"I just received a letter from the Washington Department of Revenue requesting that I fill out a 'Washington Business Activities Questionnaire!' What should I do?"
Posted Monday, March 29, 2010 by Ronald L. Bueing
The Washington Department of Revenue has a very aggressive tax discovery program that uses a variety of information sources to identify businesses that are not registered in Washington. You have been identified as an unregistered taxpayer. Washington is now seeking to determine if you are required to register and pay taxes to Washington.
First some background may be helpful.
Washington does not have an income tax. Instead, Washington imposes a business and occupation (B&O) tax on the gross income from business activities in Washington. The B&O tax is a gross receipts tax. It is measured on the gross receipts from business activities deemed to occur in Washington. There are very, very few deductions from the B&O tax. Unlike an income tax there is no deduction for labor, materials, taxes, or other costs of doing business.
The B&O tax rate varies significantly by classification, anywhere from .138% to 1.63%. There are a number of different classifications and you are taxed in the most specific classification to your business activity. Taxpayers may be subject to tax in more than classification, depending on the nature and variety of the business activities that they perform in Washington.
Perhaps most importantly, however, is that because Washington does not impose an income tax, the nexus requirements are different. Washington has traditionally used a physical presence test for nexus for the Washington B&O tax. This physical presence can be satisfied not only by very limited visits by sales personnel, but also by the presence of inventory or other property and even by the solicitation, warranty or other business activities conducted on behalf of a company by independent contractors. Washington is even considering expanding nexus under proposed legislation to include mere “economic presence” nexus.
While Washington will be primarily focused on the B&O tax, the auditor will also consider whether there is an obligation for uncollected retail sales taxes.
So what do you do next? The following checklist may be of assistance.
- Determine whether you are already paying B&O tax. In some cases, due to the use of dba names, the Department of Revenue may not realize that the company is already registered.
- Ascertain the nature and level of activities performed in Washington by employees and independent contractors.
- Determine the correct classifications for Washington business activities and estimate the tax exposure for the seven prior calendar years for which Washington will seek taxes.
- Carefully, but accurately, answer the questions in the Washington Business Activities Questionnaire.
- Consider whether any local B&O taxes are implicated by your Washington business activities. While the State of Washington will not consider a voluntary compliance agreement after contacting the taxpayer, timely action at the local level can avoid the application of the 10 year look back period employed by local jurisdictions, limiting exposure to interest and taxes for the last four years.
- Consider consulting an experienced Washington excise tax professional, such as Ron Bueing, a tax attorney with over twenty five years of experience on Washington excise taxes. There are a number of unique rules involving nexus, imported products, etc. that can have a dramatic impact on an unregistered taxpayer’s liability. Ron has successfully negotiated on behalf of hundreds of businesses located outside of Washington.
For more information, please contact Ron Bueing at 206-340-2008.