United States

Washington: Internet User Population Data Used as a Proxy for Sourcing Advertising Receipts

Jul 24, 2017
From KPMG TaxWatch

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Recently, the Washington State Department of Revenue’s Administrative Review and Hearings Division addressed whether U.S. population or Internet user population data was a better proxy for sourcing receipts from Internet advertising. Under Washington’s B&O tax law, taxpayers providing services are considered to be engaged in so-called “apportionable” activities. If the taxpayer is taxable in more than one state, it must apportion its income to Washington. Income is apportioned to Washington using a receipts factor, the numerator of which is the gross income of the business attributed to Washington and the denominator of which is gross income everywhere. A series of cascading rules apply to determine where income is attributed. For service receipts, the general rule is to source such receipts to the location where the customer received the benefit of the service. Certain departmental rules provide additional guidance. One rule provides that when a taxpayer’s services (1) do not relate to real or tangible personal property, (2) are provided to customers engaged in business, and (3) relate to the customers’ business activities, the benefit of the taxpayer’s services is received by the customer where the customer's related business activities occur. This rule applied to the taxpayer’s Internet advertising receipts because they were provided to customers offering products or services for sale and related to helping the customers make sales. So, the advertising receipts should have been sourced to the location where the taxpayer’s customers’ sold their products or services over the Internet. However, the taxpayer did not have this information. All parties agreed that a reasonable method of proportionally attributing the receipts should be applied. The dispute was over what was “reasonable.”

Another Washington rule specifically addressed this type of situation and provided that “the use of relative population in the customer’s market” was a reasonable method of proportionally attributing the benefit of a taxpayer’s services. On audit, the Department applied Internet user population data. The taxpayer protested, arguing that U.S. general population was a better proxy and that the Department had applied overall U.S. population in the past when reasonably attributing receipts from Internet advertising services. The Tax Review Officer, noting that it could not discuss the particulars of another taxpayer’s situation, agreed that because the taxpayer’s customers were selling over the Internet, Internet user population data accurately reflected the customer’s internet user market. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 16-0244.


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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.