The Washington Court of Appeals Has Foreclosed a Potential B&O Tax Deduction for Mortgage Lenders Who Sell Loans on the Secondary Market

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In a unanimous decision in HomeStreet, Inc. v. Dep’t of Revenue, a three-judge panel of the Washington Court of Appeals, Division Two, refused to allow a residential mortgage lender to take a business and occupation (“B&O”) tax deduction based on the amounts the lender received

as compensation for servicing the home loans it originated and subsequently sold on the secondary market. The Court expressly noted that the availability of this deduction was an issue of first impression.

Washington imposes a B&O tax on all businesses in the state by classifying the taxpayer’s activity according to statutory definitions and then applying specific tax rates to the business’s gross income. RCW 82.04.220. In HomeStreet, Inc. v. Dep’t of Revenue, HomeStreet sought a

B&O tax refund from the Washington Department of Revenue, asserting that it was allowed to deduct the amount of service fees it earned on certain residential mortgage loans that it originated and sold on the secondary market under agreements in which it retained the right to

service the loans. In Washington, companies engaged in “banking, loan, security or other financial business” are allowed to deduct “amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties,” from their B&O tax obligations. RCW 82.04.4292. It is this deduction that HomeStreet claimed it was entitled to.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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