WAC 162

"Gross income of the business."

Tax on manufacturers and processors of various foods and by-products - Research and development organizations.

Tax on selected business services, financial businesses, or other business or service activities.

Business within and without state - Apportionment.

Stockbrokers and security houses WAC 458-20-162 (Rule 162) explains the business and occupation (B&O) tax-reporting responsibilities of stockbrokers and security houses. The Department amended Rule 162 to recognize that stock brokers and security houses engaging in business in multiple states must apportion income for purposes of determining their B&O tax reporting responsibilities. For periods on and after June 1, 2010, the rule refers readers to WAC 458-20-19402 Single factor receipts apportionment-“ Generally.

Stockbrokers and security houses.

INVESTMENT INCOME OF A BROKERAGE BUSINESS - This document explains that gains realized on securities purchased and sold by a brokerage firm are subject to tax.The document is no longer needed as WAC 458-20-162 currently explains that income from all sources is subject to tax.Cancelled by ETA 2003 -2s6/30/00.

Apportionment of Income by Stockbrokers and Security Houses ETA 3161.2011 Apportionment of Income by Stockbrokers and Security Houses. This Excise Tax Advisory (ETA) explains how stockbrokers and security houses should apportion their income for B&O tax purposes. It discusses when and under what circumstances single factor receipts formula, cost apportionment, and the “60/40 convention” methods of apportionment apply.

CORPORATE DISTRIBUTION OF STOCK DIVIDENDS - Repealed 6/30/2000 - This document explains that in the taxpayers in question were engaging in business per RCW 82.04.150 and taxable as a financial business despite the fact that they did not "hold themselves out to the public."This document does not recognize the specific tax-reporting instructions for financial businesses provided in ETA 571.04.169 (Taxability of investment income).In addition, ETA 019.04.194 (Engaging in business within the state) also explains that a person is not required to hold itself out to the public as a prerequisite to

Economic Nexus in Washington State Applies to Securities Brokers/Dealers and Fund Managers

Combined Excise Tax Return Changes - Effective January 1, 1996

Combined Excise Tax Return Classification Reporting Change

GROSS INCOME - FACTORING.Losses from factoring business may be used to offset gains incurred in the same month to arrive at gross income which is taxed at the service rate.See Det. No. 89-474, 8 WTD 259 (1989).

B&O TAX -- ALLOCATION -- THIRD- PARTY COSTS.Third-party costs in the nature of commissions to out-of-state independent salespersons held not to be allocable to another state when they were not incurred because of taxpayer's out-of-state activities.Costs properly attributable to the Washington office from which expenses were incurred.ACCORD: Det. No. 89-448, 8 WTD 189 (1989).

B&O TAX -- SECURITY HOUSES -- DEDUCTION -- PAYMENTS TO "OTHER ESTABLISHED SECURITY HOUSES."Although Rule 162 allows a deduction for commissions paid to "other established security houses associated in such transaction," deduction not applicable when commissions are paid to independent salespersons.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 01-006, 20 WTD 124 (2001).

ESTABLISHED SECURITY HOUSE DEFINED.An established security house is a registered broker-dealer under the Washington Securities Act (Chapter 21.20 RCW) and/or The Securities and Exchange Act of 1934.Persons who are mere salespersons are not security houses.

GROSS INCOME FROM BUSINESS -- GAINS FROM THE TRADING IN SECURITIES.Where the taxpayer appoints another underwriter to act as its representative in an underwriting syndicate, the gross amount received by its representative will be treated as being received by the taxpayer. No deduction for the lead underwriter's costs will be allowed.

B&O TAX -- OTHER FINANCIAL BUSINESS. A person is engaged in an "other financial business" if the business is similar or comparable to a banking, loan, or security business.

B&O TAX -- OTHER FINANCIAL BUSINESS.Where (1) a taxpayer's financial income and securities business-like fees constitute over 87% of its gross income; (2) the taxpayer is involved in regular and recurrent trading; and (3) the taxpayer has no business purpose other than the investment of money, the taxpayer is similar or comparable to a securities business and the RCW 82.04.4281 deduction is not available to it.

B&O TAX -- GROSS INCOME OF THE BUSINESS.Generally, the measure of the business and occupation includes interest, dividends, and gains on the sale of investments.

B&O TAX -- OTHER FINANCIAL BUSINESS.Persons, other than banks, loan businesses, security businesses, and "other financial businesses", are allowed a deduction for interest, dividends, and gain on sale of investments. The determination whether a business is an "other financial business" is made by applying the test stated in Excise Tax Bulletin 571

SERVICE B&O - NEXUS APPORTIONMENT - SECURITIES DEALER.A Washington-based securities dealer is entitled to apportion its gross receipts between Washington and the numerous other states in which it markets securities through independent sales representatives that own and operate their own offices.The securities dealer has taxable nexus with those other states by entering their marketplaces to sell its services and products to customers in those states.Such out-of-state activities are more than incidental.

LIFE INSURANCE AGENTS -- SALES OF NON-VARIABLE ANNUITIES.The sale of annuities providing for a fixed amount per period over the lifetime of an annuitant are included in the licensed activities of insurance agents.Where the taxpayer is licensed under chapter 48.17 RCW and meets the requirements of the statute for the insurance agent's rate, sales of non-variable annuities are taxed under the insurance agent's rate.

SALES OF INVESTMENT ADVISORY SERVICES - FINANCIAL BUSINESS.The provision of investment advisory services with sales of security products are taxed under the financial businesses classification.

LIFE INSURANCE AGENTS -- SALES OF VARIABLE ANNUITIES - FINANCIAL BUSINESS.Only if the death benefits are more than incidental will sales of variable annuities be subject to the insurance laws.Because the usual variable annuity is primarily a securities product, sales of such annuities are taxed as sales of securities under the financial business rate.

B&O TAX -- SERVICE -- EXEMPTION -- 31 U.S.C. 3124(a) -- SECURITIES TRADING -- TAXABLE GAINS. Because the Service B&O tax measured by gains from trading in U.S. Government securities does not require a consideration of the government obligation or interest thereon, such amounts are not protected from state B&O taxation under 31 U.S.C. 3124(a).

B&O TAX -- LOANS -- CASH DISCOUNTS.Discounts given by a Taxpayer on loans it sells to investors, to increase the attractiveness of the investment's yield, are not allowable cash discounts.

ELECTRICITY CONTRACTS -- FUTURES CONTRACTS-- FORWARD CONTRACTS. A contract for the sale of electricity is not a "forward contract" for the sale of the underlying commodity for purposes of RCW 82.04.310(2) where the parties do not anticipate physical delivery of electricity.

ELECTRICITY CONTRACTS.A person trading in electricity contracts is deemed to be engaged in a financial business and is taxable on the gain realized from the trading activity.

ELECTRICITY CONTRACTS -- FUTURES CONTRACTS-- FORWARD CONTRACTS. A "forward contract" for the sale of electricity is not a sale of the underlying commodity for purposes of RCW 82.04.310(2), if physical delivery does not in fact occur.

LEGISLATIVE INTENT.Legislative intent of RCW 82.04.310(2) was to treat power marketers the same as power and light businesses, i.e., to relive them of paying either public utility tax or B&O tax on sales of electricity for resale within or without the state. The intent was not to eliminate the B&O tax on businesses that merely trade in electricity contracts.

RCW 82.04.080:SERVICE B&O TAX - ADVANCE & REIMBURSEMENTS - SECURITIES TRADING COSTS.A brokerage company was allowed to exclude from its gross income amounts received from clients as a reimbursement for costs paid to clearing brokers for executing a securities trade made on its client's behalf.

RCW 82.04.080:SERVICE B&O TAX-ADVANCE & REIMBURSEMENT - OVERHEAD EXPENSES.A brokerage company was not allowed to exclude from its gross income amounts received from account representatives as reimbursements for a pro-rata share of overhead costs incurred by the company.

RCW 82.04.080:SERVICE B&O TAX - COMMISSION INCOME - DEDUCTION - AMOUNTS PAID TO ACCOUNT REPRESENTATIVES.A brokerage company was not allowed to deduct from gross commission income amounts received from clients for security trading services and paid to its account representatives.

GAINS FROM THE SALES OF SECURITIES - TRADING GAINS - APPLICABILITY OF RULE.When a bank is engaged in essentially the same activities as a "security house," it is entitled to the tax treatment granted such entities.

B&O TAX - GROSS INCOME OF BUSINESS - STOCKBROKERS AND SECURITY HOUSES - NETTING OF GAINS AND LOSSES WITHIN AN ACCOUNT - "SECURITY HOUSE" OR "STOCKBROKER" - APPLICABILITY OF RULE.Rule 162, which applies to stockbrokers and "security houses," applies equally to financial institutions such as banks which sell securities in the same manner as regular security houses.

FINANCIAL BUSINESS INTEREST RATE SWAPS - FUTURES CONTRACTS - INTERMEDIATED SWAPS - MATCHED INTEREST RATE SWAPS - VALUE PROCEEDING OR ACCRUING - GAINS REALIZED.Financial businesses engage in interest rate hedging transactions, including intermediated or matched interest rate swaps and interest rate futures contracts are taxable upon the value proceeding or accruing from such transactions as determined by the interest gains realized when the swap is closed on a monthly reporting basis.

FINANCIAL BUSINESS - INTEREST RATE HEDGING - FUTURES CONTRACTS - GAINS REALIZED.Futures contracts used by financial businesses for interest rate hedging purposes are taxable measured by the gains realized from trading.Such gains are reportable on a monthly basis.

INTEREST RATE HEDGING PROGRAMS - ONGOING INTEREST RATE SWAPS - VALUE PROCEEDING OR ACCRUING - GAINS REALIZED - TAX REPORTING METHODS.Financial businesses which engage in ongoing programs of hedging against interest rates risk through the continuous swapping of rates are engaged in district and taxable financial business activities taxable upon the gross receipts of such activity determined by gains realized. Tax is to be measured by the annualized monthly average of gains and losses during the accounting year of the business.

B&O TAX - TRADING - GAINS AND LOSSES - ARBITRAGE - HEDGING.Because arbitrage transactions are analogous to those of matched hedging and futures transactions, the various components of an arbitrage transaction - both gains and losses - will be recorded in the trading account in the month when the last component of the transaction is completed.

B&O TAX - SECURITIES - CALCULATION OF INTEREST - AMORTIZATION OF PREMIUM OR DISCOUNT.Amortization of the premium or discount recognized by a taxpayer at the time of a security's original purchase is properly reportable (and deductible, if U.S. government interest) as an addition or reduction in income on a monthly basis under the accrual method of reporting.

B&O TAX - SECURITIES - SALE - GAIN OR LOSS.A security's book value (basis) should be adjusted to reflect the amortization of a premium or discount before calculating gain or loss at the time of the security's sale.

B&O TAX - "GROSS INCOME OF THE BUSINESS" - "ACCOUNT" AND "EARNINGS ACCOUNT" - CONSTRUED.The words "account" and "earnings account" refer to the various types of gross income discussed in the remaining paragraphs of the rule:gross income from interest, gross income from commissions, gross income from trading, and gross income from all other sources.

B&O TAX - FINANCIAL BUSINESS - INTEREST RATE HEDGING - FUTURES CONTRACTS -GAINS REALIZED.Futures contracts used by financial businesses for interest rate hedging purposes are taxable measured by the gains realized from trading.Such gains are reportable on a monthly basis.THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 98-218, 18 WTD 46 (1999).