Allocation and Apportionment Procedures 
(Seattle Municipal Code Section 5.45.081)

What is the effective date for the new allocation and apportionment procedures?

January 1, 2008.

Who is affected by the new allocation and apportionment procedures?

Beginning January 1, 2008, the sales of goods generally are allocated to the place of delivery by the seller.  Services are apportioned for taxing purposes based on the two-factor formula of payroll and service income.  

1)  Businesses that ship or deliver goods outside of their taxing jurisdiction (in this case—Seattle) are affected by the new tax code.  RCW 35.102.130 (Seattle Municipal Code 5.45.081) contains the new procedures, and essentially gives Seattle businesses that ship goods outside of Seattle a business license tax reduction.  The new tax code allows a deduction for sales delivered outside of Seattle but within Washington.   Businesses have always been able to deduct interstate sales (sales delivered by the seller to a point outside of the State of Washington).   Now they can also deduct sales delivered outside of the city but within Washington (intrastate sales).

2)  The new tax code allows businesses that provide services both within Seattle and outside of Seattle to apportion their service revenue using a two-factor formula.  This is true whether the business is located outside or inside of Seattle.  This will allow businesses to apportion part of their service revenue outside of Seattle.  (See “How do I Apportion my Service Income” below.)

How do I allocate my sales of tangible personal property?

According to RCW 35.102.130, sales of tangible personal property are allocated or assigned to the place of delivery. This is similar to the streamlined sales tax sourcing requirement, except that the cities' allocation requirement begins on January 1, 2008, while the streamline sales tax sourcing requirements begin July 1, 2008.  

How do I apportion my service income if I'm providing services both within and outside of Seattle?

Apportion gross income subject to tax under the service and other business activities classification using a two-factor formula.  The two factors are payroll and service income.   “Payroll” is generally assigned to the place where the employee is primarily assigned.  “Service income” is assigned where the majority of contacts occur between the business and its customer.  The following instructional language concerning apportionment is taken from RCW 35.102.130 and adopted in SMC 5.45.081. 

Gross income derived from service and other business activity shall be apportioned to the City by multiplying the income by a fraction, the numerator of which is the payroll factor plus the service and other business activity income factor and the denominator of which is two (2).

1.  The payroll factor is a fraction, the numerator of which is the total amount paid for compensation in the City during the tax period by the taxpayer and the denominator of which is the total compensation paid everywhere during the tax period.  Compensation is paid in the City if:

1. The individual or employee is primarily assigned within the City;

2. The individual is not primarily assigned to any place of business for the tax period and the employee performs fifty percent (50%) or more of his or her service for the tax period in the city; or

3. The individual is not primarily assigned to any place of business for the tax period, the individual does not perform fifty percent (50%) or more of his or her service in any city, and the employee resides in the city.

2.  The service and other business activity income factor is a fraction, the numerator of which is the total service and other business activity income of the taxpayer in the City during the tax period, and the denominator of which is the total service and other business activity income of the taxpayer everywhere during the tax period.  Service and other business activity income is in the City if:

1. The customer location is in the City; or

2. The income-producing activity is performed in more than one (1) location and a greater proportion of the service-income-producing activity is performed in the City than in any other location, based on costs of performance, and the taxpayer is not taxable at the customer location; or

3. The service and other business activity income producing activity is performed within the City, and the taxpayer is not taxable in the customer location.

3.  The following definitions apply in subsections 1 and 2 above.

1. "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to individuals for personal services that are or would be included in the individual's gross income under the federal Internal Revenue Code.

2. "Individual" means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee of that taxpayer.

3. "Customer location" means the city or unincorporated area of a county where the majority of the contacts between the taxpayer and the customer take place.  (The City of Seattle interprets this to be physical contracts.  Phone contacts are assigned to the place of business.)

4. "Primarily assigned" means the business location of the taxpayer where the individual performs his or her duties.

5. "Service-taxable income" or "service income" means gross income of the business subject to tax under the service and other business activity classification, excluding royalty income.  Royalty income is assigned 100% to the headquarters or domicile of the taxpayer.

6. "Taxable in the customer location" means either that a taxpayer is subject to a gross receipts tax in the customer location for the privilege of doing business, or that the government where the customer is located has the authority to subject the taxpayer to gross receipts tax regardless of whether, in fact, the government does so.

Is there a worksheet to assist in computing my taxable service income?  

The City of Seattle has prepared a Service Income Apportionment Worksheet and accompanying Instructions to assist in computing your service income under the two factor formula.  Download the form and instructions by clicking on the links.  

How do the new allocation and apportionment procedures relate to the City's square footage business tax?  

The State law requiring the use of the new allocation and apportionment procedures substantially reduces tax revenue for all cities that impose a gross receipts B & O tax beginning in 2008.  Based on work by the Washington Department of Revenue, the City of Seattle estimates it will lose $21.9 million in revenue in 2008. The City hopes to recover about $18 million of the lost $21.9 million through the square footage business tax. The square footage business tax is designed so that those businesses receiving a tax benefit under the new State law will be obligated to pay Seattle’s square footage business tax. The anticipated revenue generated by the square footage business tax will go into the General Fund, which funds basic City services, such as police, fire, libraries, and parks.  Seattle businesses that do not receive a benefit under the new State law will not owe any square footage business tax.

Link to Square Footage Business Tax Frequently-Asked Questions

The material in this site is intended for general informational purposes only. While it is current at the time of publication, changes to the Seattle Municipal Code (SMC) or state law may invalidate some of this information. In the event of a conflict between this guide and the SMC, the SMC prevails.

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