Service Income Apportionment
The apportionment of service income allows businesses to divide their taxable revenue and their taxes proportionately among the Washington cities in which they do business. Businesses that report revenue under the classification of "Service and Other Business Activities" on their City of Seattle business tax return will calculate apportionment of this revenue.
Examples of businesses that report service income include accountants, lawyers, architects, engineers and many other professional service firms. If any of these businesses serve customers within the City of Seattle and/or in other Washington cities, they will calculate how that service income should be apportioned.
If your business does not have income to report under the classification of "Service and Other Business Activities," you will not calculate apportionment. Please note that income from intangibles, such as royalties, are not included in the apportionment calculation even though they are reported in that same category. Income from intangibles is sourced to the taxpayer's domicile (headquarters).
What's new
Effective Jan. 1, 2020, the method used to apportion service revenue between jurisdictions has changed. This new method utilizes a market-based sourcing approach to determine how taxable service income is apportioned among multiple jurisdictions. Essentially, the new apportionment method redefines "customer location" for purposes of apportionment.
The amended service income sourcing rules may have a significant impact on taxpayers operating in Washington cities. For example, a Seattle-based service business with a majority of its customers located outside Washington currently is more likely to have a high apportionment factor for Seattle B&O tax purposes where most of its employees are based in Seattle and performing services remotely from the company’s office. Under the new market-based rules, that business may have an appreciably lower service-income factor more closely aligned to its Washington state B&O service apportionment factor, given that the company’s services are delivered to a marketplace predominantly outside Washington.
Customer Location
To calculate service income apportionment, it will be important to have record of the customers' location. The definition of "customer location" depends on whether the customer is a business.
For customers engaged in business, the "customer location" is:
Where the services are ordered from;
The customer's billing/mailing address, if the location from which the services are ordered is not known; or
At the customer's commercial domicile if none of the above is known.
For customers who are not engaged in business, a homeowner for example, the "customer location" is:
If the service requires the customer to be present, it is where the service is performed;
If the customer is not required to be physically present, it is the customer's residence; or if the location of the customer's residence is not known, it is the customer's billing/mailing address.
Information you will need
Before you begin to calculate the apportionment of your service income, gather the following information:
Total service receipts
Total service payroll costs
Total Seattle service payroll costs
Location of each of your customers