Sourcing Revenues From Litigation: Even Law Firms Can Have Trouble with the Laws

Professional service firms didn’t traditionally have concerns about revenue sourcing when most states used a cost or place-of-performance standard.  However, now that a significant number of states use a market-based sourcing standard, under which service revenues are sourced to the state where the customer receives the service’s benefit, it can be more difficult to assign revenues to a particular state or other jurisdiction. For example, consider an Illinois-based insurance company that is bringing or defending a lawsuit filed in a Washington state court. They must hire Washington counsel.

Does the Washington law firm source its fee revenues to Illinois, where its client is headquartered, or to Washington, in whose courts the case is tried? This was the issue in the recently decided case of Betts, Patterson & Mines, PS vs. State of Washington Department of Revenue (No. 86756-3-I, 2025 BL 392656, Wash. Ct. App. Nov. 3, 2025).

Case Background: Betts, Patterson & Mines, PS vs. State of Washington

Betts Patterson & Mines (BPM), a Seattle-based law firm with offices in Washington and Oregon, focuses primarily on insurance law and litigation. BPM originally sourced all its revenues to Washington state and paid the state’s Business & Occupation (B&O) tax, a tax on gross receipts, with no portion of these revenues sourced to Oregon or any other state. After Washington changed its method for apportioning gross income for services to a market-based method in 2010, BPM amended its B&O returns to reflect the new apportionment methodology and claimed a substantial refund by sourcing revenues to the states where its clients and their law departments were headquartered.

The Washington Department of Revenue (Department) denied most of BPM’s refund claim, determining that BPM’s legal services revenues should be sourced to Washington because the litigation occurred there and the clients received the benefits of BPM’s services there. BPM filed suit in Washington state court. At the trial level, the court agreed with the administrative bodies’ decisions. BPM had argued that revenues from services performed for the legal departments of various insurance companies should have been sourced to the clients’ addresses, as that was where the benefits of its services were received.

Court’s Reasoning and Outcome

The appellate court disagreed, accepting the position of the Department, stating:

• BPM’s clients received the benefit of their services in Washington due to BPM’s advertising itself as providing litigation services in Washington,
• Its clients need litigation services in Washington, and
• The effect of its services being realized in Washington.

Additionally, the court relied on prior decisions that established a pattern of requiring that sales of services be sourced where the customers receive the “helpful or useful” effect of the services and where the services are ultimately “used and received.”

As the helpful and useful effect of BPM’s services involved Washington-licensed attorneys handling Washington-based litigation, with the benefit used and received at the disposition of the case in a Washington court (and not when the legal department received the results of the case communicated to them), the appellate court determined that nearly all of BPM’s sales were correctly sourced to Washington. Finally, in a separate case concerning the reasonableness of how BPM could track its sales by state, the court noted that using clients’ billing addresses was not a fair representation of how their services were sourced by state. Clients used BPM to represent policyholders in Washington, regardless of where the insurance companies were located.  By all appearances, these clients used BPM’s services in the state of Washington. As such, the court ultimately found the state’s denial of most of the refund claim reasonable, given that it treated nearly all the benefits of the services as realized in Washington.

Whether discussing a gross receipts tax used by Washington or a state corporate income tax, sourcing sales to the correct state can be complex when professional services are involved, and multiple parties are involved across state lines. More often than not, states have little or no coordination with other state’s laws. They will not accommodate a company that wants to avoid having its sales sourced to more than one state and taxed twice on the same income. For the right guidance on where the sale of your company’s services should be sourced and to be able to readily justify the methods for sourcing your services, contact your CBIZ tax professional.