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Washington Business and Occupation Tax Does Not Need Physical Presence for Nexus

Tax Development Jan 27, 2022

Washington Business and Occupation Tax Does Not Need Physical Presence for Nexus

In a recent Citibank1 case, the Washington Board of Tax Appeals (“Board”) denied a petition for reconsideration of the Department of Revenue’s (DOR’s) decision imposing the Business and Occupation (B&O) tax on Citibank’s commercial banking activities in the state. 

Citibank, a South Dakota commercial bank, issued credit cards to consumers across the United States. Citibank did not file any B&O tax returns in Washington until June 2010. In November 2010, the DOR began an audit of Citibank’s business activities for 2007 through 2010 and concluded there were sufficient contacts with the state to constitute nexus. This conclusion was based on the physical presence of the retailers with which the bank had private label credit card agreements. The audit division concluded that an apportioned share of the bank’s income should be apportioned to Washington under the Service and Other Business Activities B&O tax classification and issued an assessment of $6 million in tax, with additional interest and penalties. Citibank challenged the assessment, stating the bank had no physical presence in the state and no business activities were performed in the state.

The review of the assessment by the Administrative Review and Hearings division rejected both arguments. After several reconsiderations by this divisional board, Citibank appealed to the Board. The Board considered all the facts presented, including the following:

  • Citibank had no employees or physical property in the state
  • Citibank originated, managed, and serviced unsecured revolving credit consumer loans accessed by its customers using credit cards
  • Citibank issued private label, store-branded credit cards pursuant to the terms of agreements entered into with various retailers, including Sears, Home Depot, and Federated Department Stores, all companies that have their executive offices outside of the state
  • Citibank also issued “co-branded” credit cards, which had both the name and logo of the associated retailers
  • Citibank’s income streams fell into three general categories: 1) interest and fee income received from cardholders, 2) interchange and other fee income generated from the provision of services to other commercial enterprises, and 3) income from trading and investment activities
  • All underwriting approval activity for the credit cards was done outside of Washington, as was all billing and account servicing activities
  • The DOR discovered that Citibank had filed more than 3,000 lawsuits in Washington courts between January 2007 and May 2010, seeking to collect debts owed by its Washington customers

The B&O tax is intended to apply to “virtually all business activities carried on within the state” and applies unless a specific exemption exists. “Business” includes “all activities engaged in, with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly.”2

For financial institutions, the B&O tax provides that any business that receives gross income from engaging in business as financial institutions within the scope of chapter 82.14A RCW (relating to city taxes on financial institutions) shall apportion or allocate gross income under RCW 82.04.290 to the state pursuant to rules promulgated by the DOR, consistent with uniform rules for apportionment or allocation developed by the state.

Citibank argued that the actions of third parties cannot satisfy physical presence requirements, and third-party activities cannot serve as a basis for the apportionment of B&O tax for periods prior to June 1, 2010. Citibank argued that it did not have statutory nexus with Washington, and its activities were insufficient to assign any income to Washington.

The Board concluded the bank’s activities within the state were sufficient to constitute nexus. The decision noted that Citibank’s “activities in Washington, filing more than 3,000 lawsuits in Washington’s courts, and the activities of the retailers in promoting and supporting its credit cards, were sufficient to constitute nexus during the audit period, whether characterized as a ‘physical presence’ or not. The courts have long recognized that the activities of third parties, performed on behalf of a taxpayer, can constitute sufficient nexus to support the assessment of tax.”

Ryan will continue to monitor any developments. Should your company have concerns regarding establishing nexus in Washington, please contact us.

1 Citibank South Dakota National Association v. Department of Revenue, Wash. BTA, No. 17-109. November 24, 2021.

2 RCW 82.04.140.


Mark L. Nachbar

Mary Bernard

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