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One Easy Planning Idea Based on the Recent Federal Tax Bill

Posted Wednesday, December 22, 2010 by Michael A. Larson

alt text As many of you have heard, President Obama has signed the 2010 Tax Relief Act. While, we are still digesting many of the changes, one easy tax planning idea that should be considered by anyone that has a year end bonus coming and is not over the Social Security wage base limit for 2010. Deferring payment of the bonus until 2011 will save 2% on the OASDI portion the Social Security tax that would otherwise be paid. In addition, if income is expected to exceed the wage base in 2011, the OASDI savings will be even higher as the bonus may avoid the OASDI tax completely.

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Governor Signs Amnesty Bill

Posted Wednesday, December 15, 2010 by Michael A. Larson

Just a quick note that the Governor has signed the amnesty bill, discussed in an earlier blog post. The amnesty program becomes effective February 1, 2010.

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Washington Legislature Passes Amnesty Bill in Special Session

Posted Monday, December 13, 2010 by Michael A. Larson

alt textThe Washington Legislature in last Saturday’s emergency special session adopted an amnesty program that will apply to all outstanding penalties and interest as of February 1, 2011 on certain outstanding tax obligations. The amnesty applies only to penalties and interest on B&O tax, public utility tax and both the state and local portions of sales or use tax. The amnesty period begins February 1, 2011, but applies to taxes that were required to have been reported and paid by the taxpayer for periods to February 1, 2011.

To qualify taxpayers must file all outstanding or amended tax returns with respect to which amnesty is requested by no later than April 18, 2011 and make full payment of taxes by May 1, 2011. It also appears that in order to qualify, tax returns for January through April of 2011 must also be filed with the Department by the normal due date; a potential trap for unwary amnesty takers. A yet to be developed application for amnesty must also be filed with the Department by April 18, 2011. Also, taxpayers charged with evasion penalties are not eligible for amnesty nor are sellers who misuse reseller permits or resale certificates.

The biggest drawback to the program is the inability to later challenge payments made under the amnesty program. Taxpayers will need to be careful that they adopt the correct classifications and do not inadvertently overpay their tax obligations. There are a number of other provisions that I will discuss in more detail once this bill becomes law, but this is something all taxpayers with outstanding tax liabilities need to be aware of immediately.

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

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Nexus Changes in Washington

Posted Friday, July 23, 2010 by Michael A. Larson

alt textIn the last legislative session Washington adopted “economic performance” as the nexus standard for certain apportionable service activities. However, Washington retained its “physical presence” nexus rules for all other B&O taxes, retail sales taxes and other excise taxes.

“Economic performance” nexus rules provide that a company with $50k of Washington based payroll, $50k of Washington based property or $250k of sales to Washington customers of certain apportionable services (or have 25% of the total of either their payroll, property or sales in Washington) will be subject Washington B&O tax on that apportionable income. Companies with less than these amounts of property, payroll and sales in Washington are deemed not to have nexus with Washington in spite of the physical presence that they maintain within the state, but only with respect to the taxation of these apportionable services.

Meanwhile, “physical presence” nexus continues as the standard for retail sales tax, B&O tax on other activities and other excise taxes. “Physical presence” nexus as interpreted by the Washington DOR requires an extremely limited amount of physical presence satisfied by as little as 2-3 visits by an employee or independent contractor.

Another recent change is that Washington has eliminated its notorious 5 year nexus rule, for Washington B&O tax. This rule provided that a taxpayer was presumed to have nexus in Washington for the year in which nexus was established and for each of the next four years unless the taxpayer could prove that the nexus creating activity was not a factor in making the sales in the future years. This proved to be a difficult, if not almost impossible, burden of proof to sustain with almost all Washington auditors. The recent legislative changes reduce this “trailing” nexus to one year, but only for Washington B&O taxes, not for retail sales tax collection.

These changes could lead to some bizarre situations where taxpayers have nexus for B&O tax for some sales, but not for others and still different nexus for retail sales tax. Let’s look at the following hypothetical.

In year 1 Taxpayer sells $4M of retail goods to Washington consumers over the internet. Taxpayer also provides $200k of training and support services to Washington customers, of which $20k are performed in WA on four separate days in Year 1 by an independent contractor hired by Taxpayer to teach four different customers how to use the retail products. This is the only physical presence in WA for the taxpayer ever. Taxpayer has -0- Washington payroll for any of its employees and -0- property in Washington during years 1 through 5. Taxpayer has total sales over $12M everywhere, which includes 2M of training and support services. Taxpayer provides no training services in WA in years 2 through 5, but provides $200k of online support and training for WA customers in year 2, $300k in year 3, 200k in years 4 and 5. Otherwise, Taxpayer continues to make similar online retail sales and service sales throughout the remainder of the five year period.

Year 1 - Taxpayer has nexus for retail sales tax (RST) and Retailing B&O tax (RBO) because the temporary physical presence of the independent contractor trainers creates physical presence nexus, but taxpayer does not have economic presence nexus for the apportionable services which consequently are not subject to services B&O tax (SBO) as there is only $20k of WA payroll, -0- WA property and $200k of WA apportionable service sales and less than 25% of totals for WA payroll, property and sales.

Year 2 - Taxpayer has trailing physical presence nexus for RST & RBO, but no nexus of any type for SBO.

Year 3 - Taxpayer has trailing physical presence nexus for RST & economic performance nexus for SBO ($300k of sales of apportionable services), but no nexus of any type for RBO.

Year 4 - Taxpayer has trailing physical presence nexus for RST & trailing economic performance nexus for SBO, but no nexus of any type for RBO.

Year 5 - Taxpayer has trailing physical presence nexus for RST, but no nexus of any type for RBO & SBO.

How is that for complicated?

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

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Update on Washington B&O Taxation of Director Fees

Posted Friday, July 9, 2010 by Michael A. Larson

alt textOn June 22 the Washington Department of Revenue (DOR) issued a revised special notice on B&O taxation of director fees. I recently attended a meeting with senior members of the DOR where the notice was discussed in more detail. The notice may be accessed at: http://dor.wa.gov/docs/pubs/specialnotices/2010/sn10directorsfees.pdf.

As expected, the DOR has concluded that taxable director fees include all compensation received by a director, including expense reimbursements and the value of any compensatory stock options received. The DOR has also concluded that directors who are also employees are only taxable with respect to any “nonemployee” director fees that are received by the employee. During our meeting the DOR elaborated on these points.

On the matter of expense reimbursements, the DOR indicated that any amounts received by the director as a reimbursement of expenses should be included in the tax measure. The DOR did not have a clear answer for expenses of a director that are paid directly by the corporation as opposed to being reimbursed to the director. A suggestion was made that the DOR limit the tax measure to the amounts that must be reported on the Form 1099-MISC that corporations are required to file with the IRS to report director compensation or that the DOR not require inclusion of any expenses directly paid by the corporation. Under the IRS rules travel reimbursements need only be included on Form 1099-MISC where the director does not properly account to the corporation separately for the travel expenses. Expenses paid directly by the corporation are never included on the Form 1099-MISC as compensation. The DOR agreed to examine the matter in more depth before adopting a comprehensive policy.

We can only hope that the DOR adopts the sensible policy of including only Form 1099-MISC amounts. The federal policy draws a clear line between expenses that represent the corporation’s cost of holding the meeting and expenses that are the responsibility of the director. This sensible approach provides a bright line, prevents abuses and reduces corporate compliance costs. If this approach is not taken, further regulation will be needed to determine which expenses of a meeting are treated as company expenses and which expenses will be treated as director expenses. This will not only lead to numerous future clashes with DOR auditors, but will also result in significant additional recordkeeping costs while providing scant additional revenue to the State.

With respect to compensatory stock options the notice specifically limits inclusion as compensation to the amounts reported on Form 1099-MISC. Options granted prior to the July 1 effective date of the new rules are not subject to B&O tax.

The DOR also confirmed another point included in the special notice that corporate directors would only be subject to tax in Washington if they have nexus under the new “economic performance” nexus rules. Thus, nonresident directors could avoid paying tax on director fees earned in Washington that do not exceed $250,000 (the sales threshold necessary to confer nexus on the nonresident directors) provided that the Washington director fees were not more than 25% of the director’s total nonemployee compensation. (This also assumes that nonresident directors would not have $50,000 of property or payroll in Washington.) This is true even if the director has clear physical presence nexus in Washington.

The DOR indicated that it would also apply this interpretation to other service businesses.

The special notice also confirmed that director fees will be apportioned to the state where the corporation is headquartered. The DOR warns taxpayers that in some cases a director could become taxable on a portion of director fees earned from corporations headquartered in other states if at least some of the activity of the corporate director is performed in Washington and the director is not taxable on the director fees in the other state. Based on the rules for being treated as taxable in another state, this circumstance should rarely occur.

There was substantial discussion in the meeting of procedural requirements. The DOR indicated that if corporations wished to report and pay taxes on behalf of directors that the corporations should contact the DOR’s Taxpayer Account Administration Division at (360) 902-7047 for information on how to accomplish this reporting. The DOR indicated that they may also offer some type of reporting relief in the future for taxpayers that are required to use monthly or quarterly reporting, but receive payments for their services only once or twice per year. No details are yet available on how this might work.

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

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