For business and occupation (B&O) tax purposes, apportionment refers to the use of a formula to allocate a business’ income to the appropriate taxing jurisdictions.

If you are a business that is taxable in Washington and another state, you must use our apportionment formula to determine how much of your apportionable income is subject to B&O tax in Washington.

Taxable in another state means your business meets any of the following requirements in the current or prior calendar year:

• Is subject to a business activities tax by another state or country on income received from engaging in apportionable activity.
• Has physical presence nexus in another state or country.
• Has more than $100,000 in gross receipts sourced or attributed to another state or country.
• Is organized or commercially domiciled in another state or country.

In determining if your business has exceeded the $100,000 receipts threshold, you must include gross income from all tax classifications, including the apportionable income attributed to each state or country.

If you do not meet any of the above requirements, your gross income is taxable in Washington and is not eligible to be apportioned to other states or countries.

If you are eligible to apportion your receipts, you must report gross apportionable income and then take an Apportionment (Interstate & Foreign Sales) deduction based on the results of the apportionment formula.

If you are an out of state business, see our out of state businesses reporting thresholds and nexus guide.

Apportionable income includes income reported under the following business and occupation (B&O) tax classifications:

• Service and other activities.
• Royalties.
• Travel agents and tour operators.
• International steamship agent, international customs house broker, international freight forwarder, vessel and/or cargo charter broker in foreign commerce, and/or international air cargo agent.
• Stevedoring and associated activities.
• Disposing of low-level waste.
• Insurance producers, title insurance agents, or surplus line brokers.
• Public or nonprofit hospitals.
• Real estate commissions.
• Research and development performed by nonprofit corporations or associations.
• Inspecting, testing, labeling, and storing canned salmon owned by another person.
• Representing and performing services for fire or casualty insurance companies as an independent resident managing general agent licensed under the provisions chapter 48.17 RCW.
• Contests of chance.
• Parimutuel wagering.
• International investment management services.
• Aerospace product development.
• Printing or publishing a newspaper (but only with respect to advertising income).
• Printing materials other than newspapers and publishing periodicals or magazines (but only with respect to advertising income).
• Cleaning up radioactive waste and other by-products of weapons production and nuclear research and development, but only with respect to activities that would be taxable as an “apportionable activity” if this special tax classification did not exist.

 

Royalty income is attributed under a hierarchy. This means you only move to the next step if you are unable to attribute under the current step.

The hierarchy for attributing royalty income is as follows:

1. Where the customer uses the intangible property.
   • If you can reasonably determine the amount of a specific receipt that relates to a specific use in a state, attribute to that state. This may be determined by a reasonable proportional method.
   • If you are unable to use the above method and your customer uses the intangible in multiple states, but you can reasonably determine the amount of a specific receipt that relates to a use in Washington, you must attribute that receipt to Washington. This may also be determined by a reasonable proportional method.
   • If you are unable to use either of the above methods and your customer uses the intangible in multiple states, attribute to where the customer primarily (more than 50%) uses the intangible.
2. The office of negotiation.
3. Where the customer ordered the service.
4. Where the bill is sent.
5. Where the customer sends the payment from.
6. To the customer’s address maintained in the seller’s records.
7. To the seller’s commercial domicile.
8. Use of intangible property

The use of intangible property will generally fall into one of the following three categories:

1. Marketing use. This means the intangible property is used for marketing, displaying, selling, or exhibiting and is connected to the sale of goods. Examples of this category include:
   • Trademarks.
   • Copyrights.
   • Trade names.
   • Logos.
2. Nonmarketing use. This means the intangible is used for purposed other than marketing, displaying, or exhibiting and is often connected to manufacturing or research and development. Examples of this category include:
   • Patents.
   • Know-how.
   • Designs.
   • Processes.
   • Models.
3. Mixed use. This means the intangible is for both marketing and nonmarketing use. Mixed use licenses may be sold for a single fee or more than one fee.
   • If a single fee is charged, the department will generally presume the receipts are for a marketing use unless the taxpayer can reasonable establish otherwise.
   • If more than one fees is charged, each fee may receive separate attribution treatment.

Service income is attributed under a hierarchy. This means you only move to the next step if you are unable to attribute under the current step.

The department expects most taxpayers will attribute apportionable receipts based on attribution tier #1 because the taxpayer will either have enough information to know where the customer receives the benefit of the service, or there is generally a reasonable method of proportionally attributing receipts available.

The hierarchy for service income is as follows:

1. Where the customer receives the benefit of the services.
   • If you can reasonably determine the amount of a specific receipt that relates to a specific benefit received in a state, attribute to that state. This may be determined by a reasonable proportional method.
   • If you are unable to use the above method and your customer receives the benefit in multiple states, but you can reasonably determine the amount of a specific receipt that relates to a benefit received in Washington, you must attribute that receipt to Washington. This may also be determined by a reasonable proportional method .
   • If you are unable to use either of the above methods and your customer receives the benefit in multiple states, attribute to where the customer primarily (more than 50%) receives the benefit of the service.
2. Where the customer ordered the service.
3. Where the bill is sent.
4. Where the customer sends the payment from.
5. To the customer’s address maintained in the seller’s records.
6. To the seller’s commercial domicile.

You may use a different attribution method for each transaction within an apportionable activity if doing so will more fairly represent the attribution of your receipts. However, the department has the right to question taxpayers who appear to be using this method of attribution to distort their apportionable income and avoid payment of taxes.

Benefit of the service

Use the following steps to determine where the benefit of a service is received:

1. If the service relates to real property, the benefit is received where the real property is located.
2. If the service does not relate to real property and the customer is engaged in business, the benefit is received at either the customer's market or the customer's business location(s). The customer's related business activities occur in the customer's market if the taxpayer's service is any of the following:
   • Promoting the customer's products (goods and services).
   • Engaging in or completing sales of the customer's products.
   • Obtaining or facilitating payment of amounts owed to the customer from the sale of its products.
   • Establishing or maintaining the customer's market.
3. If the customer is not engaged in business, the benefit is received based on the following:
   • If the customer must be present (e.g., doctor appointments), then the benefit is received where the service is provided.
   • If the service relates to a place, then the benefit is received at that place (e.g., wedding planning).
   • If neither of the above points apply, then the benefit is received where the customer resides.

Dispute resolution

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. You must keep documentation to demonstrate the attribution method used fairly apportions your receipts. You must make these records available upon request from the department.

To calculate your Washington taxable income, multiply your apportionable income from each apportionable activity by the receipts factor for that apportionable activity.

This formula is:

Washington taxable income = Apportionable income X Receipts factor

Receipts factor

The receipts factor is a fraction.

• The numerator is total gross apportionable income attributed to Washington during the current tax year.
• The denominator is the total gross apportionable worldwide income during the current tax year minus throw-out income.

Receipts factor = Gross apportionable income attributed to Washington / (Worldwide gross apportionable income – Throw-out income)

Reporting current periods

When filing your excise tax returns, you can estimate Washington taxable income based on information from the most recent complete calendar year, or you may use the current year. In both cases, you must later correct your reporting by filing an Annual Reconciliation of Apportionable Income.

Correcting prior periods

You may amend your returns to correct apportionable income on returns within the current calendar year. After the close of the calendar year, you must correct apportionable income by filing the annual reconciliation. Amended returns filed to correct apportionable income for periods outside the current calendar year will be rejected.

Note: If you discover you have incorrectly reported a period in the current calendar year, you should amend those periods. Adjusting other periods or waiting until you file the annual reconciliation may lead to additional penalties.

Throw-out income is a component of the receipts factor that is excluded from the denominator if both the following are true:

• The income is not considered taxable in another state.
• At least some of the activity is performed in Washington.

See the Apportionment – the basics section for more information on taxable in another state.

Determining throw-out income

To determine throw-out income, you will need to determine whether you are taxable in each state or country where you engage in business. Income attributed to a state or country you are taxable in is not considered throw-out income.

Below are the criteria used in determining throw-out income.

• Receipts threshold – You must calculate gross receipts for each state or country. This includes income reported under all tax classifications. If you have at least $100,000 in gross receipts in a state or country, you are considered taxable in that state or country.
• Business activities tax – If you are subject to a business activities tax in a state or country, you are considered taxable in that state or country. The term business activities tax does not include retail sales tax, use tax, or similar transaction taxes imposed on the sale or acquisition of goods or services.
• Physical presence – If you have a physical presence in a state or country, you are considered taxable in that state or country.
• Organized or commercially domiciled – If you are organized or commercially domiciled in a state or country, you are considered taxable in that state or country.
• Taxable in prior year (trailing nexus) – If you met any of the above criteria in a state or country in the immediately preceding calendar year, you are considered taxable in that state or country.

If you do not meet any of the above criteria but there was work related to the apportionable income performed in Washington, the income attributed to that state or country is considered throw-out income.

In determining whether your business has exceeded the receipts threshold, you must include gross income from all tax classifications along with apportionable income attributed to each state or country.

Example

Company A is an in-state entity with following facts:

State/Country	Gross Receipts	Subject to business activities tax?	Taxable in the prior year?	Physical presence?	Organized or commercially domiciled?	Work performed in WA?
Washington	157,000	YES
Colorado	73,700	YES
Florida	11,000	NO	YES
Idaho	105,700
Illinois	65,000	NO	NO	NO	NO	YES
Nebraska	103,000
Oregon	89,100	NO	NO	YES

*Gross receipts means income from all tax classifications.

Based on the information above, we can determine the following:

• Company A is taxable in Idaho and Nebraska because they have more than $100,000 annual gross income in those states.
• Company A is taxable in Colorado because they are subject to a business activities tax there.
• Company A is taxable in Florida because they were taxable there in the prior year.
• Company A is taxable in Oregon because they have a physical presence.
• Since Company A is taxable in Colorado, Florida, Idaho, Nebraska, and Oregon, the apportionable income attributed to those states is not considered throw-out income.

This leaves Illinois. Since there was work performed in Washington, but no other criteria are met, the income attributed to Illinois is considered throw-out income.

Validating your throw-out income

It is important to validate your throw-out income when filing your annual reconciliation. You can do this by selecting “I don’t know whether I have throw-out income” or “I need to calculate my throw-out income” when completing the throw-out income pages.

Alternatively, you can provide your calculations as an attachment using our Throw-out Income Spreadsheet.

Note: If we do not receive throw-out income calculations it may delay processing of your annual reconciliation.

 

Example A

Company A is an in-state entity reporting under the Service & Other Activities B&O tax with the following receipts:

State/Country	Gross receipts*	Gross Service & Other Activities Income
Washington	157,000	62,000
Colorado	73,700	4,700
Florida	11,000	6,000
Idaho	105,700	700
Illinois	65,000	3,000
Nebraska	103,000	2,000
Oregon	89,100	2,100
Totals	604,500	80,500

*Gross receipts means income from all classifications.

Based on the information above, Company A is taxable in Idaho and Nebraska because they have more than $100,000 annual gross income in those states. This means income from Idaho and Nebraska is not considered throw-out income.
 
Now let’s determine if the income attributable to the remaining states is considered taxable in those states or whether it is considered throw-out income. The states where Company A is already considered taxable are greyed out.

State/Country	Subject to business activities tax?	Taxable in the prior year?	Physical presence?	Organized or commercially domiciled?	Work performed in Washington?
Washington	Yes
Colorado	Yes
Florida	NO	Yes
Idaho	Yes
Illinios	NO	NO	NO	NO	Yes
Nebraska	Yes
Oregon	NO	NO	Yes

Based on the information above, Company A is taxable in Colorado because they are subject to a business activities tax there and in Florida because they were taxable there in the prior year, also known as trailing nexus. We can also see that Company A is taxable in Oregon because they have a physical presence. This means income attributed to Colorado, Florida and Oregon is not considered throw-out income.

Since there was work performed in Washington, but no other criteria are met, the income attributed to Illinois is considered throw-out income. 

We can now determine that Company A has a receipts factor of 80%. 

Gross Washington apportionable income (62,000)	=80%
Worldwide gross apportionable income minus Throw-out (80,500-3,000

Example B

State/Country	Gross receipts*	Gross Service & Other Activities Income
Washington	80,000	77,000
Colorado	115,000	111,800
Florida	50,800	41,800
Idaho	85,310	74,310
Illinois	40,980	33,980
Nebraska	20,640	16,640
Oregon	90,500	81,500
Totals	484,030	437,030

*Gross receipts means income from all classifications.

Based on the information above, Company B is taxable in Colorado because they have more than $100,000 annual gross income in that state. This means income attributed to Colorado is not considered throw-out income.
 
Now let’s determine if the income attributable to the remaining states is considered taxable in those states or whether it is considered throw-out income. The states where Company B is already considered taxable are greyed out.

State/Country	Subject to business activities tax?	Taxable in the prior year?	Physical presence?	Organized or commercially domiciled?
Washington	YES
Colorado	YES
Florida	NO	NO	YES	NO
Idaho	YES
Illinios	NO	NO	YES	NO
Nebraska	NO	NO	YES	NO
Oregon	YES

Based on the information above, we can see that Company B is taxable in Idaho and Oregon because they are subject to a business activities tax in those states. We can also see that Company B is taxable in Florida, Illinois and Nebraska because they have a physical presence. This means income attributed to Florida, Idaho, Illinois, Nebraska and Oregon is considered taxable in these states, so this income is not considered throw-out income.

Company B has no throw-out income.

We can now determine that Company B has a receipts factor of 17.62%

Gross Washington apportionable income (77,000)	=17.62%
Worldwide gross apportionable income minus Throw-out (437,030-0)

Example C

Company C is an out-of-state entity with nexus in Washington reporting Service & Other Activities B&O tax with the following receipts:

State/Country	Gross receipts*	Gross Service & Other Activities Income
Washington	121,000	42,000
New York	690,000	112,000
Rhode Island	17,400	2,400
Vermont	18,500	1,500
Virginia	51,800	6,800
Totals	898,700	164,700

*Gross receipts means income from all classifications.

Based on the information above, Company C is taxable in New York because they have more than $100,000 annual gross income in that state. Income attributed to New York is not considered throw-out income.

Now let’s determine if the income attributable to the remaining states is considered taxable in those states or whether it is considered throw-out income. The states where Company C is already considered taxable are greyed out.

State/Country	Subject to business activities tax?	Taxable in the prior year?	Physical presence?	Organized or commercially domiciled?	Work performed in Washington?
Washington	YES
New York	YES
Rhode Island	NO	NO	NO	NO	YES
Vermont	NO	NO	NO	NO	NO
Virgina	NO	NO	NO	NO	NO

Based on the information above, we can see that Company C is not taxable in Rhode Island, Vermont, or Virginia.
 
In this case, a Washington employee performed work related to the income earned in Rhode Island. No work was performed in Washington for income earned in Vermont or Virginia. 
Income attributed to Rhode Island is considered throw-out income because it is not taxable in Rhode Island and work was performed in Washington.
 
Income attributable to Vermont and Virginia is not considered throw-out income because it is not taxable in those states and no work was performed in Washington.

We can now determine that Company A has a receipts factor of 25.88%

Gross Washington apportionable income (42,000)	=25.88%
Worldwide gross apportionable income minus Throw-out (164,700-2,400)

Once you have the information necessary to determine the receipts factor for an entire calendar year, you must file an ARAI for each tax classification to correct your reporting and obtain a refund or pay any additional tax due.

All businesses with apportionable income that are taxable in Washington and another state or country must file an ARAI. The ARAI is due by Oct. 31 of the following year. You can file your ARAI electronically through My DOR.
 
If you are unable to complete the online form, you may complete the paper form.

Note: If you are unable to file your ARAI by Oct. 31, you may request an extension. Requests must be received before Oct. 31.

Method used to estimate income

When filing your excise tax returns, you can estimate Washington taxable income based on information from the most recent complete calendar year, or you may use the current year. 

It is important to indicate which method you used when you file your ARAI because this may impact how penalties are applied to periods with no business activity reported.

Example 1: A taxpayer is filing monthly excise tax returns for 2022. They have elected to estimate based on their receipts factor of 30% from 2021. This means they must report 30% of their apportionable income in each filing period. If they file no business activity returns for any period in 2022, penalties will apply to those periods. This is because the receipts factor is applied to gross apportionable income, not just income attributed to Washington.

Example 2: A taxpayer is filing quarterly excise tax returns for 2023. The taxpayer has elected to report their 2023 returns based on current tax year information. In this case, the taxpayer will only incur delinquent penalties in periods when they reported no business activity if they later determine there was apportionable income attributed to Washington in those periods.

Application of payments

Payments are first applied to interest, then penalties, then any outstanding tax due. This means you may be subject to additional penalties and interest if you submit a payment for less than the combined amount of tax, penalties, and interest on the ARAI.

Our system will not automatically calculate delinquent and underpayment penalties for reconciliations filed after the Oct. 31 due date. The department will review any reconciliations filed after the due date and assess additional penalties if applicable.

Penalties

Delinquent penalties may apply to additional tax due if the reconciliation is not filed and paid by the Oct. 31 due date. The minimum amount of delinquent penalty is $5. 

Additional penalties are as follows:

• 9% of the tax due if the ARAI is not filed and paid by Oct. 31.
• 19% of the tax due if the ARAI is not filed and paid by Nov. 30.
• 29% of the tax due if the ARAI is not filed and paid by Dec. 31.

A substantial underpayment penalty of 5% may apply if the department determines you have substantially underpaid. The minimum substantial underpayment penalty is $5. Substantially underpaid means you paid less than 80% of the total tax due and the additional tax due is at least $1,000. 

Example 3: A taxpayer files an ARAI for the calendar year 2022 on Nov. 15, 2023, and calculates additional tax due of $1,000. The taxpayer also submits a payment for the entire amount of tax due on Nov. 15, 2023. The department determines the taxpayer has not substantially underpaid and assesses a delinquent penalty of $90 (9% of the tax due).

Example 4: A taxpayer files an annual reconciliation for the calendar year 2022 on Feb. 15, 2024, and calculates additional tax due of $3,000. The taxpayer also submits a payment of $500 on Feb. 15, 2024. The department reviews the reconciliation and determines that tax has been substantially underpaid. The department assesses a delinquent penalty of $870 (29% of the tax due) and an underpayment penalty of $150 (5% of the tax due).

Additional resources

My DOR Help - Annual Reconciliation of Apportionable Income

If your business and occupation (B&O) tax liability is below certain thresholds, you are entitled to the small business credit (SBC). The amount of SBC you may claim varies and is automatically calculated when you file electronically.
 
The SBC may need to be adjusted based on your annual reconciliation. Our system will not automatically adjust the SBC when you file your reconciliation. This means the estimated tax balance on the reconciliation may change. The department will review the reconciliation and adjust the SBC as necessary.

Example 1: 

Period	Tax Classification	Original Tax	Original SBC	Original Amount Due	Reconciled Tax	Reconciled SBC	Reconciled Amount Due	Difference
Q1 2023	Service and Other Activities	1,200	-	1,200	850	110	740	(460)
Q2 2023	Service and Other Activities	100	100	-	800	160	160	640
Q3 2023	Service and Other Activities	1,700	-	1,700	850	110	740	(960)
Q4 2023	Service and Other Activities	300	300	-	800	160	640	640
		3,300	400	2,900	3,300	540	2,760	(140)

In this example, the taxpayer originally qualified for an SBC in the amount of $400. Based on their reconciliation, the taxpayer now qualifies for an SBC in the amount of $540. While the tax amounts will be accounted for in the reconciliation, the SBC adjustments will be made by the department when the reconciliation is reviewed. In this situation, the taxpayer will get a refund of $140, plus interest. 

Example 2: 

Period	Tax Classification	Original Tax	Original SBC	Original Amount Due	Reconciled Tax	Reconciled SBC	Reconciled Amount Due	Difference
Q1 2023	Service and Other Activities	500	460	40	1,000	-	1,000	960
Q2 2023	Service and Other Activities	700	260	440	100	100	-	(440)
Q3 2023	Service and Other Activities	500	460	40	1,000	-	1,000	960
Q4 2023	Service and Other Activities	500	460	40	100	100	-	(40)
		2,200	1,640	560	2,200	200	2,000	1,440

In this example, the taxpayer originally qualified for an SBC in the amount of $1,640. Based on their reconciliation, the taxpayer now qualifies for an SBC in the amount of $200. While the tax amounts will be accounted for in the reconciliation, the SBC adjustments will be made by the department when the reconciliation is reviewed. In this situation, the taxpayer will get a bill of $1,440, plus interest.