Tuesday, October 12, 2010

Washington Taxes

BUSINESS AND OCCUPATIONS—Nexus and apportionment rules.

The Washington State Department of Revenue has readopted new rules WAC 458-20-19401–19404 and amended rules WAC 458-20-194 (Doing business inside and outside the state) and WAC 458-20-14601 (Financial institutions—Income apportionment) on an emergency basis, effective October 1, 2010. Taxpayers may use the rules to determine tax liability until January 29, 2011, unless the Department adopts a permanent rule prior to that date. The rules were previously adopted on an emergency basis, effective June 2, 2010 (allowing taxpayer to determine their tax liability until September 30, 2010), and provide guidance on the application of new nexus thresholds and apportionment rules for the business and occupation tax enacted by 2010 legislation.

SALES AND USE TAX—Online sales of goods.

The Department of Revenue has updated its guidance on the taxation of online sales of goods. Registered businesses are required to collect sales tax on sales of tangible personal property, prewritten software, and digital goods delivered to customers in Washington; the correct retail sales tax rate is based on where in Washington the customer receives the product. Sales to customers for delivery outside of Washington are generally not subject to sales or use tax. Out-of-state businesses that sell tangible personal property to Washington consumers over the Internet are required to register with the Department and collect sales tax if they have nexus with Washington; out-of-state businesses that make wholesale sales to Washington customers are required to register if they engage in nexus-creating activity and have more than $12,000 of sales into Washington. Individuals who make occasional retail sales through online auctions or marketplaces are not required to register with the Department or collect and remit sales tax, but individuals who routinely make retail sales through online auctions or marketplaces are considered to be engaging in business and consequently are required to register with the Department and collect sales tax on sales to Washington customers. (Online Sales of Goods, Washington State Department of Revenue, 09/30/2010.)

SALES AND USE TAX—Machinery and equipment exemption.

A contract for the demolition and removal of the foundation of a manufacturing facility after obsolete equipment has been removed and before any new equipment is installed does not qualify for an exemption from sales tax because the contract is not a contract for services that are rendered in respect to installing qualifying machinery and equipment under Wash. Rev. Code §82.08.02565 and Wash. Rev. Code §82.12.02565. The statutes provide that the purchase and use of machinery and equipment used directly in a qualifying manufacturing operation, including charges for labor and services rendered in respect to installing, repairing cleaning, altering or improving the machinery and equipment, is exempt from sales and use tax. The taxpayer argued that because the demolition and excavation of the foundation was one stage in a broader project to remove the old machines and install the new ones, the demolition contract should also qualify for the exemption. The Washington Supreme Court held in Chicago Bridge and Iron Co. v. Dept. of Rev., 98 Wash 2d 814, 659 P2d 463 (1983), that if the services subject to separate contracts are functionally integrated, then the entire contract is subject to a single rate for purposes of Washington business and occupation tax. However, the contracts in Chicago Bridge and Iron were between the taxpayer and one specific vendor where in this case, the form and concrete contract and the demolition contract were separately bid, separately executed, and the work was performed by two different and unrelated vendors. The taxpayer's argument that the contract still qualified as “installing” machinery and equipment and therefore qualified for exemption was also rejected because the contract only involved the removal of foundations and the pouring of new foundations for the milling machines, supplying of the machines and installing of the machines was done by another contractor. (Washington Department of Revenue, Appeals Division, Determination No. 10-0017, 09/30/2010, 29 WTD 65 (2010).)

RECORDATION TAXES—Transfer of controlling interest.

The Department of Revenue correctly assessed real estate excise tax (REET) on the acquisition of a controlling interest in a limited liability company based on the full value of the real property transferred because the transfer was a sale of the controlling interest and not a liquidation under IRC §731. The taxpayer claimed that the transfer was exempt from tax because the transfer is a liquidation of the transferor's interest in the entity, and such transfers are excluded from the definition of “sale” under Wash. Rev. Code §82.45.010(3). Further Wash. Admin. Code §458-61A-212 provides an exemption from REET for transfers that do not involve the recognition of gain or loss for entity formation, liquidation or dissolution, and reorganizations under IRC §731. However, the plain language of the contract indicates that the transaction in question was not a liquidation of retiring partner's interest, but a sale, and the exemption provided under Wash. Rev. Code §82.45.010(3) and Wash. Admin. Code §458-61A-212 only applies to non-sale transactions. (Washington Department of Revenue, Appeals Division, Determination No. 09-0240, 09/30/2010, 29 WTD 58 (2010).)

GENERAL ADMINISTRATIVE PROVISIONS—Letter rulings for “undisclosed businesses” no longer available.

Effective October 1, 2010, the Department of Revenue (DOR) will no longer issue letter rulings for undisclosed businesses. The new policy is in response to budget reductions ordered by the governor. Requests received by the DOR before October 1 will be processed within the usual 90-day response time. Any requests made after that date will be given the option to disclose the taxpayer and get a ruling within 10 days, in most cases. No other response will be given. Any accounting or law firm that has requested an undisclosed ruling within the last few years will receive a letter from the DOR notifying them of this change. (DOR Excise Tax Information Digest, #2010-22, 09/30/2010.)


The U.S. Court of Appeals for the Ninth Circuit upheld a district court decision granting summary judgment against the Nisqually Indian Tribe in its challenge to an agreement between the Frank's Landing Indian Community, the Squaxin Island Indian Tribe, and the state of Washington governing the taxation of cigarettes at Frank's Landing. Although the Nisqually Tribe contended that the agreement violated state and federal law, those laws did not provide a private right of action. Furthermore, the agreement did not constitute a breach of the tobacco tax contract entered into between the Nisqually Tribe and the state of Washington. (Nisqually Indian Tribe v. Gregoire, U.S. Ct. App., 9th Cir., Dkt. No. 09-35725, 10/04/2010.)

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