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Tax Law

If a Tree Falls in a Forest: Washington Court of Appeals Explains How Referral Services Are Sourced for B&O Tax Purposes

The Washington Court of Appeals held that taxpayer’s receipts for referral services are sourced to Washington for B&O tax purposes to the extent that such receipts are received from a lender located in Washington. The taxpayer operates an online platform through which the taxpayer offers educational tools on the loan process to prospective borrowers, analyzes their financial information and other data and refers them to potential lenders. Washington B&O tax law provides that a service-related business must apportion the receipts from its services to the state “[w]here the customer received the benefit of the taxpayer’s service.” RCW 82.04.462(3)(b)(i). Further, “the benefit is received where the customer’s related business activities occur.” WAC 458-20-19402(303)(c). Here, the Washington Court of Appeals determined that the benefit of the taxpayer’s referral services is received at the business location of the taxpayer’s customer. The Department argued that the taxpayer provides advertising services for its customers, i.e. the lenders, and thus the benefit of the taxpayer’s services is received in the states where prospective borrowers are located. The court disagreed with the Department’s characterization of the taxpayer’s services and the related business activity of the lenders. The court found that the taxpayer does not provide advertising services, citing that the taxpayer does not use the lenders’ names in its advertisements to prospective borrowers and the relationship with each borrower is initiated by the taxpayer and remains with the taxpayer until a referral is made. Therefore, the court held that the services provided by the taxpayer were most closely related to its customers’ lending services, which occurred at the customers’ places of business.

LendingTree LLC v. State, Dept. of Revenue, No. 80637-8-I (Ct. of App. Wash., March 30, 2020).