Washington State passes sweeping tax package
From bottled water to B&O, taxes go up or make their debut
The Washington State legislature has passed a sweeping tax package with numerous increases affecting businesses and consumers alike. Governor Christine Gregoire approved the legislation, much of which goes into effect almost immediately.
We have as brief a summary of the new tax provisions as is possible to provide; there really are quite a few! They range from fairly simple to rather complex, so be sure to talk with your CPA about your particular situation. LeMaster Daniels has a good deal of expertise in state and local taxation and can help with strategies for managing and minimizing your obligations. Take advantage of it if you can.
Grab yourself a cup of coffee, pull up a chair, and get ready to pay up. Here we go:
GENERAL BUSINESS
B&O tax increase on service businesses. A temporary .3% increase on all services (up from 1.5% to 1.8%), starting May 1, 2010, and expiring June 30, 2013. (Public and private hospitals and some research and development organizations are exempt from this increase.) In conjunction with this increase, the small business B&O credit and reporting threshold for service businesses is increased from $28,000 to $46,667, reducing B&O taxes for the smallest businesses.
B&O tax on corporate director compensation. A 1.8% tax will be collected on the compensation received by corporate directors under the “service and other” classification. The exemption for corporate directors’ compensation ends on June 30, 2010. In addition, the DOR specifically notes that reimbursements of expenses incurred by the director is also subject to B&O tax as gross income received by the director.
Personal liability for unpaid sales tax. Responsibility for sales tax is expanded to officers of disbanded or insolvent corporations or LLCs that fail to pay tax debts, and the Department of Revenue has been given more authority to pursue these individuals, starting May 1, 2010.
New apportionment and economic nexus rules replace physical presence for service and royalty income. Effective June 1, 2010, an out-of-state business will be subject to Washington B&O tax on service and royalty income if:
- more than $50,000 worth of property is located in Washington; or
- more than $50,000 of payroll is in Washington; or
- more than $250,000 in receipts come from Washington; or
- at least 25% of the business’s total property, total payroll, or total receipts is located in Washington.
Income is apportioned to Washington based on a receipts (sales) factor, replacing previous cost apportionment methodologies.
Limit on bad debt deduction. Bad debt deduction for reported and uncollectible sales is limited only to the original seller, effective May 1, 2010.
Repeal of B&O exemption for amounts received by property management companies. The exemption for amounts received from property owners to pay for gross wages and benefits paid to onsite personnel is limited to nonprofit property management companies and those hired by housing authorities, starting June 1, 2010.
Tax on business structure transactions. New 35% penalty on certain business structures or arrangements deemed by the state to be tax avoidance transactions, including:
- certain joint ventures between contractors and developers
- disguising income received by unaffiliated parties by moving income to an out-of-state entity
- avoiding sales or use tax on acquired property by vesting legal title or ownership of the property through a controlled and separate related entity
A legislative committee has been created expressly to monitor this newly implemented provision.
AGRICULTURE & MANUFACTURING
Limit on preferential B&O rate for manufacture of certain agriculture products. The preferential 0.138% tax rate for fruit, vegetable, and perishable meat product processing has been narrowed to those whose end product is:
- composed of at least 50% fruits and/or vegetables,
- a perishable meat product, or
- a meat by-product, or
- a non-perishable meat product that is composed primarily of animal carcass by weight or volume
Suspension of sales tax emption for livestock nutrient equipment and facilities. This exemption for dairies and feeding operations is suspended for three years, from July 1, 2010, through June 20, 2013.
Elimination of B&O exemption for out-of-state manufacturers using representatives in Washington. Effective May 1, 2010.
SIN TAXES
Cigarette and tobacco tax increase. A tax of $1 per pack of cigarettes has been added.
Tax increase on carbonated beverages. Soda and such are taxed at 2 cents per 12 ounces. The bottler is exempt from the tax on the first $10 million sold. Tax is in effect from July 1, 2010, through June 30, 2013.
Sales tax on candy and gum. Candy and gum are subject to sales tax effective June 1, 2010.
Temporary sales tax on bottled water. From June 1, 2010, to June 20, 2013, sales tax applies to bottled water.
Beer excise tax. The excise tax on beer is increased from 26 cents to 76 cents per gallon. Microbreweries are exempt on the first 60,000 gallons sold.
Business taxation is complicated, so don’t manage the burden alone. Remember, these provisions go into effect no later than July 1, 2010, so check in with us and get up to speed sooner than later.