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Washington Board of Tax Appeals Orders Business and Occupation Tax Refund for Software Developer’s Research and Development Expenditures

Tax Development Mar 16, 2010

The Washington Board of Tax Appeals (BTA) recently ruled that a software developer was eligible for a high-technology credit against its Business and Occupation (B&O) taxes because it timely filed the required annual surveys. Surreal Software, Incorporated v. State of Washington, Department of Revenue, BTA Docket No. 70322 (March 5, 2010). The three-member BTA’s ruling set aside an Administrative Law Judge (ALJ) determination that Surreal Software, Inc. (“Surreal”) did not submit the required annual surveys within the time period prescribed by law.

Washington allows a “hi-tech” credit against the B&O tax for a person whose research and development spending exceeds a given percentage of the person’s taxable income for the year in which the credit is claimed. A person claiming the credit must file a special survey with the Washington Department of Revenue (“Department”) by March 31st of the year following the year for which the credit is claimed.

Surreal is a Chicago-based software publisher that develops and publishes video games in a studio outside Seattle, Washington, where it employs between 50 and 100 people. Surreal claimed the credit for the years at issue on amended returns filed in September 2008, one month after it had submitted the required surveys for these years. The Audit Division proposed disallowing the credits on grounds that the surveys were not filed by March 31st following the year for which the credits were claimed—notwithstanding statutory language—holding that a survey must be filed by March 31st following the year in which the credit is claimed. The ALJ upheld this determination as consistent with the “spirit” of the annual survey requirement.

On appeal, Surreal argued that by its terms, the controlling statutory language mandates only that a person must file the survey by a given date in the year following the year in which a credit is claimed, and not, as the Department maintained, the year for which the credit was claimed. Surreal contended that because the enactment was clear and unambiguous, the ALJ erred in resorting to such aids of interpretation as ascertaining the “spirit” underlying the credit statute.

The Department argued that the survey requirement served to equip the Legislature with timely information concerning the effectiveness of the credit and that Surreal’s position frustrated that goal. Surreal countered by pointing to a statutory directive that the Department report to the Legislature concerning B&O tax preferences only every four years. In addition, Surreal surveyed 12 other B&O tax credit statutes, noting that the statutes provided uniformly that no refunds were allowed. Because the research and development credit statute itself contained no such condition, Surreal argued, the only possible inference was that the Legislature did not intend to block a taxpayer from claiming this particular credit by timely filing a refund claim.

The BTA agreed with Surreal. In approving the refund claims, the BTA found that the “for which” language advocated by the Department was “absent from, and contrary to, the language” in the credit statute. Because the plain language was clear, the BTA reasoned, there was no reason to consider whether the Legislature might have intended another result.