional taxes, interest will apply that amount as well.