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State Tax Nexus and Trusts

Posted Tuesday, June 28, 2011 by Michael A. Larson

alt text Jeremiah Doyle, an estate planning strategist at BNY Mellon, delivered an interesting presentation to our partner group today on state taxation of trusts. This is a very complicated area that is often overlooked in trust and estate tax planning. The session was enlightening and Mr. Doyle covered a number of the more technical issues in his presentation. However, there were a couple of points that stood out during the presentation of which all estate and trust planners should be aware.

The first point was that rules regarding which state can exert their power to tax income from the intangible assets of trusts can vary significantly from state to state. With proper planning, state income taxation of trusts can be avoided entirely. With improper planning, trust income can be subjected to state income tax in more than one state. When you consider that a state such as California can tax income at rates as high as 10.3%, improper planning can be very costly.

The second point was that an action as simple as a trustee changing their residence from Washington to California can cause the income of the trust to be taxed by California. In other states, such as New York, the creation of an irrevocable trust by a grantor while resident in New York can cause that trust to be taxed in New York regardless of the location of the trust administration, the beneficiaries or a change in residence by the grantor. Too often trustees and administrators are appointed with little thought as to the implications of these actions on the income taxation of the trust.

We are lucky that in Washington there is no state income tax and the appointment of trustees and administrators located in Washington is beneficial. However, it is important to recognize that factors such as the location of trustees and administrators can be a crucial factor in avoiding the payment of unnecessary state income taxes. Should you have any questions regarding how these rules might affect you and your estate plans, contact Mike Larson or Ron Bueing.

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Department of Revenue Targets League and Entry Fees

Posted Friday, June 17, 2011 by Michael A. Larson

alt text Recently, the Washington Department of Revenue issued a proposed Excise Tax Advisory (ETA) 3167.2011 that would make “entry fees” and “league fees” for participation in sports subject to Washington retail sales tax. The ETA indicates that this notice is merely a clarification of existing law. However, it actually appears to be a substantial change in interpretation by the Department of Revenue.

Interestingly, WAC 458-20-183, the regulation discussing taxation of amusement, recreation and physical fitness services, clearly provides that entry fees and league fees are not subject to retail sales tax. In essence, the Department of Revenue’s position is that entry fees and league fees are only exempt if they do not provide the right to participate in the activity itself. As it would seem that entry fees and league fees always provide the participants with the right to participate in the activity, the Department of Revenue’s interpretation does not make much sense.

It should be noted that there are limited exceptions that would continue to exempt certain youth organizations that are engaged in “character building of youth.” Should you be interested in learning more of these developments and how they might affect you or your organization, contact me at (206) 805-1490.

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Dubious Study Touts Washington Tax System

Posted Wednesday, June 8, 2011 by Michael A. Larson

alt text Recently, the Small Business & Entrepreneurship Council (SBEC) issued a study that touts Washington as having one of the best state tax systems. Our governor will again be insufferable in quoting this severly flawed study - but do not be fooled. The reason once again for this extraordinary rating - the lack of a state income tax. Washington is touted as having the fifth “best state tax system.” But what are the true facts.

Washington has an above average per capita tax burden - higher than all but 12 other states. As a percentage of income Washington is more middle of the road, but is still higher than 24 other states. Washington also has one of the highest overall ratios of state taxes paid by business, surpassing 35 other states. If Washington has one of the higher state and local tax burdens and businesses pay a greater share of that tax burden, it is hard to understand how Washington could have the fifth best state taxing system for businesses.

It’s simple. We don’t.

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

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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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