November 1, 2012
Impact of Getty Images decision
Taxpayers and taxpayer representatives have expressed concern that the
Court of Appeals decision in Getty Images (Seattle), Inc. v. City of Seattle,
163 Wn. App. 590, 260 P.3d 926 (2011) could be viewed as representing a
change in Washington law that will result in increased state business and
occupation (B&O) tax liability compared to prior Departmental policy and
The Department is issuing this statement to alleviate taxpayer concerns that
Getty Images represents a major departure from established law applied in the context of affiliate transactions.
General legal background
RCW 82.04.080 defines “gross income of the business” to mean the “value
proceeding or accruing by reason of the transaction of the business engaged
Compensation for services is subject to B&O tax regardless of whether the
services are provided by an affiliate or by an unrelated person. Therefore,
gross income includes all remuneration received for providing management
services to an affiliate.
However, not all income received from an affiliate is in the nature of
remuneration for services. For example, bona fide dividends or similar
distributions from a capital account may not be subject to B&O tax.
Specifically, businesses may deduct certain fund transfers from affiliate
entities under RCW 82.04.4281:
- Amounts derived as dividends or distributions from the capital
account by a parent from its subsidiary entities; and
- 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.
Application of the Getty Images decision
The Getty Images decision does not require that all sales of services be at fair market value.
The decision does not authorize the Department to recharacterize a bona
fide nontaxable transfer of funds as compensation for services. Such bona
fide nontaxable transfers may include dividends, distributions, or fund
transfers accomplished through a shared cash management account, that do
not represent compensation for services.
The Department does not presume that a transfer of funds between
affiliates is compensation for services. Rather, the facts must establish that
the funds are compensation for services provided to an affiliate.
Therefore, Getty Images is best understood as a case where the facts
established that the funds transferred to Getty Seattle were paid as
compensation for services provided to its affiliates.
The Department believes that additional guidance may help provide clarity
and certainty for taxpayers, including but not limited to, guidance on bona
fide nontaxable dividends and similar distributions qualifying for the
exemption under RCW 82.04.4281 and bona fide nontaxable distributions
from cash management accounts, consistent with established case law and
practice. In January 2013, the Department will begin work with
stakeholders to develop new guidance on these issues.
Until further notice, any application or use of the Getty Images decision by
the Department will be reviewed by senior managers to ensure that such use
is consistent with this interim statement.
The Getty Images decision does not represent a change in law for purposes
of evaluating the continuing validity of any letter ruling issued by the
- Taxpayers that have binding written instructions from the
Department that direct or approve the tax treatment of an affiliate
transaction may continue to rely upon such written instructions
unless and until the Department advises the taxpayer otherwise.
- However, this policy does not prevent the Department from
assessing tax in circumstances where the actual facts are found to
materially differ from the assumed facts that were the basis for the
binding written instructions.