Lendingtree, LLC v. State

460 P.3d 640

LENDINGTREE, LLC, Appellant,

v.State of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 80637-8-I

Court of Appeals of Washington, Division 1.

FILED March 30, 2020

Scott M. Edwards, Ryan P. McBride, Daniel A. Kittle, Lane Powell PC, 1420 5th Ave. Ste. 4200, Seattle, WA, 98101-2375, for Appellant.

Charles E. Zalesky, Attorney General of Washington, Dept. of Revenue A.g. Office, Attorney at Law, 7141 Cleanwater Lane Sw, Po Box 40123, Olympia, WA, 98504-0123, for Respondent.

PUBLISHED OPINION

Bowman, J.

¶1 This case is about the application of the business and occupation (B&O) tax statute and administrative rules for apportioning income earned in Washington. The Washington State Department of Revenue (DOR) and LendingTree LLC disagree as to where LendingTree’s customers, lenders located across the country, receive the benefit of LendingTree’s services. We agree with LendingTree that the benefit is received at the lender’s place of business. Therefore, we reverse and remand for entry of judgment in favor of LendingTree.

FACTS

¶2 LendingTree operates an online loan marketplace that matches prospective borrowers with potential lenders. Through this marketplace, LendingTree "provides consumers a way to connect with multiple lenders for a number of financial borrowing needs." LendingTree allows lenders to "instantly expand" their reach by connecting with LendingTree’s network of 30 million borrowers and "high intent leads."

¶3 On the LendingTree website, prospective borrowers can find educational materials about the general loan process, varieties of loans, and tools to evaluate the type and amount of credit they might want. Interested borrowers can complete an online "Qualification Form" (QF) with their financial information and the type of loan sought. Upon receipt of a completed QF, LendingTree analyzes the data using proprietary software and refers the borrower to as many as five potential lenders best suited to serve the borrower’s needs. The lenders evaluate the referral and contact the borrower through LendingTree’s website. These services are free to borrowers. Lenders pay LendingTree a "QF Match Fee" for each referral, generally ranging from $4 to $100 depending on the type and size of the loan involved and the borrower’s credit score. If a QF referral results in a loan, the lender pays a "Closed Loan Fee" of $150 to $575 based on the details of the loan.

¶4 LendingTree provides services for lenders located in the state of Washington and reports income received from these customers for the purpose of state B&O tax. DOR audited LendingTree for the period of January 1, 2010 through June 30, 2014. DOR concluded that LendingTree had not properly attributed income to Washington during the audit period. Specifically, DOR determined that LendingTree should have allocated its income based on the location of potential borrowers rather than the lenders. As a result, DOR assessed additional tax, interest, and penalties totaling $196,236.28. DOR’s Administrative Review and Hearings Division upheld the audit findings. LendingTree paid the assessment and filed a complaint for refund of the taxes, interest, and penalties.

¶5 The parties filed cross motions for summary judgment. The parties disputed the location of the benefit received by the lenders for the purpose of apportioning B&O tax. The trial court concluded:

The service that LendingTree offers is to obtain qualification forms from consumers to present to consumers about LendingTree’s services and to have consumers seek loans from a pool of LendingTree’s clients, and this all happens where the consumer is located.

¶6 The trial court denied LendingTree’s motion, granted DOR’s motion for summary judgment, and dismissed LendingTree’s complaint with prejudice. LendingTree appeals.

ANALYSIS

¶7 LendingTree and DOR agree on the facts of this case. Indeed, "[b]y filing cross motions for summary judgment, the parties concede there were no material issues of fact." Pleasant v. Regence BlueShield, 181 Wash. App. 252, 261, 325 P.3d 237 (2014). The appellate court reviews summary judgment decisions de novo. Irwin Naturals v. Dep’t of Revenue, 195 Wash. App. 788, 793, 382 P.3d 689 (2016). The sole issue on appeal is the application of tax statutes to these undisputed facts. This is an issue of law reviewed de novo. Wash. Imaging Servs., LLC v. Dep’t of Revenue, 171 Wash.2d 548, 555, 252 P.3d 885 (2011). LendingTree has the burden of proving DOR incorrectly assessed the tax and establishing the correct amount of the tax. RCW 82.32.180.

¶8 A state cannot tax value earned outside its borders. ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 315, 102 S. Ct. 3103, 73 L. Ed. 2d 787 (1982). However, "by applying the principles of apportionment, states may tax that part of an interstate transaction which takes place within the state." Smith v. State, 64 Wash.2d 323, 334, 391 P.2d 718 (1964). This concept of apportionment applies to Washington’s B&O tax imposed "for the act or privilege of engaging in business activities" in this state. RCW 82.04.220(1). Any person earning income taxable in Washington and in another state must apportion to Washington the income derived from business activities performed within this state. RCW 82.04.460(1).

¶9 In 2010, the Washington legislature adopted a "single factor" receipts apportionment scheme for service income. LAWS OF 2010, 1st Spec. Sess., ch. 23; RCW 82.04.460, .462; WAC 458-20-19402. Under this method, the taxpayer multiplies its "apportionable income," or gross income, by the "receipts factor." RCW 82.04.462(1), .460(4)(a). The "receipts factor" is a fraction, calculated as follows:

The numerator of the receipts factor is the total gross income of the business of the taxpayer attributable to this state during the tax year from engaging in an apportionable activity. The denominator of the receipts factor is the total gross income of the business of the taxpayer from engaging in an apportionable activity everywhere in the world during the tax year.

RCW 82.04.462(2), (3)(a).

¶10 To compute the receipts factor, gross income of the business generated from each apportionable activity is attributed to the state "[w]here the customer received the benefit of the taxpayer’s service." RCW 82.04.462(3)(b)(i). For a service-related business like LendingTree, "the benefit is received where the customer’s related business activities occur." WAC 458-20-19402(303)(c).¹ DOR defines the "customer’s related business activity" as "the customer business activity that most closely or directly relates to the services performed by the taxpayer."² In this case, there is no dispute LendingTree is the taxpayer and the lenders are LendingTree’s customers. Accordingly, taxes are attributed to the state where the lenders conduct their business activity that most closely or directly relates to the services performed by LendingTree.

¶11 Here, we must determine the services performed by LendingTree as well as the lenders’ business activities most directly related to those services. DOR and LendingTree differ in their analysis of LendingTree’s business model and the resulting application of the tax statutes. LendingTree contends the lenders receive the benefit of its services at the lenders’ business locations where they receive and evaluate the QF referrals. In contrast, DOR argues, "The lending institutions are receiving the benefit of LendingTree’s services based on where the consumer seeking the information is located." In support of its argument, DOR focuses on LendingTree’s marketing and outreach to borrowers. DOR notes that LendingTree gears the promotion, marketing, and maintenance of its website toward "attracting potential borrowers to its website in order to expand its...