Washington finds B&O tax applies to transfer pricing payments

The Washington Administrative Review and Hearings Division (the Division) of the Department of Revenue held that payments between affiliated entities could not be deducted from “gross income” subject to business and professional tax (B&O tax). Each of the Taxpayers, three affiliated entities under the same parent company and each providing investment management services (the Taxpayers), sought to offset income received under contracts with clients against payments made to affiliated entities that provided some of the services provided under the contract. The department audited taxpayers and issued an assessment, disallowing any deduction from gross income attributable to payments made to affiliates in exchange for investment management services. In response, the taxpayers filed a petition for review, asking the Division to determine whether amounts transferred between affiliated, but separate, legal entities constitute gross income subject to B&O tax.

The Division, citing RCW 82.04.220 and RCW 82.04.290, said the B&O tax is a gross receipts tax that includes gross sales proceeds without any deduction for expenses. The Division has found that there is no specific authority in Washington that allows a transfer pricing deduction.

The Division further determined that the taxpayers provided no evidence demonstrating that an agency relationship was in place, which could have qualified payments as advances or refunds that could be excluded from the calculation of gross income. Instead, the Division found that the provision of services included two transactions: first, sales between a Taxpayer to its client, and second, between that Taxpayer and its affiliate. Thus, the Division ultimately confirmed the Department’s assessment.

Det. No. 19-0201, 40 WTD 242 (2021)

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