July 28, 2025
Written by Grant Shaver, Eric Nix, Daniel Sheldon, and Na Koo
Washington state imposes a business and occupation (B&O) tax on the act or privilege of engaging in business within the state. This tax is calculated by applying specific rates to the value of products, gross proceeds of sales, or gross income of the business, depending on the nature of the activity. The applicable tax rate is determined by the type of business activity the taxpayer engages in.
In 2024, Washington updated its rules for apportioning out-of-state gross receipts for businesses based in the state. Specifically, Washington Administrative Code 458-20-19402 (rule 19402) was revised to simplify the apportionment process for these businesses. This article addresses the apportionment procedures for ‘‘Service and Other” related business activities after the 2024 amendments and the steps you may need to take.
Apportionment Rule
For Washington-based businesses that engage in business activities outside the state, an apportionment formula must be used to determine the portion of income subject to B&O tax in Washington. Unlike retail transactions, where revenue is sourced to the location where the retail goods are delivered, revenue from service activities is attributed to the location where the benefit of the service is received by the customer. A major effort was made by Washington in the 2024 rule update to provide clarity for how and when revenue should be attributed outside of Washington state.
Determining Location
Following the updated rule, revenue earned from a taxpayer’s business activities will generally be attributed to either the customer’s market or at the customer’s business location(s). This does not necessarily relate to where the business activity is performed but rather, where benefits for the end user are received.
The rule includes a cascading set of criteria for determining how and where to attribute service revenue in section 303. If the taxpayer’s services relate to real property, then the revenue is attributable to the location of the real property. Examples of this type of service include:
- Architecture
- Surveying
- Janitorial
If the service is not related to real property and the customer is engaged in business, the revenue is typically attributable to either the customer’s market or business location. When the customer is not engaged in business, the service revenue is attributable either to the location where the service is performed for the customer (if they are required to be present when the service is rendered, such as medical examinations). If the customer is not required to be present, the revenue is attributable to the specific known location where the customer receives the benefit of the services. For example, wedding planning services would be attributable to the location where the wedding takes place.
Throw-Out Income
Throw-out income is income that is generally attributable to a state other than Washington, but the taxpayer does not meet either physical or economic nexus thresholds under Washington’s threshold standards and at least a portion of the provided services were performed in Washington. For economic nexus, this would mean that cumulative sales into a particular state are under $100,000. For physical nexus, this would mean that the taxpayer has no physical presence (e.g., offices, employees, inventory, etc.) and they do not file any other types of tax returns, such as an income tax return.
When the above conditions are applicable, then throw-out income is removed from the denominator of the apportionment formula, effectively increasing the apportionment factor which, in turn, may increase the tax owed to Washington. See this article from the Washington Department of Revenue for more information.
Revenue Categories
There were several legislative changes in 2025 regarding the taxability of specific types of services. These specific services were redefined from non-retail professional services to taxable retail services and will no longer be subject to apportionment when the legislative changes take effect on October 1, 2025. Please see this article for more information about the legislative updates and the affected services.
Considerations Going Forward
The updated Rule 19402 is expected to impact Washington-based businesses in several important ways. While the rule offers a revised framework for determining where the benefit of professional services are received by the customer, it does not specify the exact methods or types of sales data that must be used to attribute customer receipts. However, in general, the Department of Revenue expects that taxpayers will have enough information to attribute revenue to specific state, as detailed in section 301(a) or be able to use a “reasonable method of proportionally attributing receipts.”
In anticipation of the upcoming annual apportionment reconciliation due on October 31, businesses should review their current attribution methods that were developed under the previous rule. Looking ahead, while there is hope that the DOR will issue additional guidance on acceptable apportionment methods, businesses should remain attentive to any future updates or clarifications from the Department.
If you have questions about your Washington state or local B&O taxes and how they may apply to you or your business, especially the aforementioned “reasonable method of proportionally attributing receipts,” please contact a Clark Nuber professional. We will continue to monitor Washington legislative and administrative action related to the apportionment of taxes on services provided outside of Washington state to Washington-based businesses.
Eric Nix (manager), Daniel Sheldon (senior), and Na Koo, MPAc (associate) are members of the Clark Nuber State and Local Tax Services group.
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