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 either the receipts, payroll, or property thresholds 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
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 do a true-up at the end of the year to determine the current year’s factor based on actual data.
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 31 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, 2020, a business is considered to have substantial B&O tax nexus in Washington if the business:
- is organized or commercially domiciled in this state;
- exceeded $285,000 in receipts sourced to this state;
- exceeded $57,000 in payroll in this state;
- exceeded $57,000 in property in this state; or
- had at least 25% of its total receipts, payroll, or property in this state.
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. Payroll and property were eliminated from consideration, and a business is considered to have substantial B&O tax nexus in Washington if it:
- has more than $100,000 in receipts sourced to this state;
- has physical presence in this state; or
- is commercially domiciled in this state.
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.
Where do I File?
The form is available on the Department of Revenue’s website. The filing can also be completed using the Department’s MyDOR online system.
What if I Need a Filing or Payment Extension Due to Covid-19?
The Department of Revenue has not issued any guidance to date regarding whether Covid-related relief will be available for the annual reconciliations. We expect that filing and payment extension requests will be handled on a case-by-case basis and recommend that taxpayers contact the Department to request relief prior to the October 31st deadline.
What if I Need Help?
Please contact the Clark Nuber state and local tax practice with any questions regarding apportionment or if you desire any assistance in fulfilling the annual reconciliation requirement.
© Clark Nuber PS and Developing News, 2020. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.