On July 21, the Washington Department of Revenue (“DOR”) issued its analysis of the Court of Appeals’ decision from March 30, 2020, in LendingTree, LLC v. Dep’t of Revenue, no. 80637-8-I (Wash. App. Ct. Mar. 30, 2020).  As set forth in the analysis, from the DOR’s perspective, the LendingTree court followed the existing Washington Business and Occupation tax (“B&O”) attribution rules and guidance and did not create a new interpretive legal framework.[1]  Although the DOR lost the case, and the court held that LendingTree’s receipts could not be sourced based where its customers’ customers were located, the DOR’s response suggests that they are factually distinguishing the case and will continue to attribute receipts to the customer’s customer location if that is where it determines the benefit of the services occurs.

At issue in the LendingTree decision was how the taxpayer, LendingTree, LLC, should have attributed receipts from operating its online loan marketplace under the B&O attribution rules.  Through the marketplace, prospective borrowers submitted their financial information for no charge, which the taxpayer then analysed and referred to lenders.  The taxpayer earned revenue through referral fees paid by participating lenders and through loan closing fees on transactions resulting from referrals.  Following an audit, the DOR determined that the taxpayer’s receipts should be attributed based the location of the borrower, the lender’s customer, rather than the lender.  The DOR’s position was upheld by the Administrative and Hearing Division and trial court. 

Under Washington law, a taxpayer’s income earned from the performance of services is apportionable if the customer receives the benefit of the taxpayer’s services in Washington.  See RCW 82.04.462(3)(b)(i).  For service-related businesses not related to real or tangible personal property, the benefit is received where the customer’s related business activities occur.  See WAC 458-20-19402(303)(c).

Applying the B&O attribution rules for service based revenue, the Court of Appeals in LendingTree first identified the service being provided, agreeing with the taxpayer that its referral services were what its lender-customers valued, not marketing.  The court was unpersuaded by DOR’s argument that the taxpayer provided marketing and outreach services, enabling the lender to make loans to borrowers. After determining what service was at issue, the court then evaluated where these referral services occurred by focusing on where the lender-customer received the benefit of the services, holding that benefit occurred where lender-customers received and used the referrals.  In contrast, the DOR argued that the lender-customers received the benefit of the service at the location of the borrower, the customer’s customer.

When concluding that the taxpayer’s receipts should be attributed to where the customer received the benefits of the taxpayer’s services, rather than the customer’s customer location, the court cited to the recent decision in ARUP Laboratories, Inc. v. Dep’t of Revenue, no. 52349-3-II (Wash. App. Ct. Feb. 11, 2020).  In ARUP, the court applied the B&O attribution rules to an out-of-state laboratory providing medical testing services to medical providers, who reviewed the test results and related information at their location.  The court determined that the benefit of the service was not realized until the results were received by the medical provider, and, thus, receipts for the laboratory services were attributed to where medical providers received and utilized the information provided by the out-of-state laboratory.

In response to the LendingTree decision, the DOR appears to be taking the stance that although in LendingTree a borrower received benefits from LendingTree at the borrower’s business location and thus the receipts should be sourced there, if a taxpayer engages in a business different than a borrowers, then the customer’s customer location would still be relevant.  As the DOR states, if the taxpayer’s customer is engaged in selling, then it receives benefits of marketing where the taxpayer’s customer’s customer is located, not where the taxpayer’s customer is located.  This distinction appears based on characterizing LendingTree as a referral service instead of a marketing service.  The DOR does not offer any rationale for this distinction at this time.  So despite the taxpayer’s win in this case, the DOR will continue to take the same position for other businesses and taxpayers.  The resolution of this issue, in Washington and elsewhere, is far from over.

[1] LendingTree decision – what next, Washington Department of Revenue, (Jul. 21, 2020), https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/lendingtree-decision-what-next.

Contact the Authors: Mark Yopp and Garrett Kinkelaar