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Affected by Changes to Washington State's Tax Rules?
Rodney K. Fujita, CPA
Rodney Fujita, CPA; Principal and Director of Tax Services
April 19, 2010
Rodney Fujita, CPA
Principal and Director of Tax Services
"Washington state has experienced a year unprecedented since the Great Depression," according to Governor Gregoire. "In the past year, we closed a $9 billion shortfall. But just six months after signing a balanced budget, we face a shortfall of $2.6 billion as revenues continue to lag."
To address this new budget shortfall, the Washington legislature passed legislation that cuts services and increases taxes. You've probably heard of the sin tax implications--like the increase in taxes on beer. But the tax rules have also changed for service businesses, for certain out-of-state businesses with service or royalty income attributable to Washington State, and for Washington service and royalty businesses with out-of-state customers or clients, among others.
The new legislation makes changes to the state's B&O tax and sales and use tax, among others. It was passed on the last day of the special session and is one of several budget-related bills delivered to Governor Gregoire for signature. The majority of its provisions take effect on May 1 or June 1, 2010. However, a number of them are temporary and expire in 2013.
According to the legislature, the tax law changes were implemented to "preserve funding for public schools, colleges, and universities, as well as other public systems essential for the safety, health, and security of all Washingtonians."
Major changes to Washington State's tax rules as a result of the new legislation include the following:
B&O Taxes for Service Businesses Increased
Washington's B&O tax rate for services and other activities temporarily increases from 1.5 percent to 1.8 percent beginning May 1, 2010. The increase extends through June 30, 2013.
There are exemptions for public and private hospitals and for certain scientific research and development activities.
The related small business credit doubles for service businesses, from $35 per month to $70 per month. This increase is permanent.
Nexus Rules for Imposing Washington State Taxes Changed
Nexus rules establish the circumstances under which an individual or business is subject to a state's tax rules. Washington's nexus rules have traditionally required a physical presence in the state.
Beginning June 1, 2010, under new economic nexus rules for B&O taxes on royalties and services, more out-of-state businesses will pay B&O taxes to the state of Washington. The new B&O tax rules apply to businesses with at least one of the following:
 more than $50,000 of property or payroll in Washington
more than $250,000 of receipts in Washington
at least 25 percent of their total property, payroll or receipts in Washington
These new rules also provide for a one-year trailing nexus. If a business satisfies any of the above criteria in one year, it is also deemed to have substantial nexus with Washington State for the following year.
The rules have also changed for most Washington-based service businesses. A new single-factor apportionment formula means they may pay no Washington B&O taxes on their out-of-state income as long as they are taxable in those other states. However, a different apportionment formula applies to financial institutions.
B&O Tax Applied to Board of Directors Income
Employee wages are exempt from Washington's B&O tax. In a move to end the preferential B&O tax treatment received by corporate directors, they are no longer eligible for the employee exemption beginning July 1, 2010. Instead, fees paid to corporate directors for performing services in Washington are taxed at the B&O rate for services.
Corporate Officers Liable for Sales Tax Debts
With regard to an insolvent or terminated LLC, the Washington State Department of Revenue can attempt to recover the company's collected-but-unremitted sales taxes from the CEO, CFO or other persons responsible for paying the tax. This personal liability attaches to the person who held the position of CEO or CFO at the time the tax liability accrued.
This change is effective May 1, 2010, and lack of knowledge regarding the unpaid liability is not an adequate defense.
Bad Debt Deduction Limited
The deduction for bad debts on taxes paid to the state is limited to the seller who paid the tax but did not fully collect from the customer. As a result, the right to a deduction or refund generally cannot be transferred or assigned. This change is effective May 1, 2010.
Abusive Tax Avoidance Transactions Disregarded
Subject to a joint legislative review committee, the Department of Revenue is granted authority to disregard certain transactions if it finds that they lack economic substance and their purpose is to avoid Washington State's excise taxes. This new authority applies retroactively to January 1, 2006.
If the Department determines that a transaction should be disregarded, it is required to apply a 35 percent penalty.
Beer Tax Increased
From June 1, 2010 through June, 30 2013, the tax imposed on beer increases by 50 cents per gallon, or 28 cents per six-pack. The first 60,000 barrels are exempt for certain small breweries--thus effectively excluding microbreweries.
Tax on Carbonated Beverages Increased
From June 1, 2010 through June, 30 2013, the tax imposed on wholesale and retail sales of carbonated beverages increases by 2 cents per 12-ounce bottle. The first $10 million in sales is exempt from the increase.
Sales Tax Exemption on Bottled Water Repealed
Bottled water, including water delivered in a reusable container, is subject to sales tax effective June 1, 2010. There are exceptions if it is provided for medical reasons or delivered to those without a source of potable water.
Sales Tax Exemption on Candy and Gum Repealed
Candy and gum are subject to sales tax effective June 1, 2010. There is a related $100-per-employee B&O jobs credit for candy manufacturers.
First Mortgage Interest Deduction Clarified
The law establishes the amounts, such as points and certain loan origination fees, that may be deducted as part of the interest deduction available to lenders for loans secured by first mortgages on residential property. The rules are effective June 1, 2010.
New Data Center Exemption Created
As part of a jobs-creation effort, the law creates a new sales and use tax exemption for certain server equipment installed in an eligible data center. The credit is available for centers that started construction between April 1, 2010 and July 1, 2011, and is subject to advance application and annual reporting requirements. It expires April 1, 2018.
B&O Exemption for Property Management Salaries Limited
The law limits the tax exemption for payments made by a property owner to the property management company for the wages and benefits of on-site personnel. Beginning June 1, 2010, the exemption applies only to not-for-profit management companies and those property management companies that contract with a housing authority.
For More Information
The Washington State Department of Revenue publishes a comprehensive online list of tax-related legislation for 2010.
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