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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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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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