- Washington state exempts amounts derived from investments and other similar forms of income from its gross receipts tax, the business and occupation (B&O) tax.
- A past Washington Supreme Court ruling defined deductible investment income from B&O tax as an “incidental investment of surplus funds.”
- The Washington Supreme Court ruled that a subsequent amendment to the statute did not abrogate the earlier definitional ruling of investment income.
Background
The state of Washington imposes the B&O tax measured on gross income. Washington allows a deduction from the B&O tax for amounts derived from investments, dividends or distributions from a subsidiary to a parent entity, and interest on intercompany loans.1
Businesses cannot deduct amounts received from loans (other than interest on intercompany loans), the extension of credit, revolving credit, installment sales, or payment over time for goods and services from B&O.2 In addition, amounts received by a business in banking, lending, or securities are nondeductible.3
The statute has been the subject of multiple legal challenges since its enactment. Notably, in the 1986 Washington Supreme Court case of Ray O’Leary v. The Department of Revenue, the Court described a deductible “investment” as one that is an “incidental investment of surplus funds.” quoting its previous ruling in John H.Sellen v. Department of Revenue.4 The Court continued, “whether an investment is ‘incidental’ to the main purpose of a business is an appropriate means of distinguishing those investments whose income should be exempted from the B&O tax.”
In 2002, the Washington state legislature amended the statute to the current language previously discussed. Originally, the statue included language to exclude “other financial businesses” from qualifying for the deduction. The term’s ambiguity led to a narrow and restrictive interpretation in Simpson Inv. v. The Department of Revenue, prompting the legislature to eliminate it.5
Antio, LLC v. Washington State Department of Revenue
Antio, LLC and fifteen related companies were subject to an audit by the Washington Department of Revenue after filing a refund claim for B&O taxes paid over several years. The companies, whose income is derived from owning or trading investments, claimed that their income was deductible as investment income under Wash. Rev. Code Section 82.04.4281. The subsequent audit denied the refund claim. The companies sued the Department, which resulted in a ruling (and a subsequent affirming ruling by the Court of Appeals) upholding the O’Leary definition of investments and denying the deduction to the companies as the investment income was not an “incidental investment of surplus funds.” The Washington Supreme Court granted review to the petitioners.
The Supreme Court expressed the crux of the case as “whether the legislature abrogated O’Leary’s definition of investments when it amended the statute.”6 The petitioners argued that the legislature’s 2002 amendment to the structure of the statute rendered the O’Leary definition obsolete. The petitioner companies claimed that the legislature, in removing “other financial businesses” from the list of businesses that are not allowed the investment deduction, intended to conclude that only businesses in banking, lending, or securities are not allowed the investment deduction.
The decision reasons, “a change in structure of a statute is not enough. A court must find clear legislative intent to abrogate a binding decision like O’Leary.” The court turned to the legislative intent section of the statute which provides the amendment’s intent was to “reduce ‘uncertainty’ caused by the vague phrase ‘other financial businesses,’” to address legislators’ concerns about the restrictive and narrow interpretation in Simpson, and to encourage capital investment. The court found no legislative intention to nullify the O’Leary definition and highlighted that fact that the legislature did not define “investments” as “the best evidence” that it did not intend to abrogate.
The Supreme Court affirmed the lower courts’ rulings, they retained the O’Leary definition, and denied the petitioner companies a refund of B&O tax.
Forvis Mazars Insight: The decision in this case reinforces that deductibility hinges upon investments being “incidental” and from “surplus funds.” While not directly on point, the language strongly suggests that funds with any direct tie to the business will be subject to heightened scrutiny, whereas treasury funds that qualify as “surplus” and “incidental” to the purpose of the business may be afforded more latitude.
How Forvis Mazars Can Help
The O’Leary definition provides a starting point for consideration as to whether investment income is subject to the B&O tax. However, businesses and their income sources can vary, often making an application of the definition to certain facts and circumstances difficult. Forvis Mazars professionals are available to help you navigate the statute and relevant court cases to comply and to plan for the Washington state B&O tax.
Please reach out to a professional at Forvis Mazars for more information.
- 1 Wash. Rev. Code § 82.04.4281.
- 2Id.
- 3Id.
- 4Ray O'Leary, et. al., Appellants, v. The Department of Revenue, 105 Wn.2d 679 (Wash. 1986); John H. Sellen Constr. Co. v. Department of Rev., 87 Wn.2d 878, 883 (Wash. 1976).
- 5Simpson Inv. Co. v. Revenue, 141 Wn. 2d 139 (Wash. 2000).
- 6Antio LLC v. Department of Revenue, Wash., No. 102223-9, (10/24/24).