Taxpayers who do business both inside and outside of the State of Washington, and who earn revenue from performing services or licensing intangibles, are now required to complete an Annual B&O Tax “Reconciliation of Apportionable Income.”
The form must be submitted to the Department of Revenue by October 31st of each year. Failing to file the reconciliation may result in penalties.
The Department of Revenue allows businesses to use the prior year’s apportionment factor for reporting current year liabilities. This simplifies the business’ reporting method, but requires the business perform a true up at the end of the year. The true up helps determine the current year’s factor, based on actual data.
What is the Reconciliation’s Purpose?
The purposes of the annual reconciliation are to correct incomplete year-to-date data and update apportionable receipts that have been reported to the Department using the previous year’s factor. If a business owes additional B&O tax as a result of the reconciliation, late payment penalties are automatically waived – provided the form is filed by the October 31st deadline.
We recommend that businesses that conduct apportionable activities file the form, regardless as to whether they have any differences to report. This is because the Department will impose up to a 29% penalty in cases where the reconciliation was not filed, should they discover that additional taxes are due in a future examination – say in the case of an audit.
In addition to the late payment/late filing penalty, the Department may also impose an additional 5% substantial underpayment penalty if the taxpayer has paid less than 80% of the tax determined to be due, as calculated by the Department.
The Annual Reconciliation of Apportionable Income form is available here.
As of June 1, 2010, businesses that earn revenue from “apportionable activities” are required to calculate B&O tax using a single sales factor apportionment method. “Apportionable activities” include most services and intangible licensing. They also include services provided by other specified businesses, such as travel agents, tour operators, and real estate or insurance brokers.
When performing the calculations, the apportionable revenue attributable to Washington State acts as the factor’s numerator. The denominator of the apportionment factor is the apportionable revenue attributable to those states, including Washington, wherein the business files business tax returns, or is deemed to have created nexus under Washington’s “economic” nexus standards.
To determine how many of the business’ receipts are subject to B&O tax, the business’ total gross income from apportionable activities is multiplied by the apportionment factor.
For B&O tax purposes, taxpayers are statutorily permitted to determine the apportion revenue using a receipts factor that is based on the most recent completed calendar year’s data. For example, a business could use the 2015 apportionment factor to calculate B&O tax on the company’s monthly or quarterly 2016 B&O tax returns, or use year-to-date data on each return.
Regardless of the method the business chooses, taxpayers are required to complete an “Annual Reconciliation of Apportionable Income” once actual data for the year has been compiled. But again, this must happen no later than October 31st of the following year.
Please contact Bob Heller, Nicole Lyons, or another member of the CN state and local tax practice with any questions, or if you’d like assistance fulfilling this requirement.
Nicole Lyons, CMI is a manager in Clark Nuber’s state and local tax group.
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