For business and occupation (B&O) tax purposes, taxpayers earning apportionable revenue calculate their taxable Washington revenue by applying a “receipts factor” apportionment methodology. Taxpayers computing B&O tax in this manner are required to complete and file an Annual Reconciliation of Apportionable Income form with the Department of Revenue.
When is the Annual Reconciliation of Apportionable Income Form Due?
The form must be submitted to the Department of Revenue by October 31st of each year. Failure to timely file the reconciliation form may result in penalties.
Who Must File?
In-state taxpayers that earn income from apportionable business activities performed for customers located inside and outside of Washington may apportion such revenue to Washington for B&O tax purposes. Out-of-state taxpayers earning apportionable income attributable to Washington are required to apportion their revenue and report to Washington when the taxpayer exceeds the receipts threshold described below. Taxpayers that are required to apportion income, or that take an apportionment deduction for B&O tax purposes, must file an annual reconciliation form.
The following is a non-exhaustive list of apportionable activities:
- Service and other activities
- Travel agents and tour operators
- Public and nonprofit hospitals
- Real estate brokers
- International investment management services
- Aerospace product development
It is important when filing a B&O tax return for taxpayers to properly classify their activity. The Department of Revenue is taking the position that taxpayers who fail to report apportionable income, or who misclassify apportionable activity under a non-apportionable classification, are subject to late payment penalties for failure to file an annual reconciliation if a later audit results in an adjustment or reclassification and no reconciliation was filed. It may be advisable to make a protective annual reconciliation filing if there is uncertainty about whether the correct classification was selected. This can be done by filing a “no change” annual reconciliation by the October 31, 2021 due date.
What is This Filing?
The Department of Revenue allows taxpayers to use the prior year’s apportionment factor for reporting current year liabilities. This simplifies the taxpayer’s reporting method but then requires the business to determine the current year’s factor based on actual data once it becomes available.
The purpose of the annual reconciliation is to correct apportionable receipts reported to the Department using the previous year’s factor or incomplete year-to-date data. If additional B&O tax is due as a result of the reconciliation, late payment penalties are automatically waived provided the form is filed by the October 31st deadline. The form is required to be filed even if the true-up results in no additional tax liability.
How is the Single-Factor Apportionment Formula Applied?
The numerator of the factor is the apportionable revenue attributable to Washington State. The denominator of the apportionment factor is the apportionable revenue attributable to those states (including Washington) in which the company files business tax returns or is deemed to have created nexus under Washington’s economic nexus standards. (Apportionable revenue sourced to a state or country in which the business does not have substantial nexus is excluded from the denominator and is commonly known as throw-out revenue.) The business’ gross apportionable income from apportionable activities is multiplied by the apportionment factor to determine the amount of receipts that are subject to B&O tax.
For purposes of the annual reconciliation to be filed by October 31, 2021, a business is considered to have substantial B&O tax nexus in Washington if the business:
- Has physical presence nexus in Washington, or
- Has more than $100,000 in combined gross receipts from all taxable classifications sourced or attributed to Washington, or
- Is organized or commercially domiciled in Washington.
Notably, the measure of substantial nexus in Washington changed for return periods beginning January 1, 2020 and the annual reconciliation to be filed by October 31, 2021. The prior payroll and property thresholds were eliminated, so now any physical presence will create nexus. And the receipts factor was lowered from $285,000 of apportionable gross receipts attributed to Washington to $100,000 of gross receipts from all taxable classifications.
With the lower receipts threshold, we expect that for years 2020 and after, businesses with sales sourced to multiple states will have a lower Washington apportionment factor because they will be deemed to have created nexus in more states under Washington’s economic nexus standard, reducing the amount of throw-out revenue excluded from the denominator. We also expect that more out-of-state taxpayers will be considered to have substantial nexus in Washington. For taxpayers that used the 2019 apportionment factor for all/part of 2020 reporting, a significant difference in the apportionment factor may result from these changes.
Where do I File?
The form is available on the Department of Revenue’s website. The filing can also be completed online using the Department’s My DOR system.
What if I Need a Filing or Payment Extension Due to COVID-19?
The Department of Revenue has not provided any extension of time for filing the annual reconciliations due to COVID-19. The Department has stated it will provide payment extensions, upon request, to businesses in the industries directly impacted by these restrictions. The Department will waive interest from February 29, 2020, until the termination of the COVID-19 State of Emergency or Proclamation 20-20 is rescinded. At that time, interest will begin accruing on outstanding balances.
What if I Need Help?
Please contact one of the members of the Clark Nuber state and local tax (SALT) practice with any questions regarding apportionment or if you desire any assistance in fulfilling the annual reconciliation requirement.
James DeZort is a senior in the State and Local Tax Services Group.
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