Foreign Corporations Receiving Royalties in Washington State Have Nexus, Even Without a Physical Presence

Foreign entities receiving royalties in Washington create nexus in the state, according to a determination by the Administrative Review and Hearings Division (ARHD). The position comes from Washington Tax Determination (WTD) No. 15-0251, 35 WTD 230 (2016), which was released by the Department of Revenue’s ARHD on May 31, 2016.

The key takeaway: Tax treaties don’t preclude the state of Washington from imposing tax on foreign companies, even if those companies don’t pay US tax at the federal level. We give some background and details on the determination in this Insight.


The United States has negotiated income tax treaties with 66 countries. These aim to eliminate or at least limit the potential for double taxation of taxpayers, and they’re most often applied to investment income (dividends, royalties, and interest) and personal services income. These treaties also define a taxable presence in the state, and refer to businesses that meet the threshold as permanent establishments (PEs).

In the Treasury Department’s Model US Income Tax Treaty, a PE is generally defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” It goes on to expressly list several examples of PEs:

  • Places of management, branches, and offices
  • Factories or workshops
  • Mines, oil or gas wells, quarries, and any other place of extraction of natural resources

Additionally, a person that habitually exercises the ability to conclude binding contracts may create a PE.

Based on this definition, foreign entities that have neither a physical presence in the United States nor agents concluding contracts within US borders generally won’t be subject to federal tax.

US income tax treaties are all based on either the model published by the Organisation for Economic Co-operation and Development or the US Treasury model, but they may differ in specifics. The federal government of the United States and the foreign jurisdiction may also negotiate special terms.

It’s important to note that these treaties are negotiated on behalf of the federal government and that states don’t have a seat at the table. As such, states have taken the position that they aren’t obligated to respect all of the terms of a federally negotiated income tax treaty.

Washington State Ruling

The Washington determination concerned a German company that had no physical presence or business registration in Washington. The company received royalties based on where its products were sold. The ARHD analyzed whether the foreign company was subject to Washington business and occupation (B&O) tax and whether the treaty between the United States and Germany preempted Washington’s imposition of B&O tax on royalty income. 

The ARHD rejected multiple arguments from the taxpayer, concluding that the foreign company was subject to B&O tax because it had substantial nexus and that the tax treaty between Germany and the United States didn’t preempt the imposition of Washington B&O tax.

The ARHD’s reasoning included:

  • The business has substantial nexus. An out-of-state person not physically present in Washington may be subject to B&O tax when the person is deemed to have substantial nexus with the state. Substantial nexus is established when a nonresident individual or business entity has more than $250,000 of receipts from the state. Since the taxpayer had more than the threshold amount in Washington-source royalty receipts, the ARHD ruled that it had substantial nexus with the state.
  • The treaty doesn’t address state taxes. The tax treaty between the United States and Germany implicitly permits taxation of royalties by Washington because, according to the ARHD, the treaty doesn’t cover “Washington’s tax on royalties (or any state or local tax, for that matter).” This is quoted from the determination, not the treaty.
  • Non-US businesses aren’t precluded. Washington’s tax on royalties doesn’t discriminate against non-US businesses under Article 24 of the tax treaty. The law applies equally to everyone, and the tax is imposed on any business deriving royalty income from Washington sources regardless of physical presence.
  • The taxpayer won’t be doubly taxed. The ARHD noted that relief from double taxation would be available to the taxpayer under Article 23 of the treaty. The ARHD noted that the company should be able to exclude income taxed by Washington from its German base, avoiding double taxation.


Foreign companies that lack physical presence in Washington but receive royalties from Washington sources may potentially be subject to Washington B&O tax. It’s important to understand that a treaty position that exempts a foreign corporation from US federal taxes doesn’t extend to US states. As such, foreign corporations need to understand the nexus rules that apply to states in determining whether they’re subject to tax in those states.

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If you have any questions about how the Washington determination may affect your business, or for guidance on next steps for your organization, contact your Moss Adams professional.

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