How did Washington classify and apportion a technology retailer's manufacturer rebate income, and what records were required to adjust estimates?

Plain-English summary

The Washington Department of Revenue held that supplier rebates paid to a technology retailer for meeting sales-volume goals and performing related certification, training, and marketing activities were taxable under the service and other activities B&O classification—not wholesaling.

The suppliers were not buying tangible personal property from the retailer for resale. Instead, they paid the rebates to encourage more third-party sales and to obtain activities that supported those sales. Because those activities were not taxed under another specific B&O classification, the service and other activities classification applied.

The determination agreed with the retailer on one accounting principle: gross income is the rebate actually received or accrued, not both an earlier estimate and the actual rebate. But the retailer did not produce records connecting each estimated credit to the actual rebate credit and the debit reversing that estimate. Some debits had no matching credits, and the 2016 ledger included entries labeled as 2017 incentive fees. The Department therefore upheld the assessment without netting the disputed debits. The determination noted that the taxpayer could seek reconsideration under WAC 458-20-100(6) with records establishing the necessary transaction-by-transaction links.

For the audit years 2013 through 2016, the pre-2024 version of Washington's attribution rule placed the benefit of hardware-related rebate services where the end customer's hardware was delivered or principally used. Software-related rebate services were attributed where end customers purchased and used the software. Dividing Washington sales by total sales and applying that percentage to rebate income was a reasonable, record-based method. The retailer did not show that including sales from suppliers without rebate programs distorted the factor.

The Department also denied penalty and interest relief. Audit delay did not cause the retailer's reporting failures; its lack of knowledge about the rebate classification and apportionment rules did. The retailer also lacked the required prior 24-month compliance history, and neither statutory ground for waiving interest applied. The petition was denied.

What this means for you

Technology resellers

Supplier incentives tied to volume, certifications, training, marketing, or similar sales-support activities may be service-and-other-activities income even when the business also sells the supplier's products at wholesale.

Accounting teams

If rebate income is accrued through estimates, preserve a clear audit trail for every estimate, reversal, and final rebate. A general ledger containing unmatched or cross-period entries may not support a reduction to the assessed tax base.

Multistate businesses

Identify the actual market for the activity producing the rebate. Under the rule applied here, hardware-related benefits followed delivery or use of the hardware, while software-related benefits followed the end customer's software use—not simply the supplier's location.

Tax professionals

Penalty and interest waivers are statutory, not discretionary. Show both the qualifying circumstance and the direct causal link to the late payment or underpayment; audit duration alone does not establish either.

Common questions

Q: Were the manufacturer rebates taxable as wholesaling income?

A: No. The suppliers did not buy tangible personal property from the retailer for resale. They paid for volume performance and related sales-support activities, so the rebates fell under the service and other activities B&O classification.

Q: Must a taxpayer include both an estimated rebate and the later actual rebate in gross income?

A: No, not in principle. The determination says the tax base is the amount actually received or accrued. But the taxpayer must prove which debit reverses each estimate and which credit records the actual rebate.

Q: Where was the rebate income attributed?

A: Hardware-related rebate income followed where the end customer's hardware was delivered or principally used. Software-related rebate income followed where end customers purchased and used the software under the pre-2024 rule applied to the audit years.

Q: Why was Washington sales divided by total sales accepted as the receipts factor?

A: The method used the taxpayer's own undisputed sales records, was uniform and consistent, and reflected the end-customer market. The taxpayer offered no evidence that non-rebate suppliers affected Washington sales differently from total sales.

Q: Did the audit's length justify waiving penalties or interest?

A: No. The audit delay did not cause the reporting failures, the taxpayer did not meet the prior-compliance condition for the relevant waiver, and the statutory conditions for interest relief were absent.

Citations and references

• RCW 82.04.270 and .290(2) (wholesaling and service-and-other-activities classifications)
• RCW 82.04.080 and .090 (gross income and consideration actually received or accrued)
• RCW 82.32.070 and WAC 458-20-254(3) (recordkeeping)
• RCW 82.04.460 and .462; WAC 458-20-19402(106)(f), (303)(b)-(c) (apportionment and benefit attribution)
• RCW 82.32.105 and WAC 458-20-228(9) (penalty and interest waivers)
• Steven Klein, Inc. v. Department of Revenue, 183 Wn.2d 889, 357 P.3d 59 (2015)
• Det. No. 98-172E, 18 WTD 387 (1999)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD080.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD080.pdf)

Original ruling text

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Cite as Det. No. 21-0036, 45 WTD 080 (2026)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
...
)
)
)

DETERMINATION
No. 21-0036
Registration No. . . .

[1]
RCW 82.04.290: B&O TAX – CLASSIFICATION – SERVICE AND
OTHER ACTIVITES – VOLUME REBATES AND ASSOCIATED SERVICES.
Amounts received as volume rebates, as well as amounts received for performing services performed to enhance the ability to sell products to third parties, are taxable under the service and other activities B&O tax classification.
[2]
WAC 458-20-254; RCW 82.32.070: B&O TAX – ESTIMATED REBATE
INCOME – ACTUAL REBATE INCOME – RECORDKEEPING. In order to be able to adjust a taxpayer’s estimated rebate income to reflect their actual rebate income, a taxpayer has to keep and provide records that show how each of the taxpayer’s proposed adjustments corresponds from their estimated rebate to the actual rebate.
[3]
WAC 458-20-19402; RCW 82.04.462: B&O TAX – ATTRIBUTION –
REBATE INCOME PRIOR TO 2024 AMENDMENT TO WAC 458-20-19402.
Prior to the 2024 amendment to WAC 458-20-19402, rebate income from sales of hardware was attributed under WAC 458-20-19402(303)(b), while rebate income from sales of software was attributed under WAC 458-20-19402(303)(c).
[4]
WAC 458-20-228; RCW 82.32.105: PENALTIES – ANNUAL
RECONCILIATION – WAIVER – LACK OF KNOWLEDGE. A taxpayer’s lack of knowledge that its rebate income is subject to the service and other activities B&O tax classification and is attributable to Washington is not a circumstance beyond the taxpayer’s control sufficient to waive penalties assessed. Fisher, T.R.O. – A technology retailer and wholesaler protests the imposition, classification, and apportionment of tax on rebate income. The petition is denied. 1

1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

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ISSUES

1. Did the Department properly tax rebate payments from manufacturers as being subject to
   service & other activities business and occupation (“B&O”) tax classification under RCW 82.04.050 and RCW 82.04.290?
2. Did the Department properly calculate “gross income of the business” under RCW
   82.04.080, RCW 82.32.070, and WAC 458-20-254?
3. Did the Department properly apportion rebate income under RCW 82.04.462 and WAC
   458-20-19402?
4. May the Department waive penalties and interest under RCW 82.32.105 and WAC 45820-228?
   FINDINGS OF FACT
   . . . (Taxpayer) is a . . . company selling hardware, prewritten software, and maintenance agreements to businesses, governments, and health care agencies, including in Washington. The maintenance agreements include the servicing and configuration of the hardware, and providing IT support. Taxpayer has an office in Washington. In addition to the income Taxpayer receives from selling hardware, software, and maintenance agreements, Taxpayer receives rebate income from the suppliers from whom Taxpayer purchases the hardware and software. Department examined Taxpayer’s books and records to verify Taxpayer’s Washington business activities and transactions were properly reported on Taxpayer’s excise tax returns between January 1, 2013, and December 31, 2016 (Audit Period). Taxpayer provided to the Department a copy of Taxpayer’s general ledger. In comparing Taxpayer’s Washington excise tax returns to Taxpayer’s general ledger, the Department determined that Taxpayer had been reporting rebate income under the wholesaling B&O tax classification; the Department reclassified this income to service & other activities B&O tax classification. The general ledger included three accounts . . . (collectively, Rebate Estimate Accounts). Taxpayer’s general ledger recorded the net of the credits and debits in these accounts as the total amount of rebate income Taxpayer received. The Department determined that the total amount of credits listed in these accounts, without any deduction of the debits, was the proper amount of revenue Taxpayer received for rebates. The Department then apportioned the total rebate income, without deduction of the debits in the Rebate Estimate Accounts. The Department divided Taxpayer’s total Washington revenue by Taxpayer’s total revenue for each year of the Audit Period. The Department then multiplied the resulting percentage for each year by the total rebate income Taxpayer received to apportion the rebate income taxable in Washington. The Department also assessed service & other activities B&O tax on unreported income Taxpayer received under its maintenance agreements.

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The Department ultimately assessed Taxpayer $ . . . in service & other activities B&O tax, $ . . . in interest, and $ . . . in penalties for failing to correct the reporting of the receipts factor for apportionment for 2013, 2014, 2015, and 2016. Taxpayer timely sought administrative review. Taxpayer does not contest that the rebates are subject to tax, or the tax assessed on the maintenance agreement revenue. Taxpayer asserts four arguments. First, Taxpayer asserts that the appropriate B&O tax classification for rebate income is wholesaling and not service & other activities. Taxpayer argues that the rebate revenue it receives from suppliers is not in exchange for any services. Second, Taxpayer asserts that the amounts in the Rebate Estimated Accounts should not be considered Taxpayer’s gross income. Taxpayer explains that when it makes purchases from suppliers, Taxpayer estimates the amount of rebate it will receive and records that estimated amount in its general ledger as a credit. Later, when Taxpayer knows the actual amount of the rebate, Taxpayer enters a debit in the amount of the estimated rebate and puts in the real amount of rebate as a credit. According to Taxpayer, the Rebate Estimated Accounts are just the debits offsetting the estimated rebates when Taxpayer puts the true amount of the rebates, and are therefore not properly “gross income of the business” under RCW 82.04.080. Third, Taxpayer disputes the Department’s apportionment methodology. Taxpayer asserts that not all of its suppliers provide a rebate and that Taxpayer’s revenue includes all customer sales— including sales that involve products from suppliers that do not provide any rebate. Taxpayer asserts that this methodology distorts the Taxpayer’s market, and is not a reasonable method of apportionment. Taxpayer further argues that in determining where the customer receives the benefit of Taxpayer’s services, the customer is the supplier providing the rebate, and the rebate income should be apportioned to where the suppliers are. Fourth, Taxpayer protests the imposition of the penalties for failure to reconcile apportionable income in the years during the Audit Period. Taxpayer asserts that the penalties and interest should be waived due to delays in completing the audit. During the audit, the original auditor assigned to complete the audit was called to active duty military service, and a new auditor was assigned. Taxpayer declined the Department’s request to sign a waiver of the non-claim period. Along with its petition for administrative review Taxpayer submitted several documents. Taxpayer submitted documentation regarding the rebates from Taxpayer’s suppliers. The [Supplier 1] Value Incentive Program “provides a payment to partners that achieve program objectives during either a 6-month program period or 3-month program period.” Taxpayer Petition at 26. The program objectives include requirements to maintain various certifications from [Supplier 1] in addition to meeting sales volume requirements. Taxpayer Petition at 26-34. [Supplier 2] provides a Marketing Incentive Fee in exchange for “demonstrating significant achievement of sales in excess of
[Supplier 2]-specified quarterly sales goals.” Taxpayer Petition at 54. In addition, in order to qualify for the Marketing Incentive Fee a reseller of [Supplier 2] products must be a [Supplier 2] Certified Reseller or GSA Letter of Supply Holder, [and] must meet [Supplier 2] training requirements. Taxpayer Petition at 54, 70. Furthermore, half of the Marketing Incentive Fee must be spent on [Supplier 2] approved marketing and sales enablement activities. Taxpayer Petition at

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81. The Marketing Incentive Fee is payable after the fiscal quarter in which it is earned. Taxpayer
    Petition at 55.
    Taxpayer submitted a copy of the general ledger account labeled . . . for the 2016 year (“2016 Account Spreadsheet”). The 2016 Account Spreadsheet consists of 100 pages of debits and credits from 2016. The line description for each item states the name of the rebate. Most of the line descriptions, but not all, end in the word “reversal” or “accrual.” Each line also has a date. The 2016 Account Spreadsheet is organized by the size of the debit and credit. Finally, Taxpayer also submitted Exhibits 1 through 38, consisting of 362 pages of line item amounts. According to Taxpayer, these amounts substantiate the claimed debits in the 2016 Account Spreadsheet. Exhibits 16 through 31 are labeled as being rebates related to 2017 [Supplier 2] Marketing Incentive Fees. ANALYSIS Washington imposes a B&O tax for the act or privilege of engaging in business in the state of Washington. RCW 82.04.220. Taxpayer does not dispute that it has nexus with Washington, and is, therefore, generally subject to B&O tax in Washington. The B&O tax measure is “the application of rates against value of products, gross proceeds of sales, or gross income of the business, as the case may be.” Id. The rate used is determined by the type of activity in which a taxpayer engages. See generally Chapter 82.04 RCW. A. B&O Tax Classification of Rebate Income We first address Taxpayer’s argument that Taxpayer’s rebate income is subject to the wholesaling B&O tax classification. RCW 82.04.270 imposes wholesaling B&O tax on persons making sales at wholesale. RCW 82.04.060 defines “sale at wholesale” as, in relevant part, any sale of tangible personal property which is not a retail sale. RCW 82.04.050(1)(a) defines a retail sale to mean every sale of tangible personal property to all persons, with six exceptions not relevant to this determination. The wholesaling B&O rate is applied against the “gross proceeds of sales.” RCW 82.04.270. RCW 82.04.070 defines “gross proceeds of sales” to mean, in relevant part, the value proceeding or accruing from the sale of tangible personal property. “Value proceeding or accruing” means the consideration actually received or accrued. RCW 82.04.090. Taxpayer receives rebate income for meeting volume requirements and providing other services, including maintaining certifications and training requirements, in addition to, in the case of the
    [Supplier 2] Marketing Incentive Fee, marketing. The suppliers are not paying the rebate in order to buy tangible personal property from Taxpayer, so the rebate is not consideration accruing from the sale of a piece of tangible personal property. Because Taxpayer is not selling tangible personal property to suppliers so the suppliers can resell the tangible personal property, Taxpayer is not engaged in wholesale sales in exchange for the rebates, and the rebate payments from the suppliers are not subject to the wholesaling B&O tax classification.

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The suppliers are paying the rebate to induce Taxpayer to keep selling suppliers’ products to third parties and performing services to enhance Taxpayer’s ability to sell products to third parties. This is not listed under a specific definition in Ch. 82.04 RCW. Business activities other than, or in addition to, those that are specifically enumerated elsewhere in Ch. 82.04 RCW or RCW 82.04.290(1) or (3), are taxed under the service and other activities B&O tax classification. [RCW 82.04.290(2) (applying to persons engaged in a business activity “other than or in addition to an activity taxed explicitly under another section in this chapter or subsection (1) or (3) of this section”).] Accord [Det.] No. 98-172E, 18 WTD 387, 393-95 (1999) (determining that incentives from vendors to purchase products are subject to service & other activities B&O tax classification);
[see Steven Klein, Inc. v. Dep’t of Revenue, 183 Wn.2d 889, 897-99, 357 P.3d 59 (2015) (dealer cash fits within the catchall provision because it is an “other” or “additional” business activity and not a retail sale).] Because the rebates pay for Taxpayer [activities] that are not specifically enumerated elsewhere in Ch. 82.04 RCW, the Department appropriately classified the rebates as service & other activities. B. Gross Income of the Business and Recordkeeping We next address Taxpayer’s argument that the Department erred in refusing to net the debits from the credits listed in the Rebate Estimate Accounts. RCW 82.04.290(2) states that the service & other activities B&O tax is calculated by applying the relevant tax rate against the “gross income of the business.” RCW 82.04.080 defines gross income of the business to be “the value proceeding or accruing by reason of the transaction of the business engaged in.” “Value proceeding or accruing” means the consideration actually received or accrued. RCW 82.04.090. Taxpayer asserts that the estimated amounts of the rebate are not amounts “actually received.” We agree in principle. Gross income of the business includes the value proceeding or accruing by reason of the transaction of the business engaged in. RCW 82.04.080. Value proceeding or accruing means the consideration actually received or accrued. RCW 82.04.090. The consideration actually received or accrued is the amount of the rebate actually received or accrued. According to Taxpayer, Taxpayer estimates the amount of rebate it will receive for accounting purposes as a credit, and once Taxpayer receives the rebate and knows the actual amount, Taxpayer then enters the actual amount of the rebate and debits out the estimated amount. The “value proceeding or accruing” from the rebate is the amount actually received, not both the amount actually received and the earlier estimate. However, we are unable to grant Taxpayer relief. RCW 82.32.070 requires all taxpayers to keep and preserve suitable records as may be necessary to determine the amount of any tax for which the taxpayer may be liable. WAC 458-20-254(3) states that all taxpayers have a duty to prepare and preserve all records in a systematic manner to demonstrate the amounts of gross receipts and sales from all sources. The records provided by Taxpayer are insufficient to establish that the debits in the Estimated Rebate Accounts are adjusting the rebate revenue to reflect the amounts actually received or accrued without any estimated amounts. The 2016 Account Spreadsheet contains multiple entries of 2017 [Supplier 2] Marketing Incentive Fees. According to the Marketing Incentive Fee agreement provided by Taxpayer, Marketing Incentive Fee payments are payable after the end of

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the fiscal quarter in which the Marketing Incentive Fee accrues. It does not follow that the 2016 Account Spreadsheet showing amounts accrued in 2016 would list Marketing Incentive Fees accrued in 2017. Furthermore, there appear to be random debits that do not match with credits of a corresponding amount. For example, on the first page of the 2016 Account Spreadsheet, a line item for “VIP 26 Rebate Reversal” dated for April 30, 2016, is debited for $ . . . . The 2016 Account Spreadsheet is organized by size, yet there is no credit for the same amount. There are a number of other debit entries that do not have any corresponding credit entry. If all of the debits in the 2016 Account Spreadsheet truly represented estimated amounts being canceled out of the general ledger, there should not be any debit entries that do not have a corresponding credit entry. In order to establish that the debits are simply adjusting estimated rebate amounts, Taxpayer would need to show, with records, when Taxpayer put the estimate in the general ledger as a credit, when Taxpayer received the rebate (and therefore knew the actual amount of the rebate), when Taxpayer entered in the actual number of the rebate as a credit, and when Taxpayer entered a debit to cancel the initial estimate for each credit Taxpayer claims should not be included in the measure of gross income of the business. 2 Based on the records before us, we conclude that the Department did not err in refusing to net the credits and debits of the Estimated Rebate Accounts. C. Apportionment RCW 82.04.460 addresses apportionable income in this state and provides:
[A]ny person earning apportionable income taxable under this chapter and also taxable in another state must, for the purpose of computing tax liability under this chapter, apportion to this state, in accordance with RCW 82.04.462, that portion of the person’s apportionable income derived from business activities performed within this state. RCW 82.04.460(1). “Apportionable income” is defined as “gross income of the business generated from engaging in apportionable activities, including income received from apportionable activities performed outside this state, if the income would be taxable under this chapter if received from activities in this state . . . .” RCW 82.04.460(4)(a). “Apportionable activities” include, in relevant part, services and other activities taxed under RCW 82.04.290(2). RCW 82.04.460(4)(a)(vi). As explained above, the rebate income at issue here is properly classified under the service and other activities B&O tax classification in RCW 82.04.290(2), so it is apportionable income under RCW 82.04.460(1).

WAC 458-20-100(6) provides a mechanism for requesting reconsideration of determinations. If Taxpayer has documentation to establish that it entered estimates of rebate income as credits that were later cancelled out with debits, Taxpayer should provide such records along with a petition for reconsideration. Taxpayer must comply with WAC 458-20-100(6) in filing for reconsideration. 2

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A person’s income within the scope of RCW 82.04.460(1) is apportioned to Washington by multiplying the person’s apportionable income by the receipts factor. For purposes of computing the receipts factor, RCW 82.04.462(3)(b) provides that gross income of the business generated from each apportionable activity is attributable to Washington: Where the customer received the benefit of the taxpayer's service . . . . When a customer receives the benefit of the taxpayer's services . . . in [Washington] and one or more states and the amount of gross income of the business that was received by the taxpayer in return for the services received . . . can be reasonably determined by the taxpayer, such amount of gross income must be attributed to [Washington]. RCW 82.04.462(3)(b)(i). “Reasonably determined” in the context of RCW 82.04.462(3)(b)(i) means “reasonable method of proportionally attributing,” which in turn means a method of determining where the benefit of an activity is received and where the receipts are attributed that is “uniform, consistent, and accurately reflects the market, and does not distort the taxpayer's market.” WAC 458-20-19402(106)(f). RCW 82.04.462(3)(b)(ii) provides that if the customer receives the benefit of the service in more than one state and if the taxpayer is unable to attribute gross income under RCW 82.04.462(3)(b)(i), then we attribute gross income of the business where the benefit of the service was primarily received. The “benefit of the taxpayer’s service” is not defined in statute. WAC 458-20-19402(303), however, defines that term in a variety of ways, depending on the factual circumstances: (b) If the taxpayer’s service relates to tangible personal property, then the benefit is received where the tangible personal property is located or intended/expected to be located. (i) (ii) (iii)

Tangible personal property is generally treated as located where the place of principal use occurs . . . . If the tangible personal property will be created or delivered in the future, the principal place of use is where it is expected to be used or delivered. The following is a nonexclusive list of services that relate to tangible personal property: (A) Designing specific/unique tangible personal property; (B) Appraisals; (C) Inspections of the tangible personal property; (D) Testing of the tangible personal property; (E) Veterinary services; and (F) Commission sales of tangible personal property

(c) If the Taxpayer's service does not relate to real or tangible personal property, the service is provided to a customer engaged in business, and the service relates to the customer's business activities, then the benefit is received where the customer's

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related business activities occur. The following is a nonexclusive list of business related services: (i) (ii) (iii) (iv) (v) (vi)

Developing a business management plan;
Commission sales (other than sales of real or tangible personal property); Debt collection services; Legal and accounting services not specific to real or tangible personal property; Advertising services; and Theater presentations

RCW 82.08.010(7) defines “tangible personal property” as “personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” See also 34 WTD 452 (applying RCW 82.08.010(7) to WAC 458-20-19402(303)(b)). The services here are meeting volume requirements in selling hardware and software to third parties, maintaining certifications related to the hardware and software, and marketing the hardware and software. We analyze the apportionment of rebate revenue related to hardware and software separately. 3

1. The Benefit of Taxpayer’s Service - Hardware Rebate Revenue
   The hardware is tangible personal property because it is personal property that can be seen, weighed, measured, felt, or touched. We conclude that the services of meeting volume requirements, maintaining certifications related to the hardware sold, and marketing the hardware are all services that relate to tangible personal property. Because Taxpayer’s services relate to tangible personal property, Taxpayer’s customers receive the benefit of Taxpayer’s service either where the tangible personal property’s principal place of use occurs under WAC 458-20-19402(303)(b)(i) or, “[i]f the tangible personal property will be created or delivered in the future,” where “it is expected to be used or delivered” under WAC 45820-19402(303)(b)(ii). Here, the principal place of use is where the hardware is ultimately delivered to the end customer. The purpose of the rebates is to get Taxpayer to sell more of the suppliers’ hardware to the end customers.
2. The Benefit of Taxpayer’s Service - Software Rebate Revenue
   The suppliers’ related business activity is the production and sale of software. Taxpayer’s service is the sale of software in volume, maintaining certifications related to the software, and marketing the software. Because the services do not relate to real property or tangible personal property, and are provided to the suppliers who are engaged in business, and the services relate to the suppliers’

Because it is unclear whether the suppliers offer rebates for the services provided for the hardware and software differently, we analyze each separately. Even assuming a supplier does not provide separate rebates for hardware and software respectively, the analysis in the next paragraphs explains that the apportionment would reach the same result. 3

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business activity, we must apportion to where the related business activity occurs. 4 WAC 458-2019402(303)(c). The related business activity is getting end customers to use the software. The purpose of the rebates is to encourage Taxpayer to sell more of the software to the end customers, to maintain certifications so end customers feel more comfortable purchasing the software knowing Taxpayer can help them if issues come up, and market the software so that more end users purchase the software. Accordingly, the benefit of the service is received where the end customers are who purchase and use the software.

3. The Method of Apportionment of Rebate Revenue
   Because the suppliers receive the benefit of Taxpayer’s services as they relate to hardware rebates and software rebates in more than one state, we must use a reasonable method of proportionally attributing Taxpayer’s revenue. RCW 82.04.462(3)(b)(i). In determining where the benefit of Taxpayer’s activity was received, the Department took Taxpayer’s sales sourced to Washington and divided that number by Taxpayer’s total sales for each year of the Audit Period to calculate a receipts factor for each year. The Department then took that receipts factor for each year and multiplied it by the amount of rebate income received each year. This was a reasonable method of apportionment because the method was uniform, consistent, reflects the market, and does not distort the Taxpayer’s market. The receipts factor was calculated based on the undisputed Washington sourced sales divided by the total sales, and was entirely based off of Taxpayer’s own records. Taxpayer asserts that this is an unreasonable method of apportionment. According to Taxpayer, using total revenue includes suppliers that do not offer any rebate amounts, and so using total revenue to calculate receipts distorts the Taxpayer’s market. We disagree. The amount of revenue derived from sales of products from suppliers that do not offer rebates as compared to sales of products from suppliers that do offer rebates are presumably the same for both Washington sourced sales and total sales. Indeed, Taxpayer has offered no reason why the comparative amounts would not be the same for both the national sales and Washington sales. Therefore, any distortion resulting from the inclusion of revenue from suppliers who do not offer rebates would be on both the numerator and denominator of the receipts factor, thereby cancelling each other out. Accordingly, we reject Taxpayer’s argument that this method of apportionment distorts its market. D. Penalties Finally, Taxpayer requests waiver of the penalties and interest due to how long the Department took to issue the audit. Taxpayer was assessed penalties under RCW 82.04.462(4) for failure to correct the reporting of the receipts factor for apportionment for 2013, 2014, 2015, and 2016. Taxpayer was also assessed interest on these amounts pursuant to RCW 82.04.462(4). The Department is an administrative agency, and its authority to waive or cancel penalties is restricted to the authority granted by the Legislature. The Legislature has granted the Department Even if we determined that software was tangible personal property, the benefit of the service would still be received where the end customers of the software are located, as explained in the previous section.

4

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limited authority to waive or cancel penalties. RCW 82.32.105 and RCW 82.32A.020. The Department has no discretionary authority to waive or cancel penalties. Det. No. 98-85, 17 WTD 417 (1998); Det. No. 99-285, 19 WTD 492 (2000). The only authority to cancel penalties is found at RCW 82.32.105, which provides: (1) If the department of revenue finds that the payment by a taxpayer of a tax less than that properly due or the failure of a taxpayer to pay any tax by the due date was the result of circumstances beyond the control of the taxpayer, the department of revenue shall waive or cancel any penalties imposed under this chapter with respect to such tax. (2) The department shall waive or cancel the penalty imposed under RCW 82.32.090(1) when the circumstances under which the delinquency occurred do not qualify for waiver or cancellation under subsection (1) of this section if: (a) The taxpayer requests the waiver for a tax return required to be filed under RCW 82.32.045, 82.14B.061, 82.23B.020, 82.27.060, 82.29A.050, or 84.33.086; and (b) The taxpayer has timely filed and remitted payment on all tax returns due for that tax program for a period of twenty-four months immediately preceding the period covered by the return for which the waiver is being requested. RCW 82.32.105(2)(a), (b). In sum, all penalties may be cancelled if it is found that the penalty was caused by a circumstance beyond the control of the taxpayer. Waiving a penalty based on the Taxpayer not having paid a tax return late during the prior 24 months only applies to delinquentpayment penalties. WAC 458-20-228 explains that “[c]ircumstances beyond the control of the taxpayer are generally those which are immediate, unexpected, or in the nature of an emergency. Such circumstances result in the taxpayer not having reasonable time or opportunity to obtain an extension of the due date or otherwise timely file and pay.” WAC 458-20-228(9)(a)(ii). The circumstances must directly cause the late payment or substantial underpayment. WAC 458-20-228(9)(a)(i). WAC 458-20-228(9)(a)(ii) lists examples of circumstances that are beyond a taxpayer’s control sufficient to cancel penalties:
•
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Erroneous written information from the Department;
An act of fraud or conversion by the taxpayer’s employee or contract helper which the taxpayer could not immediately detect or prevent; Emergency circumstances around the time of the due date, such as the death or serious illness of the taxpayer or a family member or accountant; or

WAC 458-20-228(9)(a)(iii) also lists examples of situations that are generally not beyond the control of a taxpayer:

Det. No. 21-0036, 45 WTD 080 (June 9, 2026)

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90

Financial hardship;
A misunderstanding or lack of knowledge of a tax liability; or Mistakes or misconduct on the part of employees or other persons contracted with the taxpayer.

Here, Taxpayer requests waiver because of the length of the audit. This is not a circumstance beyond the Taxpayer’s control, because the length of the audit was not the cause of the late payment as required by WAC 458-20-228(9)(a)(i). Taxpayer incurred penalties because it did not file an annual reconciliation to correct its apportionment receipts factor for each year of the Audit Period. The last year of the Audit Period was 2016, and the corrected receipts factor was due October 31, 2017. The Audit taking until 2019 to complete was not the cause of the penalty. Taxpayer’s lack of knowledge that its rebate revenue was subject to service & other activities B&O tax, was apportionable, and required Taxpayer to file corrections to its receipt factor in each year of the Audit Period was the cause of the penalties. Next we turn to RCW 82.32.105(2)(b), which allows the Department to waive penalties when a taxpayer has timely filed and paid all tax returns due in the twenty four months prior to the penalty. The earliest penalty during the Audit Period was assessed based on the failure to file a corrected receipts factor for the 2013 tax year. Taxpayer did not timely file a corrected receipts factor for the 2012 tax year. Accordingly, Taxpayer does not qualify for waiver of taxes under RCW 82.32.105(2)(b). Finally, we turn to interest. RCW 82.32.105(3) provides that the Department may only waive interest if the failure to timely pay the tax was the direct result of written instructions given to the Taxpayer by the Department or if the extension of a due date for payment of an assessment was not at the request of the taxpayer and was for the sole convenience of the Department. Here, the failure to timely pay the tax was not the direct result of any written instructions from the Department; Taxpayer does not allege any such instructions exist. Furthermore, there was no extension of a due date; Taxpayer was given a due date, and promptly filed a petition for administrative review. Accordingly, the Department cannot waive interest. DECISION AND DISPOSITION
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Dated this 17th day of February 2021.