Washington Court of Appeals Gives Out-of-State Dental Affiliate Another Chance to Fight B&O Tax Nexus

In a recent decision, a Washington appellate court reversed a superior court order that upheld a Business and Occupation (“B&O”) tax assessment against a Colorado company, holding that genuine issues of material fact precluded summary judgment for the Department of Revenue (“DOR”). M’KNIB Company v. State of Washington, Dep’t of Revenue, No. 41068-4-III (Wash. Ct. App. Sept. 22, 2026). The case will now return to the superior court for trial, and the taxpayer will have another opportunity to prove that it lacked substantial nexus with Washington. The opinion is unpublished, so it will not be printed in the Washington Appellate Reports, but it has been filed for public record.

The Facts: M’KNIB Company (“M’KNIB”) is a Colorado corporation and one of several affiliated entities involved in franchising and subfranchising Comfort Dental practices, including in Washington. M’KNIB owns 100 percent of Budget Dental Lab LLC (“Budget Dental”), a Colorado company that sells dental prosthetics to Comfort Dental practices. An affiliate owned by the same shareholders, Comfort Dental Group, Inc. (“CDGI”), also based in Colorado, owns the Comfort Dental intellectual property. In Washington, CDGI licenses that intellectual property to a Washington subfranchisor, which in turn sublicenses it to local subfranchised practices.

DOR audited M’KNIB for 2012 through 2018. M’KNIB did not provide many of the records DOR requested, so the auditor estimated M’KNIB’s Washington receipts from three categories of income: (1) payments from Budget Dental, (2) payments from CDGI, and (3) fees received directly from Washington subfranchisees. DOR concluded that M’KNIB had substantial nexus and issued an estimated assessment. A tax review officer sustained the assessment. M’KNIB then paid the tax and filed a refund action in superior court. Based on information received during discovery, the auditor reduced the assessment by roughly one-third, in part by reclassifying the CDGI income as royalties. But the auditor also made other, unexplained changes, including increasing attributable income in certain years. The superior court denied M’KNIB’s motion for summary judgment, granted DOR’s motion, and dismissed the complaint. M’KNIB appealed.

The Decision: DOR argued that, because M’KNIB failed to produce sufficient records and forced the auditor to estimate, M’KNIB had to meet a higher burden to prove not only that the tax assessed was incorrect, but also that DOR’s estimation method was unreasonable and exceeded its authority. The Court quickly rejected that argument, finding that M’KNIB must prove that the tax paid was incorrect and the correct amount of tax, but “there are no additional requirements to show that DOR’s methods were unreasonable or that DOR exceeded its authority in estimating the taxes due.”

Turning to nexus, M’KNIB had substantial nexus with Washington if its Washington receipts met a statutory threshold. Those receipts include only gross income attributable to Washington from “apportionable activities.” M’KNIB conceded that its fees from Washington subfranchisees counted but argued that they fell below the threshold. It argued that the payments from Budget Dental and CDGI should not count because (1) they were profit distributions, not payments for services, and (2) in any event, they were payments between Colorado companies that could not be attributed to Washington.

Neither side fully prevailed on the profit distribution issue. The Court rejected M’KNIB’s argument that profit distributions are deducted from gross income, because Washington’s deduction for distributions a parent receives from a subsidiary reduces only the “measure of tax” and applies after nexus is established. But the Court also rejected DOR’s argument that profit distributions count toward nexus simply because they are gross income. DOR “does not explain why we should focus only on gross income when determining the numerator” for nexus, and it identified no statute or regulation treating profit distributions received by a parent as an apportionable activity attributable to Washington.

That left the key question: what were the payments? If they were profit distributions, and receiving profits is not an apportionable activity attributable to Washington, they would not count toward nexus. If they were royalties, as DOR argued, they could be attributed to Washington even though the payments were between Colorado companies. Because the answer turned on facts that were in dispute, the Court could not decide whether M’KNIB had nexus.

The record pointed both ways. M’KNIB’s own complaint described the affiliate payments as “management fees,” and there was evidence supporting DOR’s position that the CDGI payments were royalties. On the other hand, M’KNIB’s chief operating officer and its accountant testified that the Budget Dental payments were profit distributions, and the chief operating officer testified that CDGI (not M’KNIB) holds the Comfort Dental intellectual property, receives the franchise fees, and distributes its profit to M’KNIB. Because the nature of the income was a disputed material fact, summary judgment was improper.

Separately, DOR failed to explain the auditor’s revised calculations. DOR maintained that the revisions were made in good faith and were rational, but that is not the standard on summary judgment. At the very least, the unexplained increases in attributable income raised a genuine issue of material fact.

The Court affirmed the denial of M’KNIB's summary judgment motion, reversed the grant of summary judgment for DOR, and remanded for a trial de novo. At trial, M’KNIB will bear the burden of proving that the auditor’s classification or calculation was incorrect and the correct amount of tax, if any.

The Takeaway: M’KNIB now has another chance to prevail, but it will have to prove what the affiliate payments actually were, and its own inconsistent characterizations will not make that easier. Companies operating through related entities should make sure intercompany agreements, books, and tax filings consistently reflect the substance of each payment, whether it is a fee, a royalty, or a distribution. Taxpayers should also remember that an estimated assessment does not raise the taxpayer’s burden, and that DOR must be able to explain its numbers. When it cannot, taxpayers should be ready to push back.

This update is one in a series of updates written for the October 2026 edition of The BR State + Local Tax Spotlight.

© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.