Washington Supreme Court upholds narrow interpretation of investment income deduction

The Washington (WA) State Supreme Court (the Court) upheld Washington Department of Revenue’s (DOR) narrow interpretation of the business and occupation (B&O) tax deduction for investment income with its decision on Antio LLC v. Department of Revenue (Antio). The Court found that deductible “investments” are those incidental to the taxpayer’s business, not those that are the reason the company is in business.

Background

The state of Washington has had an investment income deduction since 1935, which has changed over time due to various cases and legislative updates. Specifically, the Sellen v. Department of Revenue decision interpreted the phrase “other financial businesses,” the O’Leary v. Department of Revenue (O’Leary) decision defined the term “investments,” and the Simpson Investment Co. V. Department of Revenue decision refined the meaning of “other financial businesses,” addressing who could take the investment deduction. In 2002, the statute (RCW 82.04.4281) was amended to read:

(1) In computing tax there may be deducted from the measure of tax:

a) Amounts derived from investments;

b) Amounts derived as dividends or distributions from the capital account by a parent from its subsidiary entities; and

c) Amounts derived from 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.

(2) The following are not deductible under subsection (1)(a) of this section:

a) Amounts received from loans, except as provided in subsection (1)(c) of this section, or the extension of credit to another, revolving credit arrangements, installment sales, the acceptance of payment over time for goods or services, or any of the foregoing that have been transferred by the originator of the same to an affiliate of the transferor; or