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For business and occupation (“B&O”) tax purposes, taxpayers earning apportionable revenue calculate their taxable Washington revenue by applying a “receipts factor” apportionment methodology. Taxpayers computing B&O tax in this manner are required to complete and file an Annual Reconciliation of Apportionable Income form with the Department of Revenue.

When is the Annual Reconciliation of Apportionable Income Form Due?

The form must be submitted to the Department of Revenue by October 31st of each year. Failure to timely file the reconciliation form may result in penalties.

Who Must File?

In-state taxpayers that earn income from apportionable business activities performed for customers located inside and outside of Washington may apportion such revenue to Washington for B&O tax purposes. Out-of-state taxpayers earning apportionable income attributable to Washington are required to apportion their revenue and report to Washington when the taxpayer exceeds either the receipts, payroll, or property thresholds described below. Taxpayers that are required to apportion income, or that take an apportionment deduction for B&O tax purposes, must file an annual reconciliation form.

The following is a non-exhaustive list of apportionable activities:

  • Service & other activities
  • Royalties
  • Travel agents & tour operators
  • Public & nonprofit hospitals
  • Real estate brokers
  • International investment management services
  • Aerospace product development

What is This Filing?

The Department of Revenue allows taxpayers to use the prior year’s apportionment factor for reporting current year liabilities. This simplifies the taxpayer’s reporting method but then requires the business to do a true-up at the end of the year to determine the current year’s factor based on actual data.

The purpose of the annual reconciliation is to correct apportionable receipts reported to the Department using the previous year’s factor or incomplete year-to-date data. If additional B&O tax is due because of the reconciliation, late payment penalties are automatically waived provided the form is filed by the October 31 deadline. The form is required to be filed even if the true-up results in no additional tax liability.

How is the Single-Factor Apportionment Formula Applied?

The numerator of the factor is the apportionable revenue attributable to Washington State. The denominator of the apportionment factor is the apportionable revenue attributable to those states (including Washington) in which the business files business tax returns or is deemed to have created nexus under Washington’s economic nexus standards. The business’ gross apportionable income from apportionable activities is multiplied by the apportionment factor to determine the amount of receipts that are subject to B&O tax.

A business is considered to have substantial nexus in Washington if the business:

  • is organized or commercially domiciled in this state;
  • exceeded $267,000 in receipts sourced to this state;
  • exceeded $53,000 in payroll in this state;
  • exceeded $53,000 in property in this state; or
  • had at least 25% of its total receipts, payroll, or property in this state.

Where do I File?

The form is available on the Department of Revenue’s website. The filing can also be completed using the Department’s MyDOR online system.

What if I Need Help?

Please contact Bob Heller, Nicole Lyons, or one of the other members of the Clark Nuber state and local tax practice with questions or if you desire any assistance in fulfilling this requirement.

More information regarding apportionment and the annual reconciliation form can be found here.

© Clark Nuber PS and Developing News, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Articles and Publications

How Do the New GAAP Revenue Recognition Standards Impact Tax?

These revenue recognition standards require companies to evaluate their revenue contracts and obligations to determine the amount of revenue they expect to be entitled to under a customer contract. They will then need to determine if they are required to recognize that revenue for book purposes, either at a point in time or over time depending on the nature of the “performance obligations” within that contract. In some cases, this will require the company to recognize income sooner than the previous standard. The TCJA has addressed how these new GAAP revenue recognition standards will be treated for tax purposes. The TCJA requires taxpayers to recognize income no later than the tax year in which the income is taken into account as income on an “Applicable Financial Statement” (AFS) or on another financial statement as specified by IRS. It also requires customer contracts with multiple performance obligations to allocate the transaction price in the same manner as used for the financial statements. This has the potential to accelerate revenue for income tax reporting purposes as well, therefore potentially creating a higher tax bill in the year of adoption. These new tax rules do not apply to any item of income, which allows for a special method of accounting in other areas of the Internal Revenue Code. An AFS is defined as: A financial statement certified as being prepared in accordance with generally accepted accounting principles (GAAP) and
  • A Form 10-K or annual statement to shareholders required to be filed with the SEC or
  • An audited financial statement which is used for credit purposes, reporting to shareholders, partners or other proprietors or to beneficiaries for any other substantial nontax purpose, or filed by the taxpayer with any other federal agency for purposes other than federal tax purposes.
OR A financial statement made on the basis of international financial reporting standards, and is filed with an agency of a foreign government (similar to the SEC), and has reporting standards not less stringent than required by that agency of a foreign government. The TCJA rules do not apply to a taxpayer that doesn’t have a financial statement described above (i.e., reviewed or compiled financial statements) or any item of gross income in connection with a mortgage servicing contract. So, if an AFS is not required by the taxpayer, they will not be required to follow the new GAAP rules for tax reporting purposes. We are waiting on guidance from the IRS regarding the procedures to make the required changes and confirm the change will qualify for automatic IRS consent. There is an option to elect to follow the new revenue recognition standards even if the taxpayer does not have an AFS. This election must be made for the year the new GAAP standard is adopted and will allow the taxpayer to use either the cut-off basis method or, if the change is negative (reduces income), the adjustment is taken against income in that year. If the change is positive (increases income), the adjustment is taken into income over a four year period. As companies start to consider the implications of the new GAAP revenue recognition standards, they should also consider the tax effect of these changes, which may result in an increase to income. Please contact your Clark Nuber professional or Rene Schaefer to help you plan for these tax changes ahead. © Clark Nuber PS, 2018. All Rights Reserved

U.S. Supreme Court Overturns Quill, Opens Door for States to Require Sales Tax Collection by Virtually All Remote Sellers

Although the Court’s choice to overturn 51 years of precedent was not altogether unexpected, it will nonetheless require businesses that sell on a multistate basis to make some impactful and immediate decisions on how to operate in the post-Quill world. A few thoughts on the Court’s June 21, 2018 decision in South Dakota v. Wayfair, and its impact (short-term and longer-term) on both remote sellers and consumers:

The Court threw out the old rule, but didn’t provide clear guidance on exactly when a seller must collect tax on remote sales.

The Court’s majority opinion held that its earlier decisions in National Bellas Hess v. Illinois (1967) and Quill v. North Dakota (1992) were wrongly decided, insofar as they provided that physical presence was a prerequisite for substantial nexus under the dormant Commerce Clause of the U.S. Constitution.  The Court found that these earlier decisions had resulted in an “online sales tax loophole” or “judicially created tax shelter” for remote sellers, which “creates rather than resolves market distortions.” Holding that “the physical presence rule is artificial in its entirety,” the Court had no trouble overturning it.  However, the decision provides no real guidance on what minimum level of activity or sales into a state would be sufficient to create substantial nexus and an obligation to collect tax post-Quill. The Court remanded the case to the South Dakota Supreme Court to determine whether the state’s law meets other constitutional requirements.  In remanding the case, the Court noted favorably that other constitutional concerns may be satisfied by the law’s sales and transaction thresholds, the bar on retroactive enforcement, and the adoption by South Dakota of certain uniformity and simplification provisions of the Streamlined Sales and Use Tax Agreement.

Congress could provide a new set of rules - but will it? 

Both the Court’s majority and dissenting opinions stress that Congress could create a new set of rules for sales tax collection on remote sales, if it chooses to act.  Acknowledging that its decision may create significant new compliance burdens on remote sellers, the majority points out that “Congress may legislate to address these problems if it deems it necessary and fit to do so.” The dissent is more pointed – although agreeing that Bellas Hess was wrongly decided, it argues that “Any alteration to [the physical presence rule] with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”  It remains to be seen whether and when Congress will act.

How will the states react?

A number of states have enacted laws in the past several years similar to the South Dakota law at issue in Wayfair, which requires sellers to collect tax if they make more than $100,000 of sales or have more than 200 sales transactions per year with customers there.  Although the South Dakota law bars retroactive assessments of uncollected sales tax, some of the similar laws in other states do not.  However, states will face their own administrative burdens in bringing a raft of remote sellers into their taxing systems rather quickly. Given the Court’s approving statements regarding the South Dakota law’s bar on retroactive enforcement, one would hope that most states will focus on getting remote sellers to collect and remit tax going forward rather than assessing uncollected tax for past periods.  Many of the states that have not yet enacted South Dakota-style laws will likely rush to do so; but, here again one hopes that the states will set a specific date on which remote sellers must begin to collect tax, rather than imposing retroactive liability for uncollected taxes.  It is important to note that there is nothing to prevent states from assessing tax for prior periods on sellers who had a physical presence inside their borders prior to the Wayfair decision.

How should remote sellers react?

This will obviously depend on many factors, including whether the seller has had any physical presence in states where it has not collected tax, what its sales volumes are in the various states, whether its products and services are even subject to sales tax in the states where its customers are located, and more.  Some remote sellers may want to consider registering and collecting tax in all states in which they make sales.  For others, a more cautious approach may be justified. Careful consideration should be given to whether liability exists for uncollected tax resulting from past in-state activities.  It is probably not advisable to register and begin collecting tax prospectively as prior periods will remain open for assessment.  Voluntary disclosure programs where the look-back period for uncollected tax is limited and penalties are waived are available in every state to address past exposure. The best strategy for coming into compliance may vary significantly from company to company based on the specific facts involved.  For those sellers that wish to register and begin collecting tax, consideration should be given to the cost of compliance.  Sales tax compliance software is available and may provide a cost-effective way to manage tax collection and filing returns.

How will consumers be impacted?

The immediate impact may be minimal.  Some of the largest remote sellers already collect tax in all or virtually all the states where they have customers.  And, as discussed above, it will likely take some time for the states to bring other remote sellers into compliance, and for those sellers to implement broad-based sales tax collection. In the long run, however, it is likely that consumers will be paying sales tax on most remote purchases that currently go untaxed. Although there may still be small seller exceptions and other provisions that allow some sales to escape taxation, the likelihood is that absent action by Congress to limit their authority, states will act aggressively to require tax collection on remote sales and sellers will eventually be brought into compliance.  The days of widespread tax-free buying from internet and catalog vendors are almost certainly a thing of the past. For more information on how the Wayfair decision may apply to your specific facts, contact any member of the Clark Nuber state and local tax team, or your own tax advisors. © Clark Nuber PS, 2018. All Rights Reserved

IRS Encourages Taxpayers to Check Withholding to Avoid 2018 Underpayment Penalties

The IRS now estimates as many as 10 million taxpayers may be facing penalties for underpayment of estimated taxes when they file their personal 2018 tax returns in early 2019. The good news is, there is still time to correct your withholding and avoid penalties. Taxpayers who pay their estimated taxes through payroll withholding are deemed to pay their taxes evenly throughout the tax year regardless of when the taxes are withheld during the year. Even taxpayers making estimated tax payments still have two additional tax payment dates on September 17, 2017 and January 15, 2019. So, there is also time for those taxpayers to catch up on estimated tax payments. Individuals with other sources of income, such as investment income, self-employment, or prizes, may find they owe additional taxes and need to make an estimated tax payment. The IRS has developed several tools to allow individual taxpayers to evaluate if they have the proper amount of taxes deposited and withheld. For taxpayers utilizing payroll withholding, the IRS has a paycheck checkup. Armed with their most recent paycheck information and prior year tax return, taxpayers can effectively use the Withholding Calculator found on the IRS website to check the number of exemptions they should claim on their Form W-4. With the corrected withholding tables, the IRS is asking taxpayers to take a second look at their withholding before year end. This will allow taxpayers to adjust their W-4 to make up for any under withholding in the first three quarters of the year and withhold the correct amount for the fourth quarter. If this does not happen, taxpayers will be responsible for any underpayment penalties when they file their 2018 Form 1040. For more information about estimated taxes, please contact your Clark Nuber tax advisor or see these additional IRS resources: © Clark Nuber PS, 2018. All Rights Reserved

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