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Washington court applies benefits received test

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On Feb. 24, 2020, the Washington Court of Appeals held that a taxpayer earning revenue from referral and closed loan fees charged to lenders appropriately sourced these amounts to the lenders’ locations for purposes of the Washington Business and Occupation (B&O) Tax, rather than the location of the borrowers of the loans.1

Background The taxpayer, LendingTree LLC, operates an online loan marketplace matching interested borrowers and lenders. As a result of this marketplace, LendingTree earned revenue from two sources: (i) referral fees from lenders; and (ii) closed loan fees on loans issued by the lenders as a result of the referrals. When calculating the sales factor in determining its B&O tax liability, LendingTree determined that the lenders received the benefit of such transactions at their own locations. Accordingly, LendingTree sourced the fees from lenders to the lenders’ locations. Following an audit for the B&O tax periods between January 1, 2010 and June 30, 2014, the Washington Department of Revenue concluded that the location of benefit for LendingTree’s lenders was the ultimate location of the lenders’ borrowers, and assessed LendingTree nearly $200,000 in additional tax, interest and penalties.

B&O receipts factor provisions Income subject to the B&O tax is apportioned via the use of a single receipts factor, with the numerator of the receipts factor being the income attributable to Washington and the denominator consisting of worldwide apportionable income.2 Service-related businesses are required to source receipts to the location where the customer received the benefit of the service, via a series of cascading rules.3 If the customer received the benefit of the service in several states, the receipts are sourced to the state in which the customer primarily received the benefit. If this location of benefit cannot be determined, then the receipts are sourced to the customer’s location using a variety of tests.4 If none of those rules are determinative, then the seller’s commercial domicile is used to source the receipts.5

A Department regulation interprets the sourcing statute to require that the benefit of a service be attributed to Washington if:

  • The service relates to real property located in Washington
  • The service relates to tangible personal property located in Washington at the time the service is received
  • Where the service does not relate to real or tangible personal property and:
  • The service is provided to a person not engaged in business who is physically present in Washington at the time the service is received
  • The service is provided to a person engaged in business in Washington, and the service relates to the person's business activities in Washington.6

For services provided to a customer engaged in business, and the service relates to the customer’s business activities, the benefit is received is where the customer’s related business activity occurs.7 The regulation contains numerous examples of how to apply the sourcing rules in practice.

Court of Appeals analyzes benefits received test With the facts not in dispute, and the parties agreeing that the lenders are LendingTree’s customers, the Court closely reviewed how to source the receipts from the lenders. Based on the regulation and related definitions, the analysis was structured to first identify the services being provided by LendingTree and then the customer’s activities that are the most directly related to such service. The Court rejected the Department’s argument that the lenders received the benefit of LendingTree’s services based on the location of the potential borrower. While LendingTree marketed and engaged in outreach to borrowers, implying that the borrowers’ location is relevant, LendingTree did not provide marketing services for lenders. Instead, LendingTree marketed its website to promote the services by which it could generate fees from lenders. Since lenders paid LendingTree a referral fee (which was a precondition of generating the closed loan fee), the lenders were paying LendingTree for referrals, not marketing. Accordingly, the lender received the benefit of the transaction at its own location, not the location of the borrower.

The Court cited to the recent ARUP Laboratories case to support its conclusion.8 In ARUP, a Utah company testing bodily fluid and tissue samples received from medical providers throughout the country electronically sent sample results back to the medical providers. The Utah company earned receipts from the medical providers for this service. The Court determined that the taxpayer’s services would not be useful until the results were received. The taxpayer’s receipts should be attributed to the medical providers’ locations where the customers received and utilized the information provided by the taxpayer, not the origination point in Utah at which the services were performed.

Commentary This decision should be of interest to all B&O taxpayers with significant service-based revenue, as it provides insight into how the “benefits received” test will be interpreted when applying market-based sourcing principles. It should be noted that the use of a sourcing test measuring activity based upon the location of a company’s direct customer, rather than the location of the ultimate end-user in the transaction (the recipient of the loan) was favorable to LendingTree. However, this might not be the case for businesses receiving fees for referrals or similar services from Washington-based businesses. In addition, similarly situated taxpayers applying market-based sourcing rules in other states that utilize the “benefits received” test now have guidance to consider, especially if they have been using an ultimate customer address methodology to source service fees in those states.



1 LendingTree LLC v. State of Washington, Department of Revenue, Washington Court of Appeals (Div. I), No. 80637-8-I, Feb. 24, 2020.
2 RCW § 82.04.462(1), (3)(a).
3 RCW § 82.04.462(3)(b)(i).
4 RCW § 82.04.462(3)(b)(ii)-(vi).
5 RCW § 82.04.462(3)(b)(vii).
6 WAC § 458-20-19402(303).
7 Id.
8 ARUP Laboratories, Inc. v. Department of Revenue, 457 P.3d 492 (Wash. Ct. App. 2020).



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