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Common Paymaster and Reimbursement of Affiliated Expenses Remains Complicated

Posted Wednesday, October 2, 2013 by Michael A. Larson

alt textIn July Gov. Inslee signed legislation (Sections 101 & 102 of ESSB 5882) to restore a deduction for reimbursements between affiliated businesses that use a centralized payroll reporting system. Despite the common sense tax policy underlying this provision and the support of the Washington Department of Revenue, a budget conscious Washington legislature had to be lobbied hard to pass this sensible legislation. The failure to pass this legislation would have kept in place a tax trap for unwary taxpayers and taxpayers with knowledge of this shortcoming in Washington tax law would have been forced to adopt costly administrative changes to avoid a tax that should never have been charged in the first place.

While businesses believed that the language in the bill was sufficient to restore the deduction on a retroactive basis, the Washington Department of Revenue has interpreted the bill to allow the Washington Department of Revenue to assess B&O tax on these reimbursements until the effective date of the law, October 1, 2013. This insistence on continued enforcement of a practice that is simply bad tax policy is disheartening. Taxpayers that are assessed under this interpretation of the Washington Department of Revenue should be aware that depending on the individual factual circumstances, we believe that litigation will eventually result in refunds of these assessments. We have already filed one appeal and expect to file more in the near future.

Taxpayers using multiple related entities should review their business operations carefully to avoid the significant taxes that can still apply when reimbursements are made within an affiliated group for wages and other expenses. From October 1, 2013 forward, businesses that use a centralized payroll system can avoid tax on reimbursements of wages in the limited circumstances covered by the new statute. Any taxpayers using a centralized payroll system in which one company within an affiliated group pays the salaries and benefits for employees of all affiliated group members should review the new law carefully to make certain that it qualifies for a deduction for these payroll reimbursements.

One of the areas that the law did not change is the taxation of reimbursements for shared employees. Taxpayers that share employees amongst a group of affiliated businesses should consider whether there are other ways to restructure operations to avoid paying B&O tax on reimbursements for wages for shared employees. It is also important to note that the new law did not affect any change to the taxation of reimbursements for expenses between affiliated companies. There are very limited options under Washington law to avoid B&O tax on these reimbursements and most of these options require advance planning. Taxpayers are often surprised on audit with an assessment for these items. In some cases, proper planning can reduce the amount of these assessments for future transactions.

If you conduct business in multiple entities and these affiliated entities make reimbursements within the affiliated group for wages or other expenses, you should consider the potential tax cost of these transactions. I have helped many taxpayers reduce their exposure to Washington B&O tax on affiliated transactions and would welcome the opportunity to assist you.

For more information, contact Pivotal Law Group, PLLC today at (206) 340-2008

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