The imposition of Washington business and occupation (B&O) tax on an out-of-state ATM card transaction processor was properly classified and did not violate the Commerce and Due Process clauses of the U.S. Constitution.
Classification of Income
The taxpayer claimed that its gross income from card service fees should have been classified under the royalties B&O tax classification rather than as services and other activities. However, the membership agreement the taxpayer had with its customers did not relate to an intangible right such as a license or trademark. The agreement provided its customers with access to a payment system that allowed them to complete the authorization, clearing, and settlement of ATM card transactions.
The taxpayer further challenged the imposition of tax under the Commerce Clause and Due Process Clause of the U.S. Constitution. The Commerce Clause requires that a tax:
– be applied to an activity with substantial nexus with the state;
– be fairly apportioned;
– not discriminate against interstate commerce; and
– be fairly related to services provided by the state.
The taxpayer had substantial nexus with Washington, as its receipts during the audit period exceeded the $250,000 economic nexus threshold. The administrative division did not have the authority to rule on the taxpayer’s challenge to the facial constitutionality of the state’s apportionment statute. However, it noted that single-factor sales apportionment has been held constitutional pursuant to the Commerce Clause. There was no discrimination against interstate commerce, as the B&O tax statutes did not make a distinction based on the taxpayer’s location. Lastly, the taxpayer received several services from Washington, including infrastructure for the processing of ATM card transactions, and therefore the imposition of tax was fairly related to services provided by the state.
The imposition of B&O tax also met Due Process requirements. The taxpayer’s activities were purposefully directed toward Washington residents, as its income derived from providing authorization, clearing, and settlement services on ATM card transactions on machines located in Washington. Furthermore, there was no evidence that the audit division’s use of the ATM machine locations in its apportionment method led to grossly distorted tax liability.
The audit division did not err in using the location of the ATM machines in its apportionment method. Though the taxpayer argued that the location of its financial institution customers should be used in calculating the receipts factor, the first step is determining where the customer received the benefit of the taxpayer’s service. The location of the ATM machines was a reasonable method for attributing the taxpayer’s income because this was where the taxpayer’s customers’ business activities occurred.
No penalty waiver was granted as the department may only waive penalties for circumstances beyond the taxpayer’s control. The taxpayer’s lack of knowledge or misunderstanding regarding tax liability does not qualify.
Determination No. 16-0026, Washington Department of Revenue, October 31, 2018, ¶204-410