City Business & Occupation (B&O) Tax Required Updates Effective January 1, 2008

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Why the Change?

In 2003, the Legislature passed EHB 2030 (RCW 35.102), the city B&O legislation. The law requires the 39 cities with local B&O taxes to adopt allocation and apportionment provisions as part of an updated city B&O tax model ordinance by January 1, 2008. (RCW 35.102.130)

What is Changing?

Allocation and Apportionment of Income
Under current law, these activities are taxed in the jurisdiction where the selling or service activity takes place, and credits apply if a business pays tax in another jurisdiction. Selling and service activities on the same transaction can take place is two or more cities. Under the new change, specific rules for allocating and apportioning revenues to jurisdictions in which it engages in business for tax purposes will apply and will vary depending on the classification under which revenue is reported:

Allocation:

• Manufacturing/Extracting/Retail Services: allocated to the location where the activity takes place
• Retail Sales: the activity takes place where delivery to the buyer occurs (similar to state sales tax changes to “destination-based sourcing” that take effect on July 1, 2008)
• Wholesale Sales: the activity takes place where delivery to the buyer occurs
• Royalties from the Granting of Intangible Rights: allocated to the commercial domicile of the taxpayer

Apportionment:
Services and Other: apportioned to a city by multiplying service income by a payroll factor (based on the payroll within the jurisdiction), plus the service-income factor (based on the income producing activity attributable for tax purposes within the jurisdiction), divided by two:

   Total services income x (Payroll Factor +
   Service-Income Factor)/2

• Payroll Factor =  Total Compensation in City/Total Compensation Everywhere

Compensation is paid in the city if:

• The individual is primarily assigned within the city;
• The individual is not primarily assigned to any place of business for the tax period and the employee performs 50% or more of his or her service for the tax period in the city; or
• The individual is not primarily assigned to any place of business for the tax period, the individual does not perform 50% or more of his or her service in any city, and the employee resides in the city.

 “Primarily assigned” is defined as the business location of the taxpayer where the individual performs her or her duties. What is meant by “business location of the taxpayer?” This must be a place of business, store, or office.

• Service Income Factor= Service Income in City/Service Income Everywhere

Service income is in the city if:

• The customer location is in the city; or
• The income-producing activity is performed in more than one location and a greater proportion of the service-income-producing activity is performed in the city than in any other location, based on costs of performance, and the taxpayer is not taxable at the customer location; or
• The service-income-producing activity is performed within the city, and the taxpayer is not taxable in the customer location.

 “Customer location” is defined as the city or unincorporated area of a county where the “majority of the contacts” between the taxpayer and the customer takes place. The term is not a commonly used term in other tax apportionment methods.

Other Changes

• Specific provisions also apply to newspaper and publishing businesses to exempt them from apportionment requirements. (RCW 35.102.150)
• Specific exemptions apply in rare cases of professional employer services – e.g. shared receptionist services in office building. (This does not apply in a temporary employment agency situation.)
• Updates to penalties and interest provisions in administrative provisions – linked to RCW to accommodate any future changes.
• Other definitional changes: definition of delivery, updates in sales at retail for telephone services.