Washington State: Document Review and Closing Charges are Loan Service Fees

In a recent determination, the Administrative Review and Hearings Division of the Washington State Department of Revenue addressed whether certain types of fees were “loan servicing fees” sourced to Washington State.  On audit, the Department applied a departmental rule and attributed various types of fees associated with loans (e.g., servicing fees, document review fees, closing charges, interest from financial assets, late charges) to Washington State when the mortgages were held by in-state borrowers and the loans were secured by real property in the state.  The taxpayer argued that the auditor defined loan servicing fees too broadly by including fees generated before the loan was entered into or at the time a loan was created. In the taxpayer’s view, these other fees, including document review fees and closing charges, were not loan servicing fees, but were undertaken for other lenders while creating the loan. As such, they represented receipts from other services that should be attributed outside the state of Washington based on costs of performance. The Tax Review Officer disagreed. Although the term “loan service fees” was not defined in the law, the Officer determined that “loan service fee” was a term of art related to the industry of extending credit for the purpose of buying real property. To determine what was understood to be a loan servicing fee for the industry, the Officer looked at the business activities set forth by the Accounting Standards Board in ASC 860-50.  In the hearing officer’s view, these activities represented “loan services” within the industry and fees generated from engaging in these activities were considered loan service fees for Washington B&O purposes. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 18-0211.