Tax Bill Includes Common Paymaster Relief

After two special sessions, the Washington legislature finally reached a compromise budget and along with that passed ESSB 5882, a potpourri of tax provisions. On June 30 Governor Inslee signed the bill. While many Democrats have criticized this bill as providing corporate welfare, most of the preferences provided within the bill are merely a continuation of existing provisions that in most cases prevented substantial increases in the taxation of Washington businesses.

One of the most critical provisions in the bill restored a deduction for payroll cost reimbursements received by an employer of record within a centralized payroll system for affiliated businesses. For many years, the Washington Department of Revenue had not taxed reimbursements of payroll cost within a centralized payroll system. This was no giveaway by the Department of Revenue; instead it was a common sense solution to prevent taxation of payroll cost reimbursements that are taxed nowhere else in the United States because it is the equivalent of taking money out of your right pocket and putting it into your left pocket.

Despite the historical practice, the Department of Revenue had recently determined that such reimbursements must be taxed. Many informed taxpayers resisted this unfortunate interpretation and ultimately the Department of Revenue partnered with taxpayers to restore this deduction. Unfortunately, the Department of Revenue still continues to tax other intercompany transactions in which no economic gain accrues to the related companies. Perhaps someday common sense and sound tax policy will bring legislation to amend these egregious practices.

Another interesting provision involved the adoption of a sales tax exemption for clay targets purchased by a nonprofit gun club for use in the activity of clay target shooting for a fee. The clay target shooting fees are subject to retail sales tax. The provision of the exemption provides the equivalent of an input exemption similar to ingredients and components of a manufacturer. Traditionally, the Department of Revenue has taxed items consumed by service providers in the provision of the service. However, until recently most services were not subject to retail sales tax. The intent section of the law is careful to note that the legislature does not intend to establish a broad policy of providing sales and use tax exemption for business consumables for providers of retail services.

Another exemption is provided for items used by a restaurant to impart flavor during the cooking process. This would include items such as wood chips, charcoal, charcoal briquettes and grapevines along with cedar grilling planks. These items would not ordinarily easily qualify for an exemption as an ingredient or component of the meal.

An exemption that could actually stir up trouble was provided for sales of standard financial information to qualifying international investment management companies. Some unfortunate and unnecessary language in the intent section may derail taxpayer’s efforts to receive relief from retail sales tax on purchases of digital information due to what many practitioners consider to be an erroneous interpretation of the digital good laws by the Department of Revenue.

The aviation manufacturing industry received some long overdue revisions to tax statutes that had required taxpayers to either engage in unnecessary structural planning or had simply driven manufacturing, refurbishing and aviation repair business outside of the state of Washington. Nevertheless, the intent section required substantial analysis of data supporting additional tax revenues as a premise for keeping this legislation past January 1, 2017. Apparently, it is beyond the imagination of legislators in Washington that a nonresident of the state would refuse to have an aircraft modified in Washington if it meant incurring a sales tax on the value of the aircraft. One sometimes wonders whether the legislature maintains any semblance of common sense or even cares that some of its tax laws border on the ridiculous.

Not to seem as a bully to aerospace industries, the legislature even adopts strict scrutiny of tax exemptions provided for blood banks. Of course, we’re all aware of the substantial amount of businesses attempting tax avoidance with blood banks. (Please note the intended use of sarcasm here.)

As a quid pro quo for allowing the nominal and mostly sensible incentives provided for in ESSB 5882, House Democrats added a whole host of new tax preference performance requirements. The Democratic Party in Washington has for the last several years attacked all exemptions, deductions, and credits as tax preference items. This attack continues despite the fact that Washington businesses pay a disproportionate amount of the entire Washington tax burden.

I should note that after adding 22 sections of new law spanning seven pages adding additional requirements on “tax incentives,” the legislature did devote a single paragraph to requiring the Department of Revenue to suggest revisions to reports and surveys that would make the data more relevant and reduce the administrative burden on taxpayers. This author’s guess is that such revisions are likely to be found in the same place that one finds unicorns.

In addition to the aforementioned provisions, the following changes were also included in ESSB 5882:

  • Preferential B&O tax rate for dairy producers retained and amended;
  • Temporary B&O tax relief for honey beekeepers extended and sales tax relief provided;
  • Deduction for interest received by a cooperative finance organization providing loan financing to rural electric utilities provided;
  • Exemption from retail sales tax charges for the opportunity to dance provided;
  • Silicon manufacturing B&O tax incentive rate retained and extended; Hog fuel sales tax exemption retained and modified;
  • Exemption for propane and natural gas used in producing mint oil added;
  • Use tax exemption provided for personal property acquired at an auction valued at $10,000 or less; and
  • Clean energy incentives extended.

Department Of Revenue Adopts Three New ETAs

Over the last month the Washington Department of Revenue has adopted three new excise tax advisories (ETAs).

ETA 3175 deals with purchases made with funds provided by the federal government. In general, this ETA emphasizes that purchases made directly to the federal government are not subject to retail sales tax, but sales made by the federal government on behalf of a person are subject to tax unless otherwise exempted by law. Thus, even though a seller may elect to receive payment directly from the federal government for an instrumentality, the payment may still be subject to retail sales tax if the payment is made on behalf of another person. The ETA notes several examples including Medicare Part B payments and payments made by the American Red Cross and FEMA.

ETA 3178 clarifies that under Washington’s recently adopted sales apportionment scheme, any receipts attributed to a DISC will not be taxed by Washington because the tangible personal property is always delivered to a foreign location and therefore the benefit of the service is received where the property is delivered.

ETA 3179 explains the availability of estate tax benefits for same-sex spouses. In general, a same-sex spouse of a decedent dying on or after December 6, 2012 is eligible for estate tax spousal benefits. In addition, a same-sex spouse with a valid marriage recognized by another jurisdiction is eligible for Washington state estate tax spousal benefits for periods prior to December 6, 2012.

Radio and Television Broadcasting Rules to be Amended

The Washington Department of Revenue is proposing amendments to WAC 458-20-241 (Rule 241) which deals with radio and television broadcasters. The Joint Legislative Audit and Review Committee (JLARC) previously reviewed Rule 241 and recommended that the rule be amended to comply with the provisions of RCW 82.04.280. The contemplated amendment of Rule 241 would likely eliminate the current practice of the Washington Department of Revenue allowing a flat 62% deduction from advertising gross receipts, in lieu of an actual itemization of advertising gross receipts from national and regional advertising.

Washington’s original attempt to tax radio broadcasters in the 1930s was found by the courts to be an unconstitutional burden upon interstate commerce. Recognizing evolving commerce clause interpretations, Washington enacted a B&O tax on advertising income of radio and television broadcasters in 1967.

Under the new law, an exclusion was provided for national and regional advertising. The exclusion, currently found at RCW 82.04.280(1)(f), could be computed as a standard deduction based on the national average of network, national and regional advertising as reported by the Federal Communications Commission (FCC). Alternatively, the deduction could be computed by an individual broadcasting station excluding the itemized portion of revenues represented by itemized network, national and regional broadcasting plus a portion of local advertising determined to have been earned from out of state broadcasting. The portion of local advertising earned out of state is determined by the ratio of the station’s out-of-state audience compared with the station’s total audience.

The FCC stopped collecting and reporting data on network, national and regional broadcasting in 1980. Subsequently, the Department of Revenue created in Rule 241 an additional method to compute the deduction for national and regional advertising, allowing the broadcast industry to annually provide figures to the Department of Revenue. National figures for such advertising were not ever provided to the Department of Revenue by industry, but a default method allowing for a standard deduction equal to 62% of broadcasting revenue was adopted in practice.

The July 23, 2013 preproposal statement of inquiry indicates that the Washington Department of Revenue is considering amending Rule 241 to comply with the JLARC recommendations. It is not entirely clear what portions of Rule 241 would be revised. It appears likely that the 62% standard deduction will be eliminated as it was specifically addressed by the JLARC recommendation. However, there is also a provision within Rule 241 allowing a deduction for agency fees paid by the broadcasting industry to advertising agencies. Based on recent actions of the Washington Department of Revenue this “agency fees” deduction could also be eliminated.

Bi-Mor Appeal Denied


The Washington Supreme Court denied the Department of Revenue’s petition for review of the Washington Court of Appeals decision in Bi-Mor v. Washington Department of Revenue that I reported on last fall. As you may recall, the court held that the Washington Department of Revenue may not treat the “advertised price” as the “selling price” for purposes of determining the seller’s measure of retail sales tax when the seller has advertised the sales price as including retail sales tax or that the seller is paying the retail sales tax. That decision has effectively overturned the portions of WAC 458-20-107 that provided for sales tax to be computed on the full sales price, if retail sales tax was not separately stated, provided that the seller has advertised that sales tax is included or that the seller is paying sales tax on behalf of the buyer.

Governor Signs Bracken Bill

Despite heavy criticism from the Washington State Bar Association, the Washington legislature passed a last-minute bill retroactively overturning the Estate of Bracken case decided last year by the Washington Supreme Court. Governor Inslee’s signature on the bill will undoubtedly lead to anew round of litigation, as many commentators, including yours truly, believe that the legislature has no legal basis for its actions and that this portion of the law will ultimately be overturned by the Washington Supreme Court.

There was some good news and some other bad news in the bill. On the good news side, beginning in 2014 there will be a new deduction from the taxable estate for family-owned businesses. The deduction is limited to $2.5 million and a deduction is not allowed if the decedent’s interest in the business exceeds $6 million in value. In order to qualify for the deduction, the decedent or a family member must have materially participated in the business for five of the eight years preceding the decedent’s date of death. Also, the $2,000,000 exemption amount will be indexed for inflation beginning in 2014.

On the bad news side, the top four marginal tax rates were increased with the maximum rate now sitting at 20%.

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