Are hosting fees and cost reimbursements between affiliates subject to Washington B&O tax?
Edvin Givargis Published 16 minute read
The short answer
Yes, in nearly every case. Washington's business and occupation tax treats each separately organized corporation, limited liability company, or partnership as its own "person" (RCW 82.04.030) and makes no provision for a consolidated return or for eliminating transactions between affiliates (WAC 458-20-203; Excise Tax Advisory 3134.2009). Gross income is measured "without any deduction on account of" labor costs or "any other expense whatsoever" (RCW 82.04.080(1)), so a charge that recovers cost and no more is still gross income to the entity that bills it. A hosting fee from a facility entity to an affiliate, a cost-plus employee charge from a services entity, and a management fee from a parent are all service and other activities receipts under RCW 82.04.290(2), taxed at 1.5, 1.75, or 2.1 percent depending on the prior calendar year's gross income subject to the Washington service and other activities tax, of the entity and, in aggregate, of its affiliates under more than 80 percent common control. The two exceptions are narrow: an amount received as a bona fide agent for a cost the affiliate alone owes (WAC 458-20-111), and the paymaster deduction for a qualified employer of record (RCW 82.04.43393). An affiliate that centralizes employees or facilities and bills the others is a taxpayer, not a cost center.
Each entity is its own taxpayer
Washington has no combined or consolidated reporting for its business taxes. "Person" includes a corporation, limited liability company, partnership, joint venture, trust, or "any group of individuals acting as a unit" (RCW 82.04.030). The Department's rule for corporations states the consequence: each separately organized corporation is a person "notwithstanding its affiliation with or relation to any other corporation," each "shall file a separate return," and the law "makes no provision for filing of consolidated returns by affiliated corporations or for the elimination of intercompany transactions from the measure of tax" (WAC 458-20-203).
ETA 3134.2009, "Transactions Between Related Entities," issued February 2, 2009 and still listed by the Department as current, applies the same principle to limited liability companies, partnerships, and joint ventures, and draws the line that matters. Charges between departments or branches of one entity are excluded from the measure of tax under WAC 458-20-201, but that rule "does not permit the exclusion or deduction of charges against or income derived from an affiliated corporation or other affiliated association." A charge from a division to a division is bookkeeping. A charge from an LLC to its parent is a sale of services.
The Washington Supreme Court settled the point in Washington Sav-Mor Oil Co. v. State Tax Commission, 58 Wn.2d 518, 522, 364 P.2d 440 (1961), where a wholly owned subsidiary that bought petroleum products, in part from its parent, and resold them at no profit, in part back to the parent, argued that one cannot make a sale to oneself. The court affirmed the wholesaling assessment: stock ownership does not create identity of corporate interest, and a company that took the advantages of separate incorporation cannot disclaim it when the tax bill arrives. The Department applies the case and Rule 203 in current determinations, taxing an out-of-state parent on the back-office support it provided to a wholly owned subsidiary operating in Washington (Det. No. 18-0300, 40 WTD 039 (2021)) and taxing affiliated investment managers on contract proceeds they allocated among themselves by transfer pricing (Det. No. 19-0201, 40 WTD 242 (2021)).
Cost recovery is still gross income
Groups tend to book support charges as an offset to expense rather than as revenue. Washington does not follow the books. Gross income of the business is "compensation for the rendition of services" and every other emolument "however designated," measured without deduction for labor costs, taxes, "or any other expense whatsoever paid or accrued" (RCW 82.04.080(1)). A markup is irrelevant to whether a charge is gross income; it matters only to how much.
ETA 3134.2009 says so in its examples. An affiliate that charges another for administrative salaries is taxable "even though no profit is received" from the work; an entity whose research is used by itself and two affiliates, each of which pays it a third of the cost, is taxable on those payments; a partnership formed to own and operate facilities used only by its partners is taxable on what the partners pay it. That last example is the hosting fee pattern: a facility entity that charges an affiliate by usage for housing the affiliate's equipment has service and other activities income measured by the fee.
The advances and reimbursements rule, WAC 458-20-111, is the exception most often reached for and least often satisfied. It excludes amounts received for costs that "the customer or client alone is liable" to pay, where the taxpayer has "no personal liability therefor, either primarily or secondarily, other than as agent." A services entity that is the employer in its own right is liable for the workers' wages and payroll taxes, so the affiliate's payment reimburses the services entity for its own obligations, not the affiliate's. The Department has denied Rule 111 treatment on that ground to affiliates that could not show they acted solely as agents (40 WTD 242; 40 WTD 039). Rule 111 reaches centralized payroll only when it is built as an agency. ETA 3181.2013 lets a captive paymaster, one serving only affiliates, exclude an affiliate's payments for employer obligations where the affiliate has "all control over the employees," the parties agree in writing, enforceably by the employees, that the affiliate "is the employer liable for all employer obligations," the paymaster acts as the affiliate's agent for federal employment taxes, and the employees are told so in writing. Short of that, Rule 111 fits a pass-through of a third-party cost incurred in the affiliate's name, not a cost-plus employee charge.
The legislature built a specific exception in 2013. RCW 82.04.43393 allows a "qualified employer of record" providing paymaster services to deduct amounts it "receives from an affiliated business to cover employee costs of a qualified employee." ETA 3196.2023 (August 24, 2023) reads the conditions strictly. The employer of record must have no "functional employment relationship" with the employee, meaning no control over schedules, activities, salary, discipline, hiring, or layoffs; the affiliate must have all of that control; and "only one entity may have a functional employment relationship with an employee." The employer of record also must have no contractual liability to the employee for the employee costs (RCW 82.04.43393(2)(f)(ii)); an employer of record that agrees to provide its own benefits does not qualify (ETA 3196.2023, Example 5). The deduction covers "employee costs," meaning actual wages, benefits, payroll taxes, and similar assessments, so a markup is outside it. The statute also denies the deduction "for any employee costs incurred in connection with a contractual obligation of the taxpayer to provide services, including staffing services." ETA 3196's first example is an entity obligated by agreement to provide engineering services to an affiliate and serving as employer of record for the engineers: it cannot deduct any of the amounts it receives for their costs. A services entity that supplies technical or administrative support to an affiliate with people it supervises is selling services, not acting as a paymaster. The arrangement has to be built to the deduction in advance.
Classification and the current rate structure
Most charges between affiliates are service and other activities income under RCW 82.04.290(2), the residual classification for anything no more specific provision reaches. Since October 1, 2025, several services are retail sales when sold to an unrelated customer, including information technology services, investigation and security services, temporary staffing, advertising, and live presentations (RCW 82.04.050(3)(g) through (l), added by 2025 c 422). Most of those, along with custom software and data processing, are not retail sales when sold between members of an affiliated group, which for this purpose means more than 50 percent common control (RCW 82.04.050(17); RCW 82.04.299(1)(f)), so an intercompany information technology charge stays in service and other activities. Temporary staffing is not on that list. An employee charge is a retail sale if it fits the staffing definition in RCW 82.04.540, which requires temporary assignments and a practice of reassigning workers to other organizations, unless the amounts are deductible paymaster receipts (RCW 82.04.050(3)(j)). A services entity that staffs its affiliates on a continuing basis ordinarily does not meet that definition.
A hosting fee raises one classification question. Washington exempts gross proceeds from the sale of real estate (RCW 82.04.390), the Department's rule extends that treatment to rentals, and the same rule taxes a mere license to use real property under the service classification (WAC 458-20-118). A lease conveys an estate in a designated area with "an exclusive right in the lessee of continuous possession against the world"; a license "grants merely a right to use the real property of another but does not confer exclusive control or dominion." A colocation arrangement in which the facility entity keeps control of the building, supplies power and cooling, and charges by consumption rather than by square footage is a license combined with services, and its receipts are service and other activities income. A true lease of a defined space with exclusive possession and a fixed rent could sit on the other side of the line; a usage-based fee rarely does.
The rate is no longer a single number. Under RCW 82.04.290(2)(a), as amended by 2020 c 2 (ESSB 6492), effective April 1, 2020, and 2025 c 420 section 109, effective October 1, 2025, service and other activities income is taxed at 1.5 percent for a person whose gross income in the classification for the immediately preceding calendar year was under $1 million (and for hospitals and persons subject to the RCW 82.04.299 surcharge), 1.75 percent at $1 million or more and under $5 million, and 2.1 percent otherwise. The affiliate rule bites in group structures: a person below a threshold is pushed to the higher tier if the aggregate service and other activities gross income of all affiliated persons meets it (RCW 82.04.290(2)(a)(i), (ii)(B)), and "affiliate" is defined by control, meaning more than 80 percent of the power to direct management and policies (RCW 82.04.290(2)(f)). Intercompany charges count toward the aggregate, so a group can cross a tier on charges that never left it. Separately, from January 1, 2026 through December 31, 2029, a person with more than $250 million of Washington taxable income in a calendar year owes an additional 0.5 percent on the excess (RCW 82.04.288). The surcharge has no affiliate aggregation rule, so a Washington entity that centralizes a large group's services carries the intercompany receipts in its own measure.
The 2020 act also replaced, retroactively to January 1, 2020, the 2019 surcharge on businesses "primarily engaged" in specified service activities, leaving only a narrow surcharge on select advanced computing businesses (RCW 82.04.299). Whether hosting was a specified activity is no longer a live question; the tier is.
Apportionment when the affiliate is outside Washington
A person earning service and other activities income that is "taxable in another state" apportions it to Washington under a single receipts factor (RCW 82.04.460(1); RCW 82.04.462). Each receipt is attributed by a cascade whose first and controlling rule is the state "where the customer received the benefit of the taxpayer's service" (RCW 82.04.462(3)(b)(i)). The Department's rule fills in "benefit" for a business customer: a service relating to real property is received where the property is located, and a service relating to the customer's business activities is received "where the customer's related business activities occur," ordinarily "at the customer's business location(s)" (WAC 458-20-19402(303)(a), (c)).
Applied to the charges in the direct answer, the result depends on what each charge buys. A hosting fee for equipment in a Washington building relates to real property in Washington, so it is attributed to Washington wherever the paying affiliate is organized or officed (WAC 458-20-19402(303)(a)); a cost-plus employee charge for staff assigned to a Washington location is attributed to that location (WAC 458-20-19402(303)(c)(iii)(B)). A management fee for group-wide functions follows the function: the Department has attributed an out-of-state parent's executive services to the affiliates' corporate domiciles and its human resources services to the affiliates' staff locations, rejecting attribution of all of them by where the affiliates' products were sold (Det. No. 17-0210, 37 WTD 076 (2018), applying an earlier version of the rule). The attribution runs the other way where the affiliate's business is elsewhere: a Washington services entity billing an out-of-state affiliate for services relating to that affiliate's out-of-state operations has receipts attributed to that state, subject to the throw-out rule for receipts attributed to a state where the taxpayer is not taxable when part of the work was done in Washington (RCW 82.04.462(3)(c); WAC 458-20-19402(403)).
Two consequences follow. An out-of-state parent's charges to a Washington affiliate are attributed to Washington to the extent they relate to the affiliate's Washington locations or activities, and whether the parent owes tax then turns on substantial nexus under RCW 82.04.067. A Washington entity that reports all of its intercompany receipts to Washington may be over-reporting if some affiliates operate elsewhere, provided it is taxable in another state; that test is met where another state could tax it under Washington's own nexus standards, even if that state does not (RCW 82.04.460(4)(b)(i)).
Two questions the Department has not answered in print
Re-pricing an under-market charge. A facility entity that charges an affiliate less than an unrelated customer would pay will eventually ask whether the Department can assert that the affiliate should have paid more. RCW 82.04.080 measures gross income by the value "proceeding or accruing," which RCW 82.04.090 defines as the consideration "actually received or accrued," not a hypothetical arm's-length amount, and the determinations under ETA 3134.2009 include charges that were made rather than impute charges that were not (40 WTD 039; 40 WTD 242). The Department has also said that Title 82 contains no authority for a transfer pricing deduction and treated an arm's-length clause in an intercompany agreement as irrelevant to the measure (40 WTD 242). Consideration need not be cash, however: the Department has taxed the value of services an affiliate provided in exchange, measured by the intercompany agreement (Det. No. 13-0255R, 36 WTD 155 (2017)), so a low fee paired with offsetting services or credits is taxed on the full consideration. An arm's-length standard does appear in the chapter, as the condition on the exemption for a financial institution's receipts from affiliates (RCW 82.04.645), but it is a condition on eligibility, not a re-pricing power. The tax avoidance statute reaches an arrangement to avoid tax on income "from a person that is not affiliated with the taxpayer" by moving it to an entity not taxable in Washington (RCW 82.32.655(3)(b)), which is aimed at diverting third-party income, not at the price two affiliates set between themselves. No published rule, advisory, or determination imputes a higher value to an under-priced related-party service, and no statute plainly grants the power. A group should still be able to explain how the price was set; the absence of a published position is not a safe harbor.
The period for a cost-plus true-up. Cost-plus arrangements are billed on estimates and trued up when actual costs are known. Gross income is reported "for the period in which the value proceeds or accrues to the taxpayer" (WAC 458-20-197(1)), on the same basis, cash or accrual, on which the books are regularly kept (WAC 458-20-199). On the accrual basis, value accrues when the taxpayer "becomes legally entitled to receive the consideration" or, under its regular accounting system, "enters as a charge against the purchaser, customer, or client the amount of the consideration agreed upon," and "the controlling factor is the time when the taxpayer is entitled to receive, or takes credit for, the consideration" (WAC 458-20-197(2)). Under an agreement that fixes the charge provisionally and provides for a later adjustment, the additional consideration is neither agreed nor owed until the true-up is computed and billed, so the better reading is that it accrues in the period of the true-up and no amended return for the earlier month is called for. A downward true-up raises the mirror question, and the agreement should address both directions. The answer flips if the agreement makes the affiliate liable from the start for actual cost plus markup and the monthly bills are installments against a fixed entitlement; then the earlier returns were understated. The intercompany agreement, not the ledger, decides which pattern applies, and it should say so in terms.
Practice notes
Every charge that crosses an entity line inside the group, including a charge the books present as an expense allocation, is gross income of the billing entity unless it fits WAC 458-20-111 or RCW 82.04.43393 on the facts, so the starting point is a map of all of them. A services entity that holds the workforce is selling services, acting as a paymaster, or staffing within RCW 82.04.540, and the choice is best made early and documented. Each entity's rate tier depends on the aggregate service and other activities gross income of all affiliates under more than 80 percent common control, and the intercompany receipts themselves count. Any entity whose affiliates operate outside Washington has a receipts factor to run, in both directions. The pricing method and the true-up mechanics belong in the intercompany agreements; both the true-up period and the defensibility of a below-market fee depend on what the agreement says. The library's article on the Washington B&O treatment of cryptocurrency mining and staking operations covers the classification of the rewards themselves. G&G State Tax Group provides Washington B&O analysis of intercompany charges and affiliated group structures alongside its state and local tax practice.
This article states the law as of October 5, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group, or another state and local tax adviser, to confirm what has changed since this was written and how the rules apply to a specific situation.
This publication is informational in nature and is not, and should not be considered, legal, accounting, tax, or other professional advice for any person or situation. Correct application of tax law depends heavily on the facts and circumstances in each case, and G&G State Tax Group, LLC assumes no liability in connection with the use of this information, and is not obligated to inform any reader of changes in the law or other factors that could affect the information contained herein.