       IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
                           DIVISION ONE

LENDINGTREE, LLC,                        )      No. 80637-8-I
                                         )
                        Appellant,       )
                                         )
                v.                       )
                                         )      PUBLISHED OPINION
STATE OF WASHINGTON,                     )
DEPARTMENT OF REVENUE,                   )
                                         )
                        Respondent.      )

      BOWMAN, J. — 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

      LendingTree operates an online loan marketplace that matches

prospective borrowers with potential lenders. Through this marketplace,
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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.”

       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.

       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




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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.

       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.

       The trial court denied LendingTree’s motion, granted DOR’s motion for

summary judgment, and dismissed LendingTree’s complaint with prejudice.

LendingTree appeals.

                                    ANALYSIS

       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 Wn. 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 Wn. 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 Wn.2d 548, 555, 252 P.3d 885 (2011).




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LendingTree has the burden of proving DOR incorrectly assessed the tax and

establishing the correct amount of the tax. RCW 82.32.180.

       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 Wn.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).

       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).




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        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.

        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

        1 (Boldface omitted.) WAC 458-20-19402(303)(c) provides:
        If the taxpayer’s service does not relate to real or tangible personal property, the
        service is provided to a customer engaged in business, and the service relates to
        the customer’s business activities, then the benefit is received where the
        customer’s related business activities occur.
(Boldface omitted.) The parties agree this rule governs LendingTree’s apportionment.
         2 Interim Statement Regarding the Attribution of Receipts from [Research &

Development] Services, W ASHINGTON STATE DEPARTMENT OF REVENUE (June 22, 2017),
https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/interim-statement-
regarding-attribution-receipts-rd-services. DOR cites this definition in its briefing without context
or explanation for its applicability.


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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

customer’s footprint in the consumer loan market.”

       DOR’s emphasis on marketing mischaracterizes LendingTree’s business

model. LendingTree does not provide marketing services for individual lenders.

Rather, LendingTree promotes, markets, and maintains its own website to

promote its own services. LendingTree drives potential borrowers to its website

without specific mention of its individual lender customers. LendingTree, not the

prospective borrower, knows the identity of its lender customers. Borrowers and

lenders do not have contact until after LendingTree matches and sends a QF

referral to the lender, the lender evaluates the referral, and the lender contacts

the borrower through LendingTree’s website. That referral is the service

provided by LendingTree that is of value to the lenders. LendingTree’s

contractual payment structure supports this interpretation—lenders pay

LendingTree a QF fee for referrals, not marketing. Lenders receive no value

from LendingTree’s services until they receive referrals identifying potential

borrowers.

       A recent case out of Division Two of this court supports our conclusion. In

ARUP Laboratories, Inc. v. Department of Revenue, ___ Wn. App. 2d ___, 457

P.3d 492 (2020), the court applied the B&O attribution rules to medical testing of

bodily fluid and tissue samples. The company’s pathology laboratory in Utah




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receives these samples from medical providers throughout the country. ARUP,

457 P.3d at 494. Upon completion of testing, the Utah laboratory sends the

results via the Internet to the medical providers at their location but does not

return the samples. ARUP, 457 P.3d at 494. In order to attribute ARUP’s

income to Washington customers properly, the court examined “where ARUP’s

customers receive the helpful or useful effect of its services.” ARUP, 457 P.3d at

499. The court considered that ARUP’s services assist medical providers in

diagnosing patients and concluded, “The medical providers cannot diagnose their

patients until they receive the results of the tests they ordered.” ARUP, 457 P.3d

at 499. The court agreed with DOR that the benefit of services is received at the

medical provider’s location. ARUP, 457 P.3d at 499. Therefore, any income

ARUP derived from medical providers located in Washington should be attributed

to the state for assessment of B&O tax. ARUP, 457 P.3d at 499.

       In ARUP, the customers accrue the benefit of ARUP’s services—the test

results—at the location where they receive and utilize the information provided by

the taxpayer. Similarly, LendingTree’s customers, the lenders, accrue the benefit

of LendingTree’s services at the location where they receive and utilize the

referrals. The origin of the information, whether the laboratory in Utah as in

ARUP or borrowers in another state as in this case, does not control attribution.

The focus must remain on the customer and where the customer benefits from

the service.




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       The trial court erred by concluding the benefit of LendingTree’s services

accrued at the location of the borrower. We reverse and remand for proceedings

consistent with this opinion.




WE CONCUR:




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