In Valente Solutions, LLC v. Department of Revenue, the Washington Court of Appeals addressed whether an information technology consulting firm was entitled to a refund of Washington business and occupation (“B&O”) taxes for “localization services” provided to Microsoft. No. 87280-0-1 (Wash. Ct. App. Dec. 22, 2025). The Court affirmed the Board of Tax Appeals’ (“BTA”) decision, holding that the taxpayer failed to prove that Microsoft received the benefit of the taxpayer’s services outside Washington. 

The Facts: Valente Solutions, LLC (“Valente”) is a Washington limited liability company that provides various information technology services to clients all over the world. Valente’s services include “‘translating client websites into foreign languages, creating and updating customer-facing websites, providing support for product launches in foreign markets, merchandising support, and website management.’” 

From January 2011 through March 2015 (the “Periods in Issue”), over 85 percent of Valente's gross income came from services provided to Microsoft, which is headquartered in Washington State. Valente and Microsoft operated under a master contract, with specific assignments governed by statements of work (“SOWs”). 

For the Periods in Issue, Valente paid $454,890 in B&O taxes. In September 2015, however, Valente filed a refund claim with respect to its “localization” services, which it described as “the process of adapting a product or media to meet the needs of a particular language, culture, country, or target population.” Valente asserted that the Department of Revenue (“Department”) failed to properly apportion its gross income from localization services by arguing that its customers received the benefit of the services in the country where the specific website marketed Microsoft products, i.e., outside Washington. 

The Department’s Audit Division concluded that the benefit of Valente’s localization services was rendered to Microsoft’s team in Washington. Consequently, the Department denied the refund request. Valente appealed to the BTA, which affirmed the Department in part and remanded for limited further review. 

The Law: Washington’s B&O tax applies to the privilege of engaging in business activities within the state. While a state cannot tax value earned outside its borders, states may reach portions of interstate transactions that occur within the state through apportionment. Under Washington’s single factor receipts apportionment scheme, adopted in 2010, gross income from services is attributed to the state where the customer received the benefit of the taxpayer’s services. 

The apportionment statute that largely applies to the Periods in Issue (i.e., the version that was in effect through June 12, 2014) provides a cascading series of inquiries for determining where income should be attributed. First, income is attributed to the state where the customer received the benefit of the service. If the benefit was received in multiple states, income is attributed to the state where the benefit was primarily received. If neither inquiry can be satisfied, income is attributed to the state from which the customer ordered the service.[1]

While the statute does not define “benefit” of a service, courts give the term its plain and ordinary meaning. Referring to the dictionary definition, the state to which income should be apportioned is the location where customers receive “the helpful or useful effect” of a taxpayer’s services. “Customer” is defined as the “person or entity to whom the taxpayer makes a sale or renders services or from whom the taxpayer otherwise receives gross income of the business.” 

The Analysis: For the Periods in Issue through June 12, 2014, the Court rejected Valente’s argument that Microsoft received the benefit of its localization services entirely in foreign countries. Valente’s founder testified that the company focused on localization services to appeal to target markets in foreign countries. However, there was specific testimony regarding only three of the many SOWs, and only one of the SOWs showed work done particularly in France. 

The Department’s auditor testified that the Audit Division analyzed each SOW and distinguished between localization services related to product development and marketing. According to the Department’s audit framework, localization services related to product development should be attributed to where the client’s product development activity occurs, while services related to marketing should be attributed to the target market location. Many of the SOWs were characterized as product development work occurring in Washington. 

The Court found that Valente failed to meet its burden under the first two cascading steps of the apportionment statute. Without specific evidence showing where Microsoft received the benefit of the services for each SOW, the analysis moved to the third step, which attributes income to where the customer ordered the service. The SOWs “nearly consistently show[ed] that Microsoft ordered the service from a Washington location.” 

The Holding: The Court affirmed the BTA’s decision and held that Valente did not provide sufficient evidence to demonstrate where Microsoft received the benefit of its localization services. Thus, Valente was required to attribute its income to the state from which Microsoft ordered the service, i.e., Washington.

This case underscores the critical importance of thorough documentation and record-keeping for businesses. Good documentation practices, including work to determine whether in the company's practice the terms of the SOW are being followed, serve many essential functions—from supporting contract disputes and regulatory compliance to serving as vital tax planning and compliance tools, as this case illustrates.