Does Seattle have an income tax?

The Seattle city council has enacted an individual income tax on Seattle “residents.” Residents is defined as someone with a “permanent place of abode” who spends 183 days or more there, or who “domicile” there. Whether anyone will have to pay the income tax is uncertain.

The 2.25% tax would apply on Gross income over $250,000 for single filers and $500,000 for married filers starting in 2018, with collection beginning in 2019.

Washington has no state income tax. It seeks to become the first municipality to impose an income tax in a state without one. The Tax Foundation says the Seattle tax faces an “uphill legal battle” because of doubts over its constitutionality and the authority of Seattle to pass such a tax.

The Seattle mayor is reported to be “eager” to be sued over the issue.

Given the likely legal challenges to a Seattle income tax, it may be premature to start planning for it. Still, it remains an issue to be watched closely by Seattle residents.

Washington sales tax bill targets out-of-state sellers and third-party marketplaces.

Washington Governor Jay Inslee has signed legislation to help the state collect sales and use taxes from online transactions. The bill, H.B. 2163, combines elements of recent legislation in Colorado and Minnesota.

Washington follows Colorado’s lead by requiring vendors selling within the state to either collect sales tax from Washington buyers or report them to the state for assessment of use taxes. It follows Minnesota’s lead by imposing the same requirement on “online facilitators,” such as Amazon, eBay and Etsy. Vendors selling only through such third-party marketplaces will not have to comply separately.

A similar rule is applied to “referrers.” This rule applies to any taxpayer who:

…contracts or otherwise agrees with a seller to list or advertise for sale one or more items in any medium, including a web site or catalog; receives a commission, fee, or other consideration from the seller for the listing or advertisement; transfers, via telephone, internet link, or other means, a purchaser to a seller or an affiliated person to complete the sale; and does not collect receipts from the purchasers for the transaction

Vendors, third-party facilitators and referrers who opt to not collect sales taxes have to refer their customers to Washington revenue officials. They also must post prominent notices on their websites of the requirement for Washington customers to remit use taxes on their purchases.

Online vendors and marketplaces are subject to the rules if their annual sales in Washington exceeded $10,000 in the previous calendar year. The cutoff for referrers is gross income from Washington referral sources exceeding $267,000. The rules take effect January 1, 2018.

Reports say litigation is likely, but so far efforts to overturn notification requirements in court have failed. Taxpayers who might be affected should be considering how to comply with the new rules. Contact a member of our State and Local Tax team to learn more.

 

 

Washington Tradeshow Nexus

The State of Washington has carved out a nexus safe-harbor for out-of-state representatives attending qualifying trade shows/conventions.

Effective July 1, 2016, for purposes of Washington’s Sales and Use Tax, and also the Business and Occupation (B&O) Tax, the Washington Department of Revenue may not make a determination of nexus based solely on the attendance or participation of one or more representatives at a single trade convention per year in Washington.

So, what does this mean for businesses? Without more, businesses that attend/exhibit (but not sell) at only one trade convention, not marketed to the general public, per year, will not be deemed to have a registration and a tax reporting requirement for purposes of Washington Sales and Use, and B&O tax.

Click here to read Washington’s Special Notice.

Or, click here to view Eide Bailly’s “Understanding Nexus” video.

Washington Plays the Name Game: Domain Name Registration Services Are Subject to Sales Tax

The State of Washington Department of Revenue issued public guidance explaining that the initial sale of a domain name by a registrar is subject to retail sales or use tax. A domain name is a unique name that allows users to access a website without using the website’s Internet Protocol (IP) address. Individual users cannot access the global domain name clearinghouse, but instead must use a third-party domain name registrar to purchase a domain name. Under Section 82.04.050(8)(A) of the Revised Code of Washington (Code), taxable retail sales include sales of digital automated services to consumers. A digital automated service is defined under Section 82.04.192(3) of the Code as “any service transferred electronically that uses one or more software applications.” In a prior determination, Det. No. 11-0081, 32 WTD 46 (2013), the Department determined that domain name registration services are digital automated services because the registrar transfers the domain name to the purchaser electronically. In this guidance, the Department makes clear that the initial sale of a domain name by a registrar is a digital automated service subject to retail sales and use tax. Washington Department of Revenue, Tax Topics: Domain Name Registration Services (May 7, 2015).

Increased Payroll Scrutiny

The frequency of payroll audits has surged over the last five years and businesses are facing increased payroll scrutiny.

Most payroll audits have traditionally focused on whether or not a business is misclassifying an employee as an independent contractor, thus avoiding Social Security, Medicare and other payroll taxes. According to an article published last March by the Wall Street Journal entitled Payroll Audits Put Employers on Edge, “local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors.”

Since the 2008 economic meltdown states have been springing into action to audit payroll taxes as a way to increase revenue. States are assessing hefty fines for misclassification. For example, Colorado passed House Bill 1301, which allows the Colorado Department of Labor and Employment to fine a business up to $5,000 for the first misclassification offense and up to $25,000 for subsequent offenses (Payroll audits increase as government seeks added revenue, Heather Draper, Denver Business Journal).

The increase in payroll audits has also been intensified by the Federal government. The U.S. Department of Labor has issued partnership agreements with California, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington to collaboratively investigate more than 6,000 employers for misclassifying employees. The U.S. Treasury estimates that if all employers were forced to properly classify employees it would result in $8.71 billion in added federal tax revenue over the next decade.

If an employer is misclassifying employees then they can take advantage of a voluntary disclosure program. The IRS is offering a Voluntary Clarification Settlement Program (VCSP) that allows employers to reclassify employees while minimizing look back, and waiving penalties and interest. Similar agreements may be negotiated at the state level.