Perspectives

Washington's business tax primary purpose test after Qualcomm Inc. v. Washington Dept. of Rev.

For Washington state business tax purposes, the assignment of business activities into one of several taxable classifications can have significant consequences since tax rates differ among the classifications. The determination becomes difficult when a business is engaged in multiple activities that cover different Washington tax classifications. Such is the case for businesses that provide a blend of telecommunications and information services to their customers.

Understanding Washington business tax entity classification

At issue in Qualcomm was whether the service component was taxable as a "network telephone service," subject to the "retailing" business and occupation tax and the retail sales tax; or as an "information service" subject only to the "service and other" business and occupation classification.

For Washington state business tax purposes, the assignment of business activities into one of several taxable classifications can have significant consequences since tax rates differ among the classifications. The determination becomes difficult when a business is engaged in multiple activities that cover different Washington tax classifications. Such is the case for businesses that provide a blend of telecommunications and information services to their customers.

In a case of first impression, the recent Washington Supreme Court decision in Qualcomm Inc. v. Washington Department of Revenue¹ offers companies providing multiple services in the state guidance regarding the methodology for classifying their activities for Washington business tax purposes. 

¹ Qualcomm Inc. v. Wash. Dept. of Rev., 249 P.3d 167 (Wash. 2011).

By Andy Colson and Stephanie Gilfeather of Deloitte Tax LLP | Originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" in August 2011
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