Property Management Companies May Face Unexpected B&O Tax Exposure

Washington business and occupation (B&O) tax is generally imposed on the gross revenues of a business, without deductions for operating expenses. Because expenses cannot be deducted, a potential for multiple layers of tax obligations exists for business models that involve more than one entity, and the property management industry is no exception.

Hotel, senior living and similar property owners commonly hire third-party managers to manage and operate their facilities. Both the property owner and the property manager have B&O tax obligations on their gross receipts for properties located in Washington State. The property owner may have B&O tax liability on some or all of the gross receipts generated by the property. Property managers are subject to B&O tax on the total receipts of the management entity.

The Washington Department of Revenue (DOR) has become increasingly aggressive in asserting that payroll costs related to facility staff are an expense of the property manager, even when these costs are paid directly by the property owner from a segregated bank account or via the establishment of a Professional Employer Organization (PEO).

In a memo to the Washington Attorney General (AG)’s office, the DOR characterizes the relationship between the entities as either the management company selling staffing services to the property owner, or as the sale of management services that include the services of the facility staff. “But in either case,” the DOR’s memo advises, “the cost of the employees is a cost of business for the [property] management company and not deductible.”

The Attorney General issued an informal opinion to a member of the Washington Legislature that agrees with the DOR’s conclusion that at least under some circumstances, payments made by the property owner to the PEO could be considered taxable gross income of the management company.

In summary, while it appears rather absurd that payroll costs paid by a facility owner would be considered gross income to the property manager, it is clear that the DOR will closely scrutinize these arrangements on audit and may attempt to subject such amounts to B&O tax.

© Clark Nuber PS and Developing News, 2013. 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.