More than 40 Washington cities impose local business and occupation (B&O) tax. This is in addition to the state’s B&O tax on gross receipts. When a business engages in activities both inside and outside a B&O tax city, Washington law requires cities to “apportion” a business’s receipts between its in-city and out-of-city activities so that local B&O tax is only paid on receipts attributed to the taxing city. Since 2008, cities have been required to apportion income according to a two-factor formula — a “payroll factor” and a “service income factor.” Unfortunately, Seattle has given service businesses mixed signals about how to determine the service income factor, creating confusion and controversy as the city ramps up audits of businesses’ apportionment calculations.
The two-factor apportionment formula is designed to allocate income based on a combination of the company’s physical location and its customer base. The payroll factor captures where the company’s employees are located. The service income factor captures where the company’s customers are located. A company’s taxable in-city income is calculated by multiplying the company’s total income by the average of these two factors.
Originally published in Seattle Business Magazine.
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