United States

Washington State: Broker Dealer Not Entitled to Use Investment Advisor B&O Rate

Nov 07, 2016
From KPMG TaxWatch

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The Appeals Division of the Washington Department of Revenue recently addressed whether a broker-dealer taxpayer was entitled to use the B&O tax rate applicable to “international investment management services.” The taxpayer was the broker-dealer entity of a financial services business. A separate, affiliated entity provided customers with investment advice. However, about 2/3 of the taxpayer’s broker-dealer employees were also registered investment advisors that served clients of both the taxpayer and its affiliate. Under Washington law, a taxpayer’s B&O tax rate is dependent on its business activity. Persons engaged in providing international investment management services are subject to a 0.275 percent B&O tax rate. Broker-dealers are subject to B&O tax under the service and other activities classification at a rate of 1.5 percent. Thus, if the taxpayer at issue qualified for the reduced rate, it would be entitled to a B&O tax refund.

A two-part test is applied to determine whether a taxpayer is eligible for the international investment management services tax rate. Under this test, a taxpayer must be primarily engaged in providing investment management services and must derive at least ten percent of its gross income from providing investment management services to certain funds outside the United States. The taxpayer asserted that its business activities fell within the definition of investment management services because it conducted investment research, investment consulting, portfolio management, investment transactions, and other related investment services (all activities included in the definition of investment management services) in the course of trading securities. The Appeals Division disagreed, noting that broker-dealers and investment advisors are subject to different regulatory regimes. Although a broker-dealer may incidentally be engaged in investment research or investment consulting in the course of selling securities, the Division disagreed with the taxpayer’s approach of taking each specifically enumerated activity and construing it as broadly as possible. Under this approach, the Division noted that any investment-related service could be characterized as an investment management services. Furthermore, the Division rejected the taxpayer’s assertions that its broker-dealers were different because of their dual employment. Although the taxpayer and its investment adviser affiliate were related, they were each only licensed to perform one activity and the Division noted that Washington courts generally respect a taxpayer’s corporate form. For more information on Washington Tax Det. No. 15-0187, please contact Michele Baisler at 206-913-4117.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.