For Washington-based service businesses, working with Oregon-based clients can provide significant tax benefits. This is due to the nexus standards defined under RCW 82.04.460, which allow a service business with receipts in more than one state to apportion revenues based on where the benefit of the services are received. However, not all states are in agreement with this method, so let’s review the unusual rules for what happens when service-based income earns revenue outside of Washington.
In Oregon, sales are based on where services are performed, whereas in Washington, sales are based on where the benefit of the service is received. For instance, if you are an architect with an office in Washington where a majority of services are performed and you are working on a project based in Oregon, the benefit for the work is received outside of Washington and may be excluded from Washington Business & Occupations (B&O) sales. However, on that same transaction in Oregon, the rules to determine the amount of sales to apportion to the state are based on where the costs to perform the service are performed. In this example, the costs are incurred at the Washington office, so the revenue associated with that transaction will not be automatically apportioned to Oregon, resulting in no tax in Washington or in Oregon.
For a Washington business to benefit from this dislocation, you must first have business activities that are “taxable in another state.” To pass this test your business must meet any of the following three criteria pursuant to the Revised Code of Washington (RCW 82.04.067(1)):
- Subject to a business activities tax in another state or country on its income from apportionable activities during the current year;
- Organized or commercially domiciled in another state or country during the current year; or
- Meets the economic nexus standards of Washington in another state ($53,000 of property or payroll, $267,000 of gross receipts, or at least 25 percent of its total property, payroll, or receipts in another state or country during the prior year).
Lastly, if you have an employee performing services or visiting another state, you may benefit from analysis to confirm if any of the income earned while working in that state might be exempt from the Washington B&O tax.
If you, as a Washington-based service business, have any business activity within Oregon or any other state (including Canada), consider having a tax professional review your transactions to verify if you are apportioning the correct amount of revenue between the various states where you have those activities.
Penny Sweeting, CPA, is a tax manager at Perkins & Co.