The Washington State Court of Appeals Division II recently published its opinion in the case of Antio, LLC, et al. v. Washington (Antio) on April 11, 2023, finding that the business and occupations (B&O) tax deduction for investment income is limited to investments that are incidental to the main purpose of the taxpayer’s business.
This interpretation is contrary to the Department of Revenue’s longstanding policy of treating investment income as deductible, regardless of the taxpayer’s main business activity. It’s unknown whether the taxpayers in this case will petition the state Supreme Court for review of this decision.
The Washington B&O tax is applied broadly to most types of gross income with very few deductions. One such deduction is the deduction for investment income in Revised Code of Washington (RCW) Section 82.04.4281.
RCW Section 82.04.4281 provides that in computing tax there may be deducted from the measure of tax amounts derived from the following:
- Distributions from the capital account by a parent from its subsidiary entities or as dividends
- Interest on loans between subsidiary entities and a parent entity or between subsidiaries of a common parent entity, but only if the total investment and loan income is less than five percent of gross receipts of the business annually
What Counts as an Investment?
Investments may not be defined as a term in Washington State law, but has historically been understood by the Department of Revenue and taxpayers alike to mean all types of investment income such as dividends or interest on deposits, without regard to the taxpayer’s other business activities.
Until April 11, 2023, the Department of Revenue’s website included this statement: “A trader not meeting the characteristics of a broker, dealer, or broker-dealer isn’t a security business and would be eligible for the B&O tax deduction for amounts derived from investments. Additionally, most mutual funds, private investment funds, family trusts, and other collective investment vehicles aren’t a securities business and are allowed the B&O tax deduction for amounts derived from investments.”
The Department of Revenue’s guidance didn’t include any indication that a taxpayer’s other activities were relevant to the analysis, but a 1986 Washington State Supreme Court case had once limited the scope of an earlier version of this deduction to investments that were incidental to the main purpose of the business. In this case, the court of appeals believed it was bound to this older interpretation of the term, thereby limiting the deduction to taxpayers who aren’t primarily engaged in investment activities.
If this ruling isn’t appealed and overturned by the state supreme court, this new interpretation of investments could have significant implications for many taxpayers.
Types of taxpayers expected to be significantly impacted include mutual funds, private investment funds, family trusts, and other investment vehicle entities whose main business activity is investing. Many of these types of entities haven’t historically reported B&O tax on their investment income and may have significant B&O tax liabilities as result of this ruling.
This outcome of this case runs contrary to the plain language of the statute and could be appealed. If this ruling is upheld or becomes law without ever being appealed, there may be additional unforeseen complexities with how to apply the B&O tax to investment income that have no historical precedent or guidance because this income wasn’t historically treated as being taxable.
For example, Washington has little guidance for attributing investment income inside and outside the state for apportionment purposes and the rules around netting gains and losses, usually only applicable to financial institutions, might not apply.
Taxpayers who could be affected by this ruling should work with a state tax professional to determine the applicability of these changes to their situation and how they can mitigate risks for historical periods.
We’re Here to Help
To learn more about how this case could impact you or your business, contact your Moss Adams professional.