Q. Do centralized money management programs operated by a parent corporation for subsidiary and affiliated corporations constitute a taxable business activity?
A. Certain money management programs offered by parent corporations do not constitute a taxable activity.
Centralized money management techniques generally involve the daily funding of operating subsidiaries by the parent or managing entity and the end of day sweeping of all subsidiary accounts down to a zero or minimum targeted balance. Banks and other financial institutions have developed and marketed such programs that they will manage for a fee. Banking officials state that these money management systems, even when internally managed by the businesses themselves, are not in competition with banks but are in cooperation with them. The systems are driven by their own business dynamics rather than by the traditional concept of investing funds for a direct anticipated yield. Yet, traditional cost accounting methods are still employed in connection with these money management systems. Thus, the daily transactions are characterized with the features of loans from the parent or central account to the subsidiary accounts, even to the extent that interest is computed and booked on the records of the parent or central account. This accomplishes an efficiency measurement of the use of all operating funds. In short, interest expense is computed to derive a true picture of how profitable any operating subsidiary has performed. It tells the business managers what the daily profit/loss status of all funded subsidiary or affiliate entities would be if they were required to procure funding at arm’s length in the financial marketplace, and pay a cost for such operating funds. However, no such cost of money is actually charged or paid. Rather, interest costs are imputed, at best. They are neither required to be recorded on the books of account of the parent or managing entity, nor to be reported as actual income for any purpose. The interest computations are exclusively for internal, informational, control purposes.
The Department has held that the money management activities are not subject to tax for two reasons. First, the business does not receive any interest payments. Nor is there any enforceable obligation to pay the imputed interest expense. Second, even if the interest amounts were actually paid, the business tax deduction (RCW 82.04.4281) is for “…amounts derived by persons other than those engaging in banking, loan, security, or other financial businesses, from investments or the use of money as such …”. The interest amounts are clearly from the use of money as such. However, when programs such as these are marketed or their functions are performed for a fee or charge, that income is taxable under the service and other activities B&O classification. This is true even when the business organization itself performs these activities for its subsidiaries if a charge for that service is made. This tax treatment is applicable only for money management activities as opposed to other arm’s length financial dealing between closely related but separate business persons. The latter activities which generate “gross income” are taxable just as if no close relationship existed between the persons.