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Proposed Washington ETA on Common Paymasters

Posted Sunday, May 6, 2012 by Ronald L. Bueing

alt text For a number of months the Washington Department of Revenue has been working on guidance for governing the taxation of reimbursement of employee salaries under a common paymaster or common pay agent arrangement. The most recent draft version of an excise tax advisory (ETA) on this subject should be a cause of concern for many businesses using centralized payroll structures. Were it to be adopted in its current form, this ETA would virtually eliminate the ability of affiliated companies to use a centralized common paymaster without incurring a substantial increase in their Washington B&O taxes.

Many companies use centralized payroll reporting out of a single entity in order to reduce the cost of payroll tax compliance. Under these systems one company will pay wages to the employees, handle centralized employee benefits, and report wages and tax information to the government often using a single employer account. Reimbursements from the affiliated companies to the reporting entity, often referred to as the common paymaster, are not subject to tax in any other states. However, as a gross receipts state Washington has a long history of taxing intercompany expense reimbursements between affiliated companies. Yet, for many years Washington has recognized that reimbursements of wages, payroll taxes and benefits within a common paymaster arrangement between affiliated companies are not subject to tax.

The draft ETA as currently structured would make it virtually impossible for most organizations to qualify for exemption from B&O tax of reimbursements of wages, payroll taxes, and benefits made by affiliates to a common paymaster. Further, the limited number of companies that could qualify under safe harbors proposed in the ETA would not likely be able to qualify unless they planned ahead of time to meet certain notice requirements that would not ordinarily be performed by any company using a common paymaster structure. This ETA has yet to be finalized and affected taxpayers may be able to affect the final language by providing commentary during the adoption and review process.

If your company employs a common paymaster or common pay agent structure, I encourage you to contact me for consideration of how this ETA may affect your Washington B&O tax liability.

For more information, please contact Ronald Bueing at RBueing@PivotalLawGroup.com.

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