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Summary of 2011 Washington Tax Legislation

Posted Friday, June 3, 2011 by Michael A. Larson

alt text Taxpayers in Washington often express mixed feelings about Tim Eyman and the initiatives that he and his organizations have backed over the years. However, Initiative 1053 that was passed by voters in 2010 is primarily responsible for the significantly lower amount of tax increases passed by the Washington legislature in 2011. With a two thirds majority requirement for any new taxes, Washington lawmakers largely avoided tax increases and concentrated on spending reductions. Following is a summary of those tax related changes that were passed in 2011.

HB 1347 – Amend sales and use tax exemptions for certain property and services used in manufacturing, research and development, or testing operations.

Once again the Washington legislature attempts to retroactively change a statute in order to prevail in existing taxpayer disputes. Certain taxpayers have argued that the manufacturing exemption applies to machinery and equipment that they purchased that is used to manufacture tangible personal property for sale, including clean water and biosolids sold as fertilizer. This statute purports to retroactively prevent the application of the manufacturing machinery and equipment tax exemption to taxpayers whose activity is within the purview of a utility business, i.e., distributing electricity, providing water and sewer services, distributing natural gas, etc., despite prior DOR decisions allowing such treatment. One exception is allowed under the statute for utilities that are also engaged in manufacturing certain “class A or exceptional quality standard” biosolids.

The DOR has also had disputes with certain public research institutions regarding the application of the sales and use tax exemption for machinery and equipment used in research and development operations. The statute clarifies the application of the sales and use tax exemption for such equipment, but limits the institutions that would be eligible for the exemption and requires that such institutions file an annual survey with the Department of Revenue similar to that required of other companies using the research and development machinery and equipment sales and use tax exemption.

EHB 1357 – Requires all taxpayers to report and pay taxes electronically. The Department is authorized to waive the requirements for taxpayers filing on an annual basis and taxpayers with certain extenuating circumstances such as lack of access to the Internet, computer problems, or not having a bank account or credit card. The 10 percent penalty for disregarding specific written instructions is amended to apply where the Department has specifically required a taxpayer to electronically file or remit taxes and the taxpayer willfully disregards those instructions. Applies to tax returns and payments originally due after July 24, 2011.

ESHB 1826 - Requires a county board of equalization to waive the property tax valuation appeal deadline if a request is made within a reasonable time after the normal filing deadline where: the taxpayer’s property was in the revaluation area; the taxpayer was not sent a property value change notice; and the property value did not change from the previous year.

HB 1867 – Clarifies for purposes of application of unclaimed property rules that the definitions of “gift certificate” and “gift card” do not include prepaid telephone calling cards or prepaid commercial mobile radio services.

ESHB 1902 – Provides a deduction from the business and occupation (B&O) tax is provided to nonprofit health or social welfare organizations for amounts received as compensation for providing child welfare services provided under a government funded program. A deduction is also provided to taxpayers for amounts received from a government for distribution to a nonprofit health or social welfare organization for the provision of government funded child welfare services.

SB 5083 – Clarifies that each real estate firm that receives a commission at the time of closing on a real estate transaction need only pay the B&O tax on its respective share of the commission. Interestingly, the bill was originally structured as a clarification and would have applied retroactively. However, the Governor vetoed this provision deciding that no refunds could have been granted under the bill as that would have represented a gift of state funds and only “delinquent” taxpayers would have benefitted. As noted above the Governor and legislators have no such qualms about retroactively imposing taxes.

SB 5501 – Provides a new B&O tax and a sales and use tax exemption to restaurants for meals provided to employees without a specific charge to the employee.

SB 5763 – Revises the nonresident sales tax exemption rules to provide that a state’s residents are ineligible for the exemption if their state imposes not only a sales or use tax of 3 percent or more, but also if the state imposes a value added tax, gross receipts tax or similar generally applicable tax of 3 percent or more.

SB 5849 – Amends the estate tax rules to allow for the introduction of extrinsic evidence in order to determine what was the testator’s or grantor’s intent regarding a formula clause based on the federal estate tax or generation-skipping transfer tax exemptions. It also changes the time limit for bringing a judicial construction action to two years following the death of the decedent’s death, as opposed to one year and conforms the time to make a qualified disclaimer of property passing from an estate of decedent dying after December 31, 2009, and prior to December 18, 2010, to the later of nine months following the date of death or September 17, 2010 as is used for federal tax rules.

For more information, please contact Ron Bueing at 206-340-2008.

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House Bill 2080: Modifying Washington Excise Tax Refund and Interest Provisions

Posted Thursday, May 19, 2011 by Michael A. Larson

alt text Earlier this month on May 5, I spent the morning in Olympia testifying on behalf of the Association of Washington Business against HB 2080. This bill would modify interest provisions to charge a much higher interest rate of interest on assessments than it would allow to taxpayers on refunds. This unfair tax treatment of taxpayers was abolished in Taxpayer Fairness legislation in prior years only to surface as a bad idea in tough budgetary times. I was able to catch the attention of the House Committee chair with an example that explained how the bill could actually result in taxpayers paying an interest penalty to the state merely by reason of paying their taxes too early.

Further, the statute of limitations on on refunds would have been reduced from four years to three years, while the assessment statutory period remained at three years. Poorly drafted offset provisions could have required taxpayers to pay taxes twice to Washington. Hopefully, this bill will die in committee.

For more information, please contact Ron Bueing at 206-340-2008.

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Washington Excise Tax Update: Washington Supreme Court Rules against Advance and Reimbursement Deduction for Payments by an Imaging Company to Radiologists

Posted Thursday, May 19, 2011 by Michael A. Larson

alt textThe Washington Supreme Court dealt another blow to taxpayers seeking to reduce their gross income subject to B&O tax by amounts paid to independent contractor physicians. Washington Imaging Services v. DOR, Docket Number 84101-2 (5/19/2011). Washington Imaging Services (WIS) was a medical imaging company that received amounts from patients and their insurers for medical imaging services. WIS sought a deduction from their gross income for amounts that were paid to Overlake Imaging Associates (Overlake), a professional services corporation that employs radiologists.

WIS argued that it could deduct the payments to Overlake as pass-through payments because (1) WIS was not liable to pay any amounts to Overlake that it did not collect from patients or insurers and (2) WIS was not licensed to sell the medical services that were provided by Overlake. The court noted that WIS was in the business of providing medical imaging services, a business that required both the creation of the image and interpretation of the image. WIS argued that it had no ownership interest in the amounts it collected and paid to Overlake. The court held that WIS could not avoid its B&O tax obligation merely by reason of its private contract with Overlake.

The court also found that although WIS was legally barred from engaging in the practice of medicine, this did not prevent WIS from contracting with an independent contractor to provide such services. The court distinguished an earlier case, Walthew, Warner, Keefe, Arron, Costello & Thompson v. DOR, 103 Wn.2d 183, 691 P.2d 559 (1984), that allowed attorneys a deduction from gross income for amounts advanced to its clients for court costs. In this earlier case, ethical rules mandated that clients and not attorneys must retain ultimate liability for all such expenses. However, there was no such restriction on WIS. WIS could purchase medical diagnostics services from Overlake, it simply was not allowed to employ physicians itself to perform such services.

The court found that WIS could only be allowed a deduction for the amounts paid to Overlake if WAC 458-20-111 (Rule 111) applied to provide WIS with “pass-through” deduction. For Rule 111 to apply, WIS must be the agent of the patients to whom it provides the medical imaging services. The Washington Supreme Court agreed with the trial court that WIS failed to establish the requisite agency relationship.

This case establishes once again the difficulty that taxpayers face in obtaining a “pass-through” deduction under Rule 111. It is imperative that there be an agency relationship between the taxpayer in its customer to obtain services on the customer’s behalf. In addition, it should be noted that even if an agency relationship is established, it is also absolutely necessary that the taxpayer limit its liability to the service provider exclusively as an agent. Taxpayers attempting to avail themselves of a deduction under Rule 111 should seek experienced advice on structuring their arrangements. Pivotal Law Group can provide this experienced expertise.

For more information, please contact Ron Bueing at 206-340-2008.

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Primary Purpose Test Resolved in Favor of Taxpayer

Posted Thursday, March 10, 2011 by Michael A. Larson

alt textThe WA Supreme Court issued Qualcomm, Inc. v. DOR today. This is a major win for Washington taxpayers. Qualcomm sold an OmniTRACS system to trucking companies to provide information about the location of vehicles on the road and other relevant management information. The DOR had asserted that because the service involved the transmission of data, the service was a telecommunications service subject to retail sales tax, as well as the retailing Washington B&O tax. The taxpayer had argued that while transmission was involved, the “primary purpose” or “true object” of the service was the information provided, not the transmission of that information. Thus, the taxpayer argued that the service and other classification should apply as opposed to the retailing classification. The court sided with the taxpayer analyzing the transaction using the “primary purpose” test.

This case could have ramifications in other areas of classification. Recently the DOR has been attempting through regulation to treat certain digital information services as digital automated services subject to retail sales tax, as opposed to digital goods exempt under the business use exemption. The application of the primary purpose test as analyzed by the court in Qualcomm could have a significant effect on that analysis.

For more information, please contact Ron Bueing at 206-340-2008.

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Unintended Consequences of the National Practitioner Data Bank on Medical Malpractice Litigation

Posted Thursday, January 20, 2011 by Christopher L. Thayer and Mark B. Shepherd

Authors: Christopher L. Thayer and Mark B. Shepherd are principals at Pivotal Law Group. Mr. Thayer and Mr. Shepherd have over 40 years of combined experience helping patients who have been victims of negligent medical care.

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I. Inception of the National Practitioner Data Bank

The National Practitioner Data Bank (“NPDB”) was established by the Health Care Quality Improvement Act of 1986 and has been in effect since 1990. The NPDB tracks payments made on medical malpractice claims (whether by settlement, arbitration award or verdict) and tracks other “adverse actions” involving licensure or hospital privileges. The establishment of the NPDB was prompted in part by a concern that physicians who had been the subjects of disciplinary actions or other “adverse actions” in one jurisdiction (e.g., having admitting privileges revoked or having settled a malpractice suit) were simply moving to other jurisdictions or other hospitals to continue practicing without disclosure of the prior problems.

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II. A basic primer on the National Practitioner Data Bank

Who must report, and what must be reported?

Medical malpractice payers must report for physicians, dentists and other defined health care practitioners any payment resulting from a written claim or judgment. There is an exception for amounts paid pursuant to a “high-low” agreement when a payment is made at the low end of an agreement that is in place prior to a verdict or an arbitration decision, but only if the fact-finder rules in favor of the defendant and assigns no liability to the defendant practitioner. The rationale is that the payment is being made pursuant to an independent contract between the defendant’s insurer and the plaintiff rather than in settlement of a medical malpractice claim. In addition, when an individual (the practitioner or another person) pays out of personal funds, or when payments are made solely for the benefit of a corporation such as a clinic, group practice or hospital – reporting to the NPDB is not required.
State licensing boards must report for physicians and dentists any licensure disciplinary action based on professional competence or conduct. Licensure disciplinary actions include (1) revocation, suspension, restriction, or acceptance of surrender of a license; and (2) censure, reprimand, or probation of a licensed physician or dentist based on professional competence or professional conduct.

Hospitals and other health care entities must report for physicians and dentists any professional review action, based on reasons related to professional competence or conduct, adversely affecting clinical privileges for a period longer than 30 days; or voluntary surrender or restriction of clinical privileges while under, or to avoid, investigation.

Professional societies must report for physicians and dentists any professional review action, based on reasons relating to professional competence or conduct, adversely affecting membership.

HHS office of inspector general must report for physicians, dentists and other health care practitioners any exclusion from Medicaid/Medicare and other Federal programs. 45 C.F.R §60

Who has access to information from the NPDB?

45 C.F.R. §60.13 allows requests for information by: hospitals and health care entities regarding a practitioner for purposes of employment, clinical privileges or professional review activity; practitioners requesting information about themselves; state licensing boards; and, in tightly circumscribed circumstances, an individual or his/her attorney. A plaintiff’s attorney or a pro se plaintiff is permitted to obtain information from the NPDB under very limited conditions: A medical malpractice action or claim must have been filed by the plaintiff against a hospital, and the individual physician or practitioner about whom the information is requested must be named in the action or claim. Obtaining NPDB information on that individual is permitted only after evidence is submitted to HHS demonstrating that the hospital failed to submit a query mandated by 45 C.F.R §60.12 to the NPDB regarding the individual named by the plaintiff in the action. This evidence is not available to the plaintiff through the NPDB. Evidence that the hospital failed to request information from the NPDB must be obtained by the plaintiff from the hospital through discovery in the litigation process.

III. Effects of NPDB on medical malpractice litigation

Questions and criticisms concerning the application of the NPDB have existed from the outset. One controversial feature of the NPDB is that all malpractice settlements identified in 45 C.F.R. §60 need to be reported, regardless of size. Some have questioned whether there should be a minimum amount as a threshold, so that cases with more modest damages could be settled for nominal amounts without the negative impact of reporting the settlement to the NPDBi. This raises the question as to whether the reporting requirements of the NPDB have had any “chilling” effect on the settlement of otherwise legitimate medical malpractice claims. The question is whether a physician, who may have a “consent to settle” provision in his or her insurance policy, may decline to authorize settlement of a claim that arguably should settle, due to concern over the ramifications of reporting to the NPDB.

This question was addressed in a 2003 study published in the journal Inquiry (“Impact of the National Practitioner Data Bank on Resolution of Malpractice Claims”)ii. The results of that study are both thought-provoking and concerning for attorneys who represent patients injured through negligent healthcare. The Inquiry study looked at over 3,500 claims reported to the NPDB to determine if there is any empirical evidence of a chilling effect on malpractice settlements. The authors noted that:

Malpractice settlements avert costly trials, dispose of worthy claims expeditiously, and spare defendants and plaintiffs the anxiety of protracted disputes.

The Inquiry authors collaborated with four commercial insurance carriers to compile a database of information on the respective claims. Lacking the resources to individually evaluate each of the over 3,500 claims on their merit (to assess whether or not any particular claim was “legitimate” and therefore should theoretically settle), the authors used the amount of indemnity reserves set by the claims adjusters as a metric for assessing the validity of any given claim.iii Certainly practitioners who handle medical malpractice cases on behalf of injured patients would likely disagree with many of these assessments but, faced with the impracticality of conducting detailed medical reviews of each and every one of the 3,500 cases, this was a compromise that the authors had to accept.

Notwithstanding the limitations of the data available, the authors were able to conclude that the NPDB reporting process has had measurable effects on the malpractice litigation process. The authors noted that settlement of claims the study deemed to have a “low probability of success” decreased by approximately 30% after the adoption of the NPDB.iv Interestingly, the authors characterized this effect as a “decrease [in] the proportion of nonmeritorious claims that received compensation” and that:

[T]he imposition of reporting and querying requirements actually may have sharpened the malpractice system’s accuracy by bolstering incentives to deny spurious claims.v

Some might view that same data as merely reflecting that the NPDB reporting requirements erect a barrier to settlements by encouraging physicians to litigate cases to conclusion rather than settle. Although the Inquiry study acknowledged that there were certain limitations associated with their interpretation of the available data, the results of this study are consistent with these authors’ experience – the NPDB’s reporting requirements noticeably effect medical malpractice litigation.

IV. A view from “in the trenches”

As any plaintiff practitioner knows, even with the average tort claim, it is not merely the merits of a case that influence whether or not a case settles – or even gets filed. The challenges of proving liability, causation and damages combine with the expenses of litigation and various other factors in every plaintiff attorney’s evaluation of a potential case. In medical malpractices cases there is yet another layer to factor in. Any attorney representing an injured patient in a medical malpractice action in Washington needs to be keenly aware of the effects of the NPDB reporting requirements and the likely role this will play in settlement discussions. Combined with the provision included in many medical malpractice insurance policies which require that the physician provide consent to any settlement (so called “consent to settle” provisions), care must be taken in selecting which medical malpractice cases you are going to take on and what parties you will name as defendants.

Modest damages cases, even those with relatively clear liability and causation, can be challenging to pursue. Based on personal experience in a number of cases, it is not uncommon to encounter a situation where the malpractice carrier and/or defense counsel recommends settlement, but the physician, who may have the right to preclude settlement under the terms of his or her insurance policy and is concerned about the effects of reporting to the NPDB (on obtaining subsequent hospital privileges, licensure issues, and increased malpractice premiums, etc.), refuses to authorize settlement. The plaintiff practitioner is then faced with the decision of whether to proceed to an expensive trial (where the doctor will contest liability), on a case that might only have modest damages.The Inquiry authors portray this as a benefit of the NPDB, characterizing it as weeding out the cases that lack merit. The reality is that the dynamic created by the reporting requirements of the NPDB also negatively impacts the practicality of pursuing modest yet very much meritorious claims.

Given the disincentives to settlement created by the NPDB reporting requirements, in the authors’ experience it is advisable, where appropriate and supported by the facts and law, to include as defendants hospitals, clinics and other organizations that may have culpability in a medical negligence action – as these parties do not face the same reporting requirements imposed on physicians by the NPDB.

For more information, please contact Christopher Thayer at 206-805-1494 or Mark Shepherd at 206-340-2008.

i. Impact of the National Practitioner Data Bank on Resolution of Malpractice Claims; Waters, Studdert, Brennan, Thomas, Almagor, Mancewicz & Budetti, Inquiry (Vol. 40, 283-294, 2003).
ii. Id.
iii. Id., at 291.
iv. Id., at 290.
v. Id., at 291.

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