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The Washington Court of Appeals held that Seattle’s method of apportioning the City’s business and occupation tax (B&O tax) was unconstitutionally applied and unfairly apportioned when the City excluded compensation paid to independent representatives from the apportionment payroll factor. The taxpayer, a financial services firm headquartered in Seattle, generated most of its income through the sale of securities by registered representatives based outside the City. In calculating the payroll factor for its B&O tax liability, the taxpayer included the compensation paid to these registered representatives. The City disagreed with this method and argued that the taxpayer’s representatives were independent contractors, not employees, and therefore should be excluded from the payroll factor (which roughly tripled the taxpayer’s B&O tax liability). The court, however, concluded that the City’s method was not externally consistent as applied to the taxpayer because the City failed to consider where and how the taxpayer generated its income. It did not matter whether income was generated by independent contractors or employees working outside the city. The court reasoned that “either way they are not working in the city” and thus, “the city has no claim to a ‘fair share’ of the income they generate.”
City of Seattle v. KMS Financial Srvs. Inc., Dkt No. 78946-5-I (Wash. Ct. App. Feb. 24, 2020).