Update on Washington B&O Taxation of Director Fees
Posted Friday, July 9, 2010 by Ronald L. Bueing
On 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.