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The Pivotal Law Blog

Economic Presence Nexus Regulations Moving Forward

Posted Thursday, July 28, 2011 by Michael A. Larson

alt textYesterday I attended the Washington Department of Revenue hearing on proposed WAC 458-20-19401 (Rule 19401) and WAC 458-20-19404 (Rule 19402). Rule 19401 covers the minimum nexus threshold for apportionable activities in Washington. Although the concept of applying economic presence nexus rules to service businesses remains controversial, the Department of Revenue’s interpretation of the 2010 statute garnered scant comment as the proposed Rule 19401 language appears to be a fair interpretation of the statute adopted by the Washington legislature.

Also in 2010 the Washington legislature adopted single sales factor apportionment for service businesses, including banks. The Washington apportionment scheme for banks has long been patterned after the MTC Apportionment and Allocation Rules for Financial Institutions. The 2010 legislation continued this practice with respect to financial institution apportionment with two primary changes: replacement of the three factor formula (receipts, property and payroll) with a single sales receipt factor; and explicit authority to treat the definition of “financial institution” as advisory only.

The Department of Revenue had a problem with the standard MTC apportionment scheme. Nonfinancial service income of banks was to be allocated to the numerator of the receipts formula using a greater cost of performance rule. Subsidiaries of financial institutions are treated as financial institutions under the MTC rules. Thus, a service-based business owned by a financial institution would allocate its nonfinancial service receipts according to the greater cost of performance rule, while similar service businesses that were not owned by financial institutions would be required to allocate service receipts to the place where the benefit of the service is received.

To remedy this problem the Department of Revenue chose to narrow the definition of financial institution to a specific group of regulated financial institutions. While this rule provides symmetry between service businesses regardless of their ownership, it creates significant problems for certain special-purpose entities that are used by regulated financial institutions to engage in certain securitization transactions. As such, a request was made by the Washington banking industry to broaden the definition of “financial institution,” but to change the allocation rule for gross receipts from nonfinancial service activities.

Interestingly, many taxpayers that had previously been subject to the financial institution apportionment rules of WAC 458-20-14601 will not be subject to the provisions of Rule 19404, but instead will be subject to WAC 458-20-19402. This will primarily affect these companies by eliminating the ability to use the greater cost of performance rule to allocate nonfinancial service income for purposes of the computing the receipts denominator. For some companies this could result in significant changes to their Washington B&O tax liability.

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"The Missing Link" on the Burke-Gilman Trail - Debate Continues

Posted Thursday, July 14, 2011 by Christopher L. Thayer

alt textFor recreational riders and bike commuters the section of the Burke-Gilman Trail (between the Ballard Fred Meyer and the Locks) known as the “Missing Link” has been the source of some ongoing controversy and, unfortunately, a number of bicycle accidents. The attached article, written by an avid cyclist, provides the perspective from the commercial truck drivers who have to drive on the same roads - shared with bicyclists. It addresses the safety concerns of trying to have large commercial vehicles share the road with cyclists.

Bikes vs. Freight on the “Missing Link” of the Burke Gilman Trail

For more information, please contact Christopher Thayer at 206-805-1494.

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Aggressive Nexus Actions by States Encourage Taxpayers to Get a Nexus Checkup and Consider Amnesty Programs

Posted Tuesday, July 12, 2011 by Michael A. Larson

alt textIn preparing for an upcoming speech on recent developments in state tax nexus, it became all too obvious that states are increasingly looking to out-of-state taxpayers to fill significant holes in their state budgets. By adopting click-through nexus standards, applying economic presence nexus and minimizing physical presence requirements, states are aggressively pursuing tax collection from out-of-state businesses.

For many businesses, a state tax nexus checkup is the first step in determining the risks of state taxation and making the critical business decisions of where to collect, file and remit state taxes. These nexus checkups, focus on truly understanding where and how the company does business. Once business operations have been analyzed, the risk of taxation can be measured and cost-benefit decisions can be made on changes in filing positions and/or changes to existing operations.

While many businesses can benefit from a state tax nexus checkup in any environment, the need for such knowledge is especially important now as states face some of the toughest economic times that they have faced in recent years. Further, armed with the knowledge of where a company faces its greatest risk of state taxes, businesses can take advantage of voluntary compliance and amnesty programs. Washington and Michigan recently ended their amnesty programs, but there are currently programs available in states such as Colorado and Ohio.

At Pivotal Law Group we are uniquely qualified to assist taxpayers with nexus checkups, risk assessments and assistance with voluntary compliance and amnesty negotiations. I am often called on to speak at professional conferences with respect to nexus issues and my years of experience in a national tax accounting firm prepared me to efficiently and effectively handle these topics. If you are interested in a nexus checkup, contact me at (206) 805-1490.

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Electronic Medical Records Create New Risks for Healthcare

Posted Thursday, July 7, 2011 by Christopher L. Thayer

alt textComputers and software have become an integral part of our daily lives. When our computer fails, or there is a glitch in the software, it can be extremely aggravating and inconvenient. The risks and the consequences are more signficant, however, when your healthcare is at stake. As the healthcare industry is increasingly turning to electronic records and other computerized systems, we are starting to see some of the tragic consequences that can result. Electronic medical records and computerized systems have huge advantages over traditional paper records in many ways, and can help enhance care, but it comes with a whole new set of risks and problems which will need to be addressed.

In the future, medical malpractice cases may increasingly involve forensic computer and software analysis in order to simply understand what happened during the patient’s care.

Baby’s death spotlights risks linked to computerized hospital systems

For more information, please contact Christopher Thayer at 206-805-1494.

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Washington DOR Finalizes League and Entry Fee ETA

Posted Wednesday, July 6, 2011 by Michael A. Larson

alt text On July 1, 2011 the Washington Department of Revenue finalized Excise Tax Advisory Number 3167.2011 (ETA 3167). ETA 3167 states that league fees and entry fees are subject to retail sales tax if they provide the person with the right to participate in the underlying activity. The Department attempts to present the ETA as a clarification, but there is little doubt that this is a distinct change in the sales tax treatment of entry fees and league fees. Granted, there had been some inconsistent application of retail sales tax to league fees, but there has never been any application of retail sales tax to tournament entry fees until this ETA.

Interestingly, WAC 458-20-183 (Rule 183) could not be more clear with respect to the application of sales tax to entry fees. Rule 183 clearly states, “The term ‘sale at retail’ or ‘retail sale’ does not include: … league fees and/or entry fees.” Further, entry fees are defined as, “those amounts paid solely to allow a person the privilege of entering a tournament or other type of competition. The term does not include any amounts charged for the underlying activity.”

The Department has determined that the proviso language, “the term does not include any amounts charged for the underlying activity,” excludes from the Department’s definition of entry fees, any entry fees that allow a person to participate in the activity. However, as we can see from the above definition, an entry fee is an amount paid to allow a person the privilege of entering a tournament or other type of competition. As such, under the Department’s interpretation, an entry fee is only exempt from sales tax if it allows you to enter a competition, but not to compete in that competition. This makes no sense.

This absurd interpretation puts taxpayers that relied on the clear language of the rule in danger of assessments for prior periods. While it should be noted that the DOR website indicates that “full compliance with the ETA is expected no later than October 1, 2011,” there is nothing in the ETA that provides for prospective application. Even worse, the Department has not indicated that Rule 183 will be amended anytime soon, allowing this rule to continue misinforming taxpayers that are unaware of the ETA.

In the meantime, any organization that charges an entry fee to a participative sporting event, such as a tennis tournament, soccer tournament, softball tournament, fun run, etc. should consider whether ETA 3167 requires they must collect retail sales tax on the entry fees that are charged. If you have any questions, regarding the application of this ETA call Ron Bueing at (206) 805-1490.

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