Court Opinion

ID: 9898072
Source: CourtListenerOpinion
Date Created: 2023-11-14 19:28:18.298778+00
Date Added: 2024-06-11T09:16:08.067272
License: Public Domain

Filed
                                                                                        Washington State
                                                                                        Court of Appeals
                                                                                         Division Two

                                                                                       November 14, 2023

    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                         DIVISION II
 CITIBANK (SOUTH DAKOTA),                                           No. 57127-7-II
 NATIONAL ASSOCIATION,

                               Appellant,

        v.                                                    UNPUBLISHED OPINION

 STATE OF WASHINGTON DEPARTMENT
 OF REVENUE,

                               Respondent.

       MAXA, P.J. – Citibank (South Dakota), National Association (Citibank) appeals the Board

of Tax Appeals’ grant of summary judgment in favor of the Department of Revenue (DOR)

regarding the assessment of over $6 million in business and occupation (B&O) taxes from

January 1, 2007 through May 31, 2010. Citibank had challenged DOR’s determination that

Citibank was subject to B&O taxes because it had engaged in business in Washington during the

relevant period.

       Citibank is a commercial bank with its headquarters in South Dakota. Citibank does not

have a place of business or any employees or property within Washington. However, during the

assessment period Citibank generated over $1.7 billion in interest and fee income from issuing

credit cards to Washington residents. Some of these credit cards were private label, store

branded cards that could only be used at certain retailers. Pursuant to agreements with Citibank,

these retailers were obligated to market the credit cards and distribute marketing materials to
No. 57127-7-II

customers in their Washington stores in order to solicit new accounts for Citibank. In addition,

Citibank used Washington attorneys to file over 3,000 lawsuits in Washington courts to collect

unpaid debts owed by Washington residents during the relevant period.

       Before June 2010, former RCW 82.04.220 (1961) provided that a B&O tax would be

collected from every person “for the act or privilege of engaging in business activities.”

Effective June 1, 2010, the legislature amended this statute to state that a B&O tax would be

collected from every person “that has a substantial nexus with this state . . . for the act or

privilege of engaging in business activities.” Former RCW 82.04.220 (2010) (emphasis added).

       Citibank asserts that before the 2010 amendment, the term “engaging in business

activities” in RCW 82.04.220 required that a business have a physical presence in Washington to

be subject to B&O taxes. Citibank argues that it could not be subject to B&O taxes before June

2010 because it did not have a physical presence in Washington.

       DOR acknowledges that before June 2010, its policy and procedure was to assess B&O

taxes against out-of-state businesses only when they had a physical presence in Washington. But

DOR argues that even though there was a physical presence requirement under RCW 82.04.220

before June 2010, Citibank’s activities satisfied that requirement in two ways: (1) having a

contractual relationship with retailers to promote private label credit cards issued by Citibank to

Washington consumers, and (2) continuously using Washington courts to collect unpaid debts

from Washington residents.

       A second issue involves DOR’s apportionment of Citibank’s gross income to its

Washington activities based on WAC 458-20-14601. DOR apportioned Citibank’s income to

Washington based on the billing addresses of Citibank cardholders. Citibank argues that even if

it was subject to B&O taxes, no amount of income could be apportioned to Washington activities

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No. 57127-7-II

because Citibank did not engage in any business activities in Washington. In addition, Citibank

argues that WAC 458-20-14601 was an invalid regulation and was unconstitutional as applied.

       We hold that (1) although before June 2010 a physical presence requirement existed for

the imposition of B&O taxes on out-of-state businesses, Citibank’s activities in Washington

satisfied that physical presence requirement; and (2) the formula provided under WAC 458-20-

14601(2)(b) was the correct formula to use to apportion Citibank’s gross income to Washington

activities and the regulation was not invalid or unconstitutional. Accordingly, we affirm the

Board of Tax Appeals’ final decision granting summary judgment in favor of DOR.

                                               FACTS

Background

       Citibank is a commercial bank with its headquarters in South Dakota. During the

assessment period at issue in this appeal, Citibank did not have a place of business in

Washington and did not have any employees or property within Washington. All Citibank

employees worked at business locations outside of Washington.

       Citibank was engaged in the business of originating, managing, and servicing unsecured

revolving consumer loans as a credit card issuer. Citibank issued credit cards to customers

throughout the United States, including in Washington. A majority of the credit cards that

Citibank issued were general credit cards, including Visa and MasterCard, which could be used

at any location that accepted the cards. Citibank also issued private label, store-branded credit

cards that could be used only at the designated retailers. These cards generally bore the name

and logo of the retailer. Finally, Citibank issued co-branded credit cards that could be used at the

designated retailers as well as at other locations as a general credit card.

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No. 57127-7-II

       Citibank generated income through four general categories: (1) interest income received

from cardholders that did not pay their outstanding amounts due within the applicable grace

period; (2) interchange income from retailers, issuing banks, and third-party retailers with whom

Citibank entered into private label agreements; (3) fee income for the provision of services for

cardholders, such as annual fees, cash advance fees, balance transfer fees, and late payment fees;

and (4) income from trading and investment activities outside of Washington.

       Citibank earned gross income attributable to Washington in the following amounts: (1)

$360,355,363 in 2007, (2) $421,068,521 in 2008, (3) $492,478,463 in 2009, and (4)

$452,621,110 in 2010. Total income during this period exceeded $1.7 billion.

       During the assessment period, Citibank used Washington counsel to file more than 3,000

collection actions in Washington courts to collect debts owed by defaulting Washington

residents.

Private Label Agreements

       Citibank entered into private label credit card agreements (PL agreements) with various

retailers, including three retailers that operated in Washington – Home Depot U.S.A., Inc. (Home

Depot), Sears, Roebuck and Co. (Sears), and Federated Department Stores, Inc. (Federated). The

PL agreements generally provided that Citibank and the retailers would cooperate in the

development of marketing plans for the private label cards. Citibank and the retailers agreed to

review all marketing plans to support the growth of Citibank’s private label card program.

Pursuant to the agreements, Citibank and the retailers established joint management committees

to review policy and marketing operations.

       The PL agreements also required the retailers’ employees to market the credit cards and

distribute marketing materials to in-store customers in order to solicit new accounts. For

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No. 57127-7-II

example, the agreement with Home Depot required Home Depot to “prominently display” credit

card applications at all retailer locations and to use “reasonable efforts” to promote the program.

Admin. R. (AR) at 226. Marketing plans included in-store programs such as sales associate

incentives and customer events. The Sears agreement required Sears to have its store employees

market and support the private label credit card program. The Federated agreement required

Federated to solicit new accounts through “in-store credit procedures” and display credit card

applications, and to pay sales associates compensation for soliciting new accounts. AR at 1318.

Except as carried on by the retailers as provided for in the agreements, Citibank did not carry out

any solicitation activities in Washington related to the private label cards.

       In addition, the PL agreements provided that the retailers could accept in-store payments

for the private label cards. Under the agreement with Sears, when Sears received an in-store

payment, it was deemed to hold the payment in trust for Citibank until the payment was either

delivered to Citibank or applied to reduce the amounts payable to Sears by Citibank.

Tax Audit and Subsequent Proceedings

       Citibank did not file any Washington B&O tax returns between January 1, 2007 and May

31, 2010. DOR audited Citibank with respect to this period and assessed an outstanding liability

of $6,010,265 in B&O tax under the service and other activities classification, a delinquency

penalty of $1,104,440, a five percent assessment penalty of $300,513, and $775,368 in interest.

       To determine gross taxable income attributable to Washington, DOR divided Citibank’s

total credit card receivables from Washington residents by Citibank’s total gross income, and

divided that number by three. This apportionment method was dictated by WAC 458-20-14601.

DOR’s apportionment computation from gross income attributable to Washington was based on

Citibank’s receipts, which were measured solely on the billing address of the credit card holders.

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No. 57127-7-II

       Citibank filed an appeal petition with respect to DOR’s assessment. The DOR Appeals

Division affirmed the assessment.

       Citibank appealed to the Board of Tax Appeals. Citibank and DOR filed cross-motions

for summary judgment. The Board granted summary judgment in favor of DOR, affirming

DOR’s determinations. The Board found that, as Citibank conceded, Citibank’s activities met

the constitutional standards for imposition of Washington’s B&O tax. The Board concluded that

the agreements with retailers requiring the retailers to promote and support Citibank’s credit

cards and Citibank’s lawsuits in Washington courts “were sufficient to constitute nexus during

the audit period, whether characterized as a ‘physical presence’ or not.” AR at 67. The Board

further found that “the activities of third parties, performed on behalf of a taxpayer, can

constitute sufficient nexus to support the assessment of tax.” AR at 67.

       Citibank then paid the disputed tax assessment in the total amount of $9,725,485.10 and

appealed to the superior court. The superior court transferred the case to this court for direct

review pursuant to RCW 34.05.518.

       Citibank appeals the Board of Tax Appeals’ final decision granting summary judgment in

favor of DOR.

                                            ANALYSIS

A.     STANDARD OF REVIEW

       We review decisions of the Board of Tax Appeals under the Administrative Procedures

Act (APA), chapter 34.05 RCW. Echo Glob. Logistics, Inc. v. Dep’t of Revenue, 22 Wn. App.

2d 942, 945, 514 P.3d 704, review denied, 200 Wn.2d 1020 (2022). Under the APA, we may

grant relief from an agency’s order based on one of nine reasons listed in RCW 34.05.570(3),

including that the order is based on an erroneous interpretation or application of the law. RCW

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No. 57127-7-II

34.05.570(3)(d). We review alleged errors of law de novo. Greenfield v. Dep’t of Lab. and

Indus., 27 Wn. App. 2d 28, 44, 531 P.3d 290 (2023). The party challenging the agency’s

decision has the burden of demonstrating the invalidity of that decision. RCW 34.05.570(1)(a).

       When an administrative decision is decided on summary judgment, we overlay the APA

and summary judgment standards of review. Waste Mgmt. of Wash., Inc. v. Wash. Utils. and

Transp. Comm’n, 24 Wn. App. 2d 338, 344, 519 P.3d 963 (2022), review denied, 1 Wn.3d 1003

(2023). We review the ruling de novo and construe the facts and all reasonable inferences in the

light most favorable to the nonmoving party. Id. Here, the parties do not dispute the material

facts. Summary judgment can be determined as a matter of law if the material facts are not in

dispute. Antio, LLC v. Dep’t of Revenue, 26 Wn. App. 2d 129, 134, 527 P.3d 164 (2023).

B.     IMPOSITION OF B&O TAXES

       Citibank argues that it is not subject to B&O taxes for the 2007-2010 period because

during that period DOR imposed B&O taxes only on businesses that had a physical presence in

Washington, and Citibank did not have such a physical presence. We hold that even though

before June 2010 there was a physical presence requirement for the imposition of B&O taxes,

Citibank’s activities in Washington satisfied that requirement.

       1.   Scope of B&O Tax

       Before June 2010, former RCW 82.04.220 provided, “There is levied and shall be

collected from every person a tax for the act or privilege of engaging in business activities.” As

reflected in the statutory language, this B&O tax is an excise tax imposed for the privilege of

doing business in Washington. Ford Motor Co. v. City of Seattle, 160 Wn.2d 32, 39, 156 P.3d

185 (2007). The term “business” is defined to include “all activities engaged in with the object

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No. 57127-7-II

of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly.”

RCW 82.04.140.

          “In adopting our State’s B & O tax system ‘the legislature intended to impose the

business and occupation tax upon virtually all business activities carried on within the state.’ ”

Simpson Inv. Co. v. Dep’t of Revenue, 141 Wn.2d 139, 149, 3 P.3d 741 (2000) (quoting Time Oil

Co. v. State, 79 Wn.2d 143, 146, 483 P.2d 628 (1971)). “The B&O tax is to be imposed as

broadly as constitutionally allowed.” Avnet, Inc. v. Dep’t of Revenue, 187 Wn.2d 44, 51, 384

P.3d 571 (2016).

          A state may tax on an out-of-state business only if the requirements of the due process

clause of the Fourteenth Amendment and the commerce clause1 of the United States Constitution

are satisfied. Lamtec Corp. v. Dep’t of Revenue, 170 Wn.2d 838, 843, 246 P.3d 788 (2011).

Due process requires that the business being taxed has sufficient contacts with the taxing state.

Id. The commerce clause imposes several requirements, including that the tax be “ ‘applied to an

activity with a substantial nexus with the taxing State.’ ” Id. at 844 (quoting Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977)).

          In Quill Corp. v. North Dakota, the United States Supreme Court noted that due process

is satisfied when an out-of-state corporation “purposefully avails itself of the benefits of an

economic market in the forum State . . . even if it has no physical presence in the State.” 504

U.S. 298, 307, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992), overruled by S. Dakota v. Wayfair, Inc.,

138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018). But the Court confirmed that the commerce clause

mandated a physical presence requirement for sales and use taxes imposed on mail-order

businesses. Id. at 311, 317. The Court stated, “Whether or not a State may compel a vendor to

1
    U.S. Const., article I, § 8, cl. 3.

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No. 57127-7-II

collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant,

or office.” Id. at 315.

          However, in 2011 our Supreme Court in Lamtec noted that the great weight of authority

in other jurisdictions had limited the holding in Quill to sales and use taxes and had refused to

apply the physical presence requirement to other kinds of taxes. Lamtec, 170 Wn.2d at 848-49.

          2.   2010 Amendment to RCW 82.04.220

          Effective June 1, 2010, the legislature amended RCW 82.04.220 to read as follows:

“There is levied and collected from every person that has a substantial nexus with this state a tax

for the act or privilege of engaging in business activities.” Former RCW 82.04.220 (emphasis

added).

          Regarding the 2010 amendment to RCW 82.04.220 and other related amendments, the

legislature provided the following findings:

          The legislature finds that out-of-state businesses that do not have a physical
          presence in Washington earn significant income from Washington residents from
          providing services or collecting royalties on the use of intangible property in this
          state. The legislature further finds that these businesses receive significant benefits
          and opportunities provided by the state, such as: Laws providing protection of
          business interests or regulating consumer credit; access to courts and judicial
          process to enforce business rights, including debt collection and intellectual
          property rights; an orderly and regulated marketplace; and police and fire protection
          and a transportation system benefiting in-state agents and other representatives of
          out-of-state businesses. Therefore, the legislature intends to extend the state’s
          business and occupation tax to these companies to ensure that they pay their fair
          share of the cost of services that this state renders and the infrastructure it provides.

LAWS OF 2010, ch. 23, § 102 (emphasis added).

          3.   Physical Presence Requirement

          Former RCW 82.04.220 had no express physical presence requirement. The only express

requirement was “engaging in business activities.” Former RCW 82.04.220. But DOR

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No. 57127-7-II

acknowledges that its policy and procedure before June 2010 was to assess B&O taxes against

out-of-state businesses only when they had a physical presence in Washington.

       Therefore, during the assessment period DOR would not have imposed B&O taxes on

Citibank unless Citibank had a physical presence in Washington.

       4.   Citibank’s Physical Presence in Washington

       DOR argues that Citibank’s activities satisfied the physical presence requirement in two

ways: (1) having a contractual relationship with retailers to promote private label credit cards

issued by Citibank to Washington consumers, and (2) continuously using Washington courts to

collect unpaid debts from Washington residents. We agree.

            a.   Legal Principles

       In analyzing whether Citibank had a sufficient physical presence in Washington, the

parties seem to equate physical presence under former RCW 82.04.220 with physical presence

under the commerce clause’s nexus standard.

       The Supreme Court in Lamtec addressed whether there was a physical presence

requirement to establish a substantial nexus with the taxing state under the commerce clause. 170

Wn.2d at 844-46. The court stated,

       [T]o the extent there is a physical presence requirement, it can be satisfied by the
       presence of activities within the state. It does not require a “presence” in the sense
       of having a brick and mortar address within the state. We do not see a material
       difference whether the activities are performed by staff permanently employed
       within the state, by independent agents contracted to perform the activity within the
       state, or persons who travel into the state from without. The activities must be
       substantial and must be associated with the company’s ability to establish and
       maintain the company’s market within the state.

Id. at 850-51 (emphasis added). The court held that Lamtec’s practice of sending sales

representatives to Washington to meet with customers satisfied the constitutional nexus

requirement even though Lamtec did not have a permanent presence within the state. Id. at 851.

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No. 57127-7-II

       In Lamtec, the Supreme Court discussed Tyler Pipe Industries v. Department of Revenue,

105 Wn.2d 318, 715 P.2d 123 (1986), vacated in part, 483 U.S. 232, 107 S. Ct. 2810, 97 L. Ed.

2d 199 (1987).2 Lamtec, 170 Wn.2d at 849-50. Tyler Pipe distributed pipe and fittings

nationwide with its principal place of business in Texas. Tyler Pipe, 105 Wn.2d at 320. While it

did not have a place of business or employees within Washington, Tyler Pipe hired independent

contractors to act as sales representatives within Washington. Id. at 320-21, 324. The court

stated that “the crucial factor governing nexus is whether the activities performed in this state on

behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and

maintain a market in this state for the sales.” Id. at 323. The court concluded that the difference

between employees and independent contractors lacked constitutional significance in applying

the nexus standard. Id. at 324. And there was a substantial nexus between Tyler Pipe and

Washington because the sales representatives acted daily on behalf of Tyler Pipe, provided Tyler

Pipe with almost all of their information about the Washington market, and maintained and

improved Tyler Pipe’s market share. Id. at 325.

       Commenting on Tyler Pipe and noting that the United States Supreme Court in Tyler

Pipe quoted the above passage from the Washington Supreme Court opinion, the court in Lamtec

stated, “We agree with [DOR] that the ‘crucial factor’ in this language is that the activities were

‘significantly associated with the taxpayer’s ability to establish and maintain’ its market.” 170

Wn.2d at 850 (quoting Tyler Pipe, 483 U.S. at 250-51).

       In Department of Revenue v. J. C. Penney Co., J.C. Penney operated over 50 retail stores

in Washington and supplied credit cards to its customers there. 96 Wn.2d 38, 39-40, 633 P.2d

2
 The United States Supreme Court reversed this case on other grounds, but affirmed the
Washington Supreme Court’s holding that an adequate nexus existed to support a state tax.
Lamtec, 170 Wn.2d at 850.

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No. 57127-7-II

870 (1981). Credit card applications could be obtained at a local store. Id. at 40. Local store

employees solicited the credit card applications and helped customers fill them out. Id. The

completed applications were sent to J.C. Penney’s regional credit office in Portland, Oregon,

which then determined whether the applicant would receive a charge card and would establish

the applicant’s credit limit. Id. J.C. Penney’s credit office also handled the billing on the credit

card accounts and generated income from the finance charges on the credit sales. Id. at 40-42.

       DOR sought to tax the service charge income. Id. at 41. J.C. Penney argued that its

finance charge income was not subject to B&O taxes because all activities relating to the

imposition of the service charges occurred in Oregon. Id. at 42. The Supreme Court disagreed,

stating, “It is the credit sale which places Penney in the position of potentially receiving a

finance charge. The local activities which promote the sale on credit are sufficient to bring the

finance charge income within the taxing statute.” Id. at 44. The court concluded, “We cannot

construe the facts before us to support a finding that Penney does not engage in any business

activity in Washington which gives rise to a finance charge.” Id. at 47. Therefore, the court

upheld imposition of the tax. Id. at 48.

             b.   Analysis

       Here, Citibank did not have a place of business or any employees or property within

Washington. But under Lamtec, the question is whether Citibank engaged in activities within

Washington sufficient to satisfy the physical presence requirement that existed before June 2010.

See 170 Wn.2d at 850-51. We conclude that Citibank did engage in such activities.

       First, Citibank entered into contractual relationships with three retailers – Home Depot,

Sears, and Federated – to promote private label credit cards that were issued by Citibank to

Washington consumers. These agreements expressly required the retailers to market Citibank’s

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No. 57127-7-II

private label credit cards in their stores, some of which were located in Washington. Marketing

included displaying credit card applications in the stores and having store employees market the

credit cards. These activities were “ ‘significantly associated with the taxpayer’s ability to

establish and maintain’ its market.” Lamtec, 170 Wn.2d at 850 (quoting Tyler Pipe, 483 U.S. at

250-51).

       These arrangements may not have risen to the level of the activities of the sales

representatives in Lamtec or the local agents in Tyler Pipe, but there is no question that Citibank

was working with Washington stores and Washington store employees to sign up Washington

residents for its credit cards. In this way, the facts here are similar to the involvement of the

store employees in J.C. Penney. And issuing more credit cards to Washington residents allowed

Citibank to generate more income from fees and interest. We conclude that the operation of

Citibank’s PL agreements was sufficient to establish a physical presence in Washington.

       Second, the PL agreements authorized the retailers to accept payments from its customers

on behalf of Citibank on amounts the customers owed to Citibank. As a result, the retailers

facilitated Citibank’s collection of income in Washington.

       Third, Citibank used Washington attorneys to file more than 3,000 lawsuits against

Washington residents in Washington courts to recover unpaid debts. These attorneys clearly

were acting on behalf of Citibank, akin to the local agents in Tyler Pipe. As a result, Citibank

was physically present in Washington, through its attorneys, almost on a daily basis.

       Citibank argues that Citibank’s Washington lawsuits cannot satisfy the physical presence

requirements because they constituted the exercise of creditor rights, not the generation of gross

income. But the issue here is physical presence, not whether that presence generated income.

Citibank also argues that the Washington lawsuits are immaterial because they did not involve

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No. 57127-7-II

establishing or maintaining a market, as referenced in Lamtec, 170 Wn.2d at 850-51. To the

extent that activities must help establish or maintain a market in order to constitute a physical

presence, collecting unpaid debts could be considered maintaining an existing market. 3

       Each one of these factors standing alone may not have been sufficient to establish a

physical presence in Washington. But together, these factors show that Citibank was physically

present in Washington. Therefore, we hold that Citibank met the pre-June 2010 physical

presence requirement of RCW 82.04.220 through its activities within Washington.

C.     APPORTIONMENT OF GROSS INCOME

       Citibank argues that even if it was subject to B&O taxes, no amount of income could be

apportioned to Washington activities because (1) Citibank did not engage in any business

activities in Washington, (2) WAC 458-20-14601 is an invalid regulation because it was

inconsistent with former RCW 82.04.220, and (3) WAC 458-20-14601 is unconstitutional as

applied to Citibank. We disagree.

       1.    Legal Principles

       Former RCW 82.04.460(2) (2004) required any person doing business within and without

of Washington who was receiving gross income from engaging in business as a financial

institution to apportion their taxable gross income to Washington pursuant to rules adopted by

DOR. Those rules are stated in WAC 458-20-14601,4 which provide the apportionment

3
 Citibank argues that it did not meet the physical presence requirement because under former
RCW 82.04.460(1) (2004), it was required to maintain a place of business within Washington.
Subsection (1) referenced maintaining a place of business in Washington. But subsection (2),
not subsection (1), applied to financial institutions. Subsection (2) merely required an entity to
do business within and without of Washington, not to maintain a place of business.
4
 WAC 458-20-14601 was amended after the assessment period, but the amendments are not
material here. Therefore, we cite to the current version of the regulation.

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No. 57127-7-II

requirements for financial institutions that did business inside and outside of Washington and

incurred tax liability through May 2010.

       WAC 458-20-14601(2)(b) states,

       The apportionment percentage is determined by adding the taxpayer’s receipts
       factor (as described in subsection (4) of this section), property factor (as described
       in subsection (5) of this section), and payroll factor (as described in subsection (6)
       of this section) together and dividing the sum by three. If one of the factors is
       missing, the two remaining factors are added together and the sum is divided by
       two. If two of the factors are missing, the remaining factor is the apportionment
       percentage. A factor is missing if both its numerator and denominator are zero, but
       it is not missing merely because its numerator is zero.

The receipts factor is a fraction where the numerator is the gross income of the taxpayer in

Washington and the denominator is the gross income of the taxpayer inside and outside of

Washington. WAC 458-20-14601(4)(a). When a credit card holder has a billing address in

Washington, then the numerator of the receipts factor includes interest and fees from credit card

receivables and income from card holder fees. WAC 458-20-14601(4)(g).

       WAC 458-20-14601(2)(d) provides for the use of an alternative apportionment method

under certain circumstances:

       If the allocation and apportionment provisions of this section do not fairly represent
       the extent of its 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:

       (i) Separate accounting;

       (ii) A calculation of tax liability utilizing the cost of doing business method outlined
       in RCW 82.04.460(1);

       (iii) The exclusion of any one or more of the factors;

       (iv) The inclusion of one or more additional factors which will fairly represent the
       taxpayer’s business activity in this state; or

       (v) The employment of any other method to effectuate an equitable allocation and
       apportionment of the taxpayer’s receipts.

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No. 57127-7-II

        2.   Business Activities in Washington

        Citibank argues that even if it was subject to B&O taxes, no amount of income could be

apportioned to Washington activities because it did not engage in any business activities in

Washington. Citibank emphasizes that under former RCW 82.04.220, B&O taxes applied only

to business activities occurring in Washington. Citibank repeatedly claims that the stipulated

facts establish that it had no business activities in Washington. And Citibank asserts that it is

undisputed that all of its activities – transaction processing, loan accounting, funding,

management of receivables, marketing and negotiation with retailers – occurred outside of

Washington.

        Based on its position that it had no business activities in Washington, Citibank argues

that the standard apportionment formula in WAC 458-20-14601(2)(b) cannot be applied.

Instead, the alternative methods in WAC 458-20-14601(2)(d) must be used because subsection

(2)(b) did not “fairly represent the extent of its business activity in this state.”

        First, the stipulated facts do not establish that Citibank had no business activities in

Washington. The stipulation stated only that Citibank had no employees or property in

Washington. And the stipulation stated that Citibank issued credit cards to consumers in

Washington and generated interest and fee income from those cardholders.

        Second, Citibank’s argument requires us to determine the usual and ordinary meaning of

the term “business activities” in the context of a credit card issuer. See Ekelmann v. City of

Poulsbo, 22 Wn. App. 2d 798, 807, 513 P.3d 840 (2022). Citibank focuses on where the

employees managing the credit card business are located. But it is undisputed that Citibank

issued credit cards to thousands of Washington residents and earned $1.7 billion from those

Washington credit cards during the assessment period. We conclude that the usual and ordinary

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No. 57127-7-II

meaning of the term “business activities” includes issuing credit cards in Washington and

earning substantial income from those credit cards, regardless of where those credit cards are

managed.

       In addition, requiring retailers to market Citibank’s credit cards in the PL agreements and

filing lawsuits in Washington to collect unpaid debts as discussed above also fall within the usual

and ordinary meaning of the term “business activities.”

       Third, because issuing credit cards to Washington residents constitutes business

activities, apportioning gross income to Washington based on the billing address of cardholders

under WAC 458-20-14601(4)(g) does “fairly represent the extent of [Citibank’s] business

activity in this state,” which means that the alternative methods listed in WAC 458-20-

14601(2)(d) are inapplicable.5

       We hold that DOR’s use of the apportionment formula in WAC 458-20-14601(2)(b) to

determine Citibank’s gross income attributable to Washington was appropriate.

       3.   Validity of Regulation

       Citibank argues that WAC 458-20-14601 is an invalid regulation because it is

inconsistent with the “business activities” requirement in former RCW 82.04.220. However, this

argument is based on Citibank’s position that it did not engage in any business activities in

Washington. As discussed above, this position is incorrect. Therefore, we reject this argument.

       4.   Constitutional Claim

       Citibank argues that WAC 458-20-14601 as applied is unconstitutional because the tax

assessed under that regulation is out of proportion to the business Citibank performed in

5
 Further, there is no indication that Citibank petitioned DOR for use of an alternative
apportionment method as referenced in WAC 458-20-14601(2)(d).

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No. 57127-7-II

Washington and because Citibank did not perform or manage the services and transactions that

led to the taxed credit card receivables within Washington.

       Both the due process and commerce clauses require a state’s apportionment formula to be

fair. Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S. Ct. 2933, 77 L. Ed.

2d 545 (1983).

       The first, and again obvious, component of fairness in an apportionment formula is
       what might be called internal consistency – that is the formula must be such that, if
       applied by every jurisdiction, it would result in no more than all of the unitary
       business’s income being taxed. The second and more difficult requirement is what
       might be called external consistency – the factor or factors used in the
       apportionment formula must actually reflect a reasonable sense of how income is
       generated.

Id. The United States Supreme Court in Container Corp. stated that it would strike down an

apportionment formula if the taxpayer could show by clear and cogent evidence that the income

allocated to a state was out of proportion to the business conducted in that state. Id. at 170.

       Once again, the premise of Citibank’s constitutional argument – that it did not engage in

any business activities in Washington – is incorrect.

       Regarding the Container Corp. analysis, the internal consistency requirement is satisfied

by focusing only on where Citibank’s cardholders reside. WAC 458-20-14601(4)(g) guarantees

that there will not be double taxation by some other state where those cardholders do not reside.

The external consistency requirement is satisfied because Citibank’s income is generated by

issuing credit cards and collecting gross income from Washington residents, and the

apportionment formula allocates income only from those residents.

       We hold that the formula applied to Citibank under WAC 458-20-14601 was not

unconstitutional.

                                                 18
No. 57127-7-II

                                        CONCLUSION

       We affirm the Board of Tax Appeals’ final decision granting summary judgment in favor

of DOR.

       A majority of the panel having determined that this opinion will not be printed in the

Washington Appellate Reports, but will be filed for public record in accordance with RCW

2.06.040, it is so ordered.

                                                    MAXA, P.J.

 We concur:

 VELJACIC, J.

 CHE, J.

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