Allocation and apportionment—Nonresident business activity.

(1) The portion of federal adjusted gross income of a nonresident derived from or connected with a business, trade, or profession carried on in this state, including a sole proprietorship and any distributive share of a pass-through entity of a business, trade, or profession carried on in this state, must be apportioned and allocated as provided in this section. This section does not apply to compensation received as an employee allocated under RCW 82A.04.430.(2) Income from a business, trade, or profession carried on in this state, including any distributive share of a pass-through entity of a business, trade, or profession carried on in this state, must be classified as either apportionable income or nonapportionable income.(3) All apportionable income must be apportioned to this state by multiplying the income by the receipts factor. The receipts factor is a fraction the numerator of which is the total receipts of the taxpayer in this state during the tax period and the denominator of which is the total receipts of the taxpayer everywhere during the tax period.(a) Receipts from the sale of tangible personal property are in this state if:(i) The property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the free on board point or other conditions of the sale; or(ii) The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and (A) the purchaser is the United States government or (B) the taxpayer is not taxable in the state of the purchaser.(b)(i) Receipts, other than receipts described in (a) of this subsection (3), are in this state if the taxpayer's market for the sales is in this state. The taxpayer's market for sales is in this state:(A) In the case of sale, rental, lease, or license of real property, if and to the extent the property is located in this state;(B) In the case of rental, lease, or license of tangible personal property, if and to the extent the property is located in this state;(C) In the case of sale of a service, if and to the extent the service is delivered to a location in this state; and(D) In the case of intangible property:(I) That is rented, leased, or licensed, if and to the extent the property is used in this state, provided that intangible property used in marketing a good or service to a consumer is "used in this state" if that good or service is purchased by a consumer who is in this state; and(II) That is sold, if and to the extent the property is used in this state, if:(1) A contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area is "used in this state" if the geographic area includes all or part of this state;(2) Receipts from intangible property sales that are contingent on the productivity, use, or disposition of the intangible property must be treated as receipts from the rental, lease, or licensing of such intangible property under subsection (4)(a)(i) of this section; and(3) All other receipts from a sale of intangible property must be excluded from the numerator and denominator of the receipts factor.(c) If the state or states of assignment under (b) of this subsection (3) cannot be determined, the state or states of assignment must be reasonably approximated.(d) If the taxpayer is not taxable in a state to which a receipt is assigned under this subsection (3), or if the state of assignment cannot be determined under (b) of this subsection (3) or reasonably approximated under (c) of this subsection (3), the receipt must be excluded from the denominator of the receipts factor.(4)(a) If the allocation and apportionment provisions in subsection (3) of this section do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the department may require, in respect to all or any part of the taxpayer's business activity, if reasonable:(i) Separate accounting;(ii) The exclusion of any one or more of the factors;(iii) The inclusion of one or more additional factors that will fairly represent the taxpayer's business activity in this state; or(iv) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.(b) If the allocation and apportionment provisions of this section do not fairly represent the extent of business activity in this state for taxpayers engaged in a particular industry or in a particular transaction or activity, the department may, in addition to the authority provided in (a) of this subsection (4), adopt rules for determining alternative allocation and apportionment methods for such taxpayers. Rules adopted pursuant to this subsection (4)(b) must be applied uniformly, except that with respect to any taxpayer to whom such rule applies, the taxpayer may petition for, or the department may require, adjustment under (a) of this subsection (4).(c)(i) The party petitioning for, or the department requiring, the use of any method to effectuate an equitable allocation and apportionment of the taxpayer's income pursuant to (a) of this subsection (4) must prove by clear and convincing evidence:(A) That the allocation and apportionment provisions of this section do not fairly represent the extent of the taxpayer's business activity in this state; and(B) That the alternative to such provisions is reasonable.(ii) The same burden of proof applies whether the taxpayer is petitioning for, or the department is requiring, the use of any reasonable method to effectuate an equitable allocation and apportionment of the taxpayer's income. However, if the department can show that in any two of the prior five tax years, the taxpayer had used an allocation or apportionment method at variance with its allocation or apportionment method or methods used for such other tax years, then the department does not bear the burden of proof in imposing a different method pursuant to (a) of this subsection (4).(iii) If the department requires any method to effectuate an equitable allocation and apportionment of the taxpayer's income, the department may not impose any civil or criminal penalty with reference to the tax due that is attributable to the taxpayer's reasonable reliance solely on the allocation and apportionment provisions of this section.(iv) A taxpayer that has received written permission from the department to use a reasonable method to effectuate an equitable allocation and apportionment of the taxpayer's income may not have that permission revoked with respect to transactions and activities that have already occurred unless there has been a material change in, or a material misrepresentation of, the facts provided by the taxpayer upon which the department reasonably relied.(5) Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or copyright royalties, to the extent that they constitute nonapportionable income, must be allocated as provided in subsections (6) through (9) of this section.(6)(a) Net rents and royalties from real property located in this state are allocable to this state.(b) Net rents and royalties from tangible personal property are allocable to this state: (i) If and to the extent that the property is utilized in this state; or (ii) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized.(c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.(7)(a) Short-term capital gains and losses from sales of real property located in this state are allocable to this state.(b) Short-term capital gains and losses from sales of tangible personal property are allocable to this state if: (i) The property had a situs in this state at the time of the sale; or (ii) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs.(c) Short-term capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state.(8) Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.(9)(a) Patent and copyright royalties are allocable to this state: (i) If and to the extent that the patent or copyright is utilized by the payer in this state; or (ii) if and to the extent that the patent or copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state.(b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located.(c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.(10) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.(a) "Apportionable income" means:(i) All income that is apportionable under the Constitution of the United States and is not allocated under the laws of this state, including:(A) Income arising from transactions and activity in the regular course of the taxpayer's trade or business; and(B) Income arising from tangible and intangible property if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer's trade or business; and(ii) Any income that would be allocable to this state under the Constitution of the United States, but that is apportioned rather than allocated pursuant to the laws of this state.(b) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed.(c) "Nonapportionable income" means all income other than apportionable income.(d) "Receipts" means all gross receipts of the taxpayer that are not allocated under this section, and that are received from transactions and activity in the regular course of the taxpayer's trade or business, except that receipts of a taxpayer from hedging transactions and from the maturity, redemption, sale, exchange, loan, or other disposition of cash or securities, shall be excluded.(e) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof.(f) "Taxpayer" means a pass-through entity or individual conducting business activity in the state of Washington.[ 2026 c 238 s 405.]Notes:Findings—Intent—Effect of invalidation of 2026 c 238 s 201—Automatic expiration date and tax preference performance statement exemption—Necessity of act—Intent—Implementation by department of revenue—2026 c 238: See notes following RCW 82A.04.030.