WASHINGTON STATE DEVELOPMENTS

I. INCOME/FRANCHISE TAXES (BUSINESS AND OCCUPATION TAX) A. Legislative Developments

B&O tax apportionment – determining benefit received. The Legislature amended the statutory method of attributing gross income to Washington for B&O tax apportionment purposes to conform to the Department of Revenue’s administrative regulations, WAC 458-20-19402 and 458-20-19403. Wash. Laws of 2014, ch. 97, § 305 (amending RCW

82.04.462(3)(b)). Under the regulations and now the statute, gross income from apportionable activities are assigned to the Washington numerator of the apportionment receipts factor based on the proportion of the benefit received or the intangible property used in Washington. Prior to the amendment, the statute generally assigned gross income to the state in which the benefit of the service was “primarily received” or the intangible property was “primarily used.” Although the amendment purports to be “clarifying and corrective,” it has significant impact on taxpayers that were relying on the statute (rather than the department’s regulations) to apportion gross income.

High technology R&D credit to expire. Washington’s B&O tax credit for qualified research and development expenditures is set to sunset on January 1, 2015.

B. Judicial Developments

Nexus – delivery in company trucks. The Washington Court of Appeals held that an out-of-state seller of fuel had B&O tax nexus based on regular deliveries of fuel to Washington customers in taxpayer-owned and operated vehicles. Space Age Fuels, Inc. v. Wash. Dep't of Revenue, 178 Wash. App. 756, 315 P.3d 604 (2013), rev. denied, 180 Wash.2d 1010, 325 P.3d 914 (2014).

B&O tax deduction for residential mortgage interest - REMIC and CMO interest. The Washington Supreme Court held that interest income from real estate mortgage investment conduits (REMICs) and collateralized mortgage obligations (CMOs) was not deductible from gross income as “amounts derived from interest received on investments or loans primarily secured by first mortgages or deeds of trust on nontransient residential properties.” The court concluded that the deduction did not apply because REMICs and CMOs were not “primarily secured” by first mortgages or deeds of trust. Cashmere Valley Bank v. Wash. Dep't of Revenue, 2014 WL 4792055 (Wash. 2014).

C. Administrative Developments

Nexus – trade show attendance. The Department of Revenue held that the taxpayer’s

attendance at trade shows was sufficient physical presence to create B&O and sales tax nexus.

The Department noted that, unlike many states, Washington does not have a nexus safeharbor for trade show attendance. Wash. Dep’t of Revenue Det. No. 14-0062, 33 WTD 439 (2014).

II. SALES AND USE TAXES

A. Legislative Developments

Liquefaction or compression of natural gas – M&E exemption. The Legislature amended the definition of “manufacture” to include the production of liquefied or compressed natural gas (LNG or CNG) for use as a transportation fuel. As a result of this change, LNG and CNG facilities will qualify for the manufacturing machinery and equipment exemption from sales and use tax. In order to manage the fiscal impact of the expansion, the M&E exemption for LNG and CNG facilities will be administered through a “remittance” or refund process. The legislation also impacts the application of B&O, public utility, fuel, brokered natural gas use, and city taxes to the production and sale of LNG and CNG. The legislation is effective July 1, 2015. Wash.

Laws of 2014, ch. 216.

B. Judicial Developments

Personal property v. real property fixture. The court of appeals held that shipping container cranes were tangible personal property and not real property fixtures and, therefore, lease payments connected with the cranes were subject to sales tax. Applying the common law fixtures test, the court concluded that the taxpayer failed to show that the owner of the cranes intended to make a permanent accession to real property. The court noted that the cranes could be removed, had a resale market, were treated by the owner as a personal property for tax purposes, and were not listed as improvements in the owner’s lease with the tenant. APL Ltd. v.

Wash. Dep’t of Revenue, 180 Wash. App. 1016 (2014) (unpublished), rev. denied, 180 Wash.2d 1028, 331 P.3d 1172 (2014).

Contribution of construction services to joint venture. The Washington Court of Appeals held that an LLC was subject to sales tax on construction services contributed by its member.

The court reasoned that the member—and not the LLC—performed the construction services on land owned by the LLC. Further, the contribution of those services to the LLC was a sale because the services were provided in exchange for consideration in the form of a credit to the member’s capital account. Bravern Residential, II, LLC v. Wash. Dep’t of Revenue, 2014 WL 4792060 (Wash. App. 2014).

C. Administrative Developments

Reward programs. The Department of Revenue advised that awards provided solely for enrollment in a rewards program, the passage of time, or for purchasing the seller’s products are bona fide discounts that are excluded from the sales price. In contrast, awards provided in exchange for property, service, credit, or cash are not bona fide discounts and are part of the selling price when redeemed. The Department has clarified that a member’s provision of contact information to the seller is not consideration. Wash. Dep’t of Revenue Excise Tax Advisory No.

3191.2014 (9/30/2014).

Bad debt deduction - private label credit cards. The Department of Revenue held that a retailer was not entitled to a bad debt deduction for sales tax on customer purchases made using its private label credit cards because the retailer sold the accounts to a bank, which bore the credit risk. Wash. Dep’t of Revenue Det. No. 13-0178, 33 WTD 109 (2014).

M&E exemption - majority use. The Department of Revenue held that equipment used for both manufacturing and non-manufacturing purposes must satisfy the “majority use” test in order to qualify for the manufacturing machinery and equipment exemption. Wash. Dep’t of Revenue Det. No. 13-0034, 32 WTD 220 (2013).

III. PROCEDURAL MATTERS

Retroactivity - legislation to reverse outcome of prior court decisions. The Washington Supreme Court held that the legislature’s retroactive amendment of the state estate and transfer tax to reach transfers that the supreme court had previously held were nontaxable did not violate the separation of powers doctrine, the due process clause, or several other federal and state constitutional provisions. The court concluded that the legislature’s amendment did not violate the separation of powers doctrine because the amendment was carefully drafted so that it “[did]

not affect any final judgment, no longer subject to appeal, entered … before the effective date of [the legislation].” The supreme court concluded that the legislation did not violate the due process clause because the retroactive amendments served the legitimate purpose of preventing unanticipated and significant fiscal shortfalls resulting from the court’s prior decision and that the eight-year period of retroactivity was rationally related to that purpose. In re Estate of Hambleton, 2014 WL 4925666 (Wash. 2014).

City B&O tax procedure – exhaustion of administrative remedies. The Washington Supreme Court held that a taxpayer’s superior court refund lawsuit was not barred by the exhaustion doctrine because the city had not responded to the taxpayer’s administrative refund claim. The supreme court clarified that the superior court’s original jurisdiction over tax matters did not vitiate the need to exhaust administrative remedies. Instead, the taxpayer in this case had satisfied the exhaustion doctrine because there were no more administrative steps for the

taxpayer to pursue. The court also held that a taxpayer that chose to file a tax refund lawsuit (with a three year statute of limitations) cannot also seek a writ of mandamus for the purpose of seeking administrative relief beyond the statute of limitations. Cost Management Services, Inc.

v. City of Lakewood, 178 Wash.2d 635, 310 P.3d 804 (2013).

City tax procedure – exhaustion of administrative remedies. The Washington Court of Appeals, applying Cost Management Services, held that a taxpayer’s superior court refund lawsuit was barred by the three year statute of limitations. The court concluded that the statute of limitations was not equitably tolled for the period that the taxpayer’s refund claim was pending in the city’s administrative process because the taxpayer failed to exhaust those administrative remedies. New Cingular Wireless PCS LLC v. City of Bothell, 2014 WL 4198297 (Wash. App. 2014) (unpublished).

IV. AUTHORS’ BIOGRAPHIES

Robert (Bob) Mahon is a state and local tax partner in the Seattle office of Perkins Coie, a law firm with more than 950 lawyers in 19 offices in the United States and Asia. Mr. Mahon serves as Editor-in-Chief of the Journal of Multistate Taxation and Editor-in-Chief of the ABA Sales and Use Tax Deskbook. He also teaches state and local taxation as an adjunct professor at the University of Washington School of Law. Mr. Mahon is past president of the Washington State Bar Association Tax Section and is listed in The Best Lawyers in

America for Tax Law and as Best Lawyers’ Seattle Tax Law Lawyer of the Year. Mr. Mahon received his B.A.

with honors from Grinnell College (1992); his J.D. with high distinction from the University of Iowa (1995);

and his LL.M. in Taxation from the University of Washington (1996).

Gregg Barton is a partner in the Seattle office of Perkins Coie LLP, where he practices exclusively in the state and local tax area, concentrating principally in the states of Washington, Oregon and Alaska. Mr. Barton received his undergraduate degree from the University of Washington, his J.D. from the University of Oregon, and his Master of Laws in Taxation with distinction from Georgetown University Law Center. He is listed in The Best Lawyers in America for Tax and Tax Litigation & Controversy and as Best Lawyers’ Seattle

Litigation and Controversy - Tax Lawyer of the Year. He is also listed in Washington Law & Politics as one of

“Washington’s Super Lawyers.” He is a Fellow of the American College of Tax Counsel, and is Chair of the ABA Tax Section’s State and Local Taxes Committee through 2015.

WYOMING STATE DEVELOPMENTS