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Washington: Online loan marketplace receipts apportioned to lender’s location

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Detailed Washington Development

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A Washington Court of Appeals recently addressed how an online loan marketplace should source its fees for B&O tax purposes. The taxpayer’s marketplace allowed prospective borrowers to connect with multiple lenders. Potential borrowers filled out a form that captured their financial information and the type of loan in which they were interested. Using proprietary software, the taxpayer then analyzed the data and referred the borrower to as many as five different lenders. After evaluating the information, the lenders would contact the borrower through the taxpayer’s site. The service was free to borrowers, but lenders paid the taxpayer a referral fee, and, if a referral resulted in a finalized loan agreement, the taxpayer received a closed loan fee. On audit, the Department of Revenue determined that the taxpayer’s receipts should be apportioned based on the location of the potential borrowers, rather than the location of the lenders. After a trial court ruled in the Department’s favor, the taxpayer appealed.

Under Washington’s B&O tax law, income is apportioned using a single receipts factor. Service receipts are attributed to Washington if a “customer received the benefit of the taxpayer’s service” in the state. For a service business like the taxpayer, the “benefit is received where the customer’s related business activities occur.” It was undisputed that the customers at issue were the lenders. The Department, however, argued that the taxpayer marketed its services to borrowers on behalf of lenders and therefore the benefit of the service was received at the location where the borrowers were located. The appeals court disagreed, observing that the Department’s emphasis on marketing mischaracterized the taxpayer’s business model.  In the court’s view, the taxpayer was not providing a marketing service to the lenders; the lenders received no value from the services until they received referrals.  The benefit of these referral services was received at the location where lenders received and utilized the information in a referral to potentially generate a loan for a borrower. “The focus must remain on the customer and where the customer benefits from the service.” As such, the court concluded that the trial court erred when it determined the benefit of the services at issue occurred at the borrower’s location. For more information on LendingTree, LLC v. Wash. Dep’t of Rev., please contact Michele Baisler at 206-913-4117. 

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Sarah McGahan

Sarah McGahan

Director, State & Local Tax, KPMG US