An ALJ for the Appeals Division of the Washington Department of Revenue recently addressed numerous issues associated with a B&O audit assessment issued to an out-of-state automated teller machine (ATM) card transaction processor. The taxpayer at issue provided card processing services to financial institutions from data centers outside of Washington. The taxpayer’s customers were “issuers,” who provided ATM cards with the taxpayer’s branding and “acquirers,” from whose ATM machine a cardholder could request a cash withdrawal. When a cardholder sought a cash withdrawal from an ATM, the issuer and acquirer used the taxpayer’s system to determine whether cash should be given. In other words, the taxpayer facilitated the “clearing” and “settlement” aspects of the ATM transaction. The taxpayer’s two primary sources of income were card service fees and data processing fees for use of the taxpayer’s system. Under Washington law, B&O tax is imposed “for the act or privilege of engaging in business” in the state. The rate varies depending on the taxpayer’s classification. A “catch-all” classification covers services and other activities not explicitly enumerated. The taxpayer filed its original B&O returns treating its income as royalty income and paid B&O tax at the royalty rate. On audit, the Department determined that the taxpayer should have paid at the “catch-all” service and other activities’ rate, which was higher than the royalty rate. The Department also revised the taxpayer’s apportionment to attribute receipts to Washington if the location of the ATM at which the card was used was in the state, rather than to the billing address of the taxpayer’s customers—the issuers and acquirers. The taxpayer subsequently appealed the audit assessment.
On appeal, the taxpayer argued that its income from card service fees was “gross income from royalties, which under Washington law, was defined as compensation derived from the use of intangible property, such as copyrights, patents, etc. The ALJ disagreed that the card service fees were associated with the use of intangible property. Rather, they entitled customers to access the taxpayer’s system, which enabled them to complete essential phases of ATM transactions. While in some cases a right to issue ATM cards bearing taxpayer’s brand name was also provided, the card service fees were not related to obtaining an intangible right, but were for access to the taxpayer’s system.
The ALJ next concluded that subjecting the taxpayer to B&O tax violated neither the Commerce Clause nor the Due Process Clause of the U.S. Constitution. In making this conclusion, however, ALJ noted several times that he/she was unable to address constitutional issues.
Finally, the ALJ addressed whether, on audit, the Department used the appropriate method to apportion the taxpayer’s gross income. The taxpayer argued that receipts should be sourced based on the billing location of its financial institution customers. Under Washington law, income from “services and other activities” is first attributed to the location where the taxpayer’s customer received the benefit of the service. There is a cascading criteria for sourcing receipts if the taxpayer is unable to source the receipts using the benefit of the service rule, the fourth prong of which addresses customer billing address. A Department rule provides that “If the taxpayer's service does not relate to real or tangible personal property, the service is provided to a customer engaged in business, and the service relates to the customer's business activities, then the benefit of the taxpayer’s service is received where the customer's related business activities occur.” The ALJ concluded that this regulation applied to the taxpayer and that it its customers received the benefit of the taxpayer’s service where the customers’ related business activity occurred. In the ALJ’s view, the issuer’s “related business activity” was the authorization of cash withdrawals and the debiting of the cardholder’s bank accounts, while the acquirer’s “related business activity” was to complete the ATM transactions through the ATM machines. Both of these activities, the ALJ concluded, occurred where the cardholder “swiped” the ATM card. Thus, the ALJ determined that the “swipe” location, or the location of the ATM machine, was the location to which the receipts should be attributed. Finally, the ALJ declined to waive the associated penalties. Please contact Michele Baisler at 206-913-4117 with questions on this determination (Det. No. 16-006).