The good and the bad for Washington companies

| FROM THE PRINT EDITION |
 
 

Sponsored Content

Washington’s unique tax structure puts it at both the top and bottom of various studies that attempt to rank states’ business climates. Some reports, including one prepared by Forbes magazine, rank Washington very high, in large part because the state does not have a personal income tax. The absence of a state personal income tax has been a major recruiting tool for Washington businesses conducting national searches for skilled employees and executives. Success in recruiting highly educated workers to relocate from elsewhere is, in turn, a factor in Washington’s high ranking for the educational attainment of its workforce.

Other reports, including one prepared by Ernst & Young for the Council on State Taxation, rank Washington near the bottom quintile for business climate. Washington fares poorly in these studies because of the heavy tax burden the state imposes on its businesses. The business and occupation tax, commonly referred to as the B&O tax, combined with the state’s heavy reliance on sales taxes, results in more than half of all tax revenues collected by state and local governments being paid by Washington businesses. The tax burden on Washington businesses is well above the national average; according to the 2011 Ernst & Young study, only 12 states impose a heavier tax burden on their businesses than Washington. Reducing the tax burden on Washington businesses can put people back to work and grow state revenues as the economy recovers.

Washington’s B&O tax is imposed on “the act or privilege of engaging in business” in Washington. The tax rate depends on the type of business activity. There are more than 50 different B&O tax classifications. State B&O tax rates vary between .0138 percent for classifications such as “processing perishable food products” and up to 3.3 percent for “disposing of low-level waste.” The successive taxation of business activities results in a pyramid of B&O tax costs — the revenue from a single transaction may be subject to more than one B&O tax. B&O tax compliance is further complicated by the fact that 39 cities also have a local B&O tax. Local B&O tax systems differ from the state structure and from each other.

Washington is also more dependent on its sales tax than all but a handful of states. Its over-reliance on its sales tax has been a contributing factor to the state’s current fiscal crisis. For example, although the construction industry accounts for roughly 5 percent of economic activity in Washington, because construction is subject to sales tax, it has historically accounted for about 10 percent of state tax revenues. Consequently, the downturn in construction has had an outsized impact on deteriorating tax revenues. At the same time, the state tax treatment of construction is highly complicated, with the same activity taxed differently, depending on factors such as whether the project is deemed custom or speculative building, whether the owner or the contractor is deemed the “consumer” and whether the project is private or public.

The business climate in the state, including its tax structure, will continue to affect businesses’ decisions whether to expand into Washington, whether to leave Washington, and in some instances whether to even remain in business. In June, the Department of Revenue issued a report identifying a number of tax simplification measures focused on small businesses. The top recommendation was centralized administration of both state and local B&O taxes. The department found that by “centralizing administration of state and local B&O tax reporting, Washington can relieve a significant burden for small business owners — freeing them to get back to the work of running their businesses.”

Scott M. Edwards is a shareholder at Lane Powell, where he focuses his practice on all aspects of state and local tax including tax planning, audit defense, refund claims, administrative proceedings and litigation. He is a frequent author and speaker on state and local tax issues, and has been an adjunct professor in taxation at the University of Washington School of Law since 2000. He can be reached at edwardss@lanepowell.com or 206.223.7010

Sponsored

Legal Briefs: Women in the C-Suite

Legal Briefs: Women in the C-Suite

It's good business.
| FROM THE PRINT EDITION |
 
 

The underrepresentation of women on boards of directors and in the C-suite is astounding in a world driven by analytics aimed at increasing the bottom line. Of the nearly 22,000 companies examined in a 2014 study conducted by the Peterson Institute for International Economics, approximately 60 percent had no female board members, more than half had no women holding executive-level positions and fewer than 5 percent had a female CEO. Aside from the imbalance posed by these statistics, a growing body of literature posits that the business community has yet to fully embrace the financial impact associated with increased female representation within the highest levels of company management.

One crucial metric — the proportion of women represented in upper-level management, particularly with regard to representation in the C-suite — is positively correlated with improved financial performance. The Peterson study suggests that once a company reaches a minimum threshold of female representation in executive-level management positions — at least 30 percent of all such positions — that company could expect an increase of 1 percent to net margin compared to companies with no female representation. While that number appears small, given that companies in the data set produced an average profit margin of 6.4 percent, a 1 percent increase in net margin results in a 15 percent jump in profitability.

First Round Capital, a national venture capital fund, found that of its 300 series seed investments made between 2005 and 2015, portfolio companies with at least one female founder performed 63 percent better than their all-male counterparts when measuring the value at exit against First Round’s initial investment. The Diana Project, an analysis conducted by Babson College and Ernst & Young, found that companies with female entrepreneurs on the executive team experience higher valuations than those lacking such representation — 64 percent higher at the first round of funding and 49 percent higher at the last round of funding.

Given the above, the unanswered question is why is female representation at the highest levels of company management positively correlated with enhanced financial performance? One theory rests in data suggesting that men and women — whether due to experiential or genetic differences — approach and resolve certain business issues in different ways. Men, for example, are more prone to risk than women. According to the Ratio Institute, companies run by male executives have been shown to take on greater amounts of debt and are more likely to undertake risky acquisitions as compared to their female-led counterparts.

These varying approaches to the resolution of crucial issues facing any board or executive team highlight the value proposition of executive-level management represented by female leadership. The purpose of a board of directors is to collectively oversee and direct the most crucial decisions facing a company.

Highly functioning boards and executive teams are those that take the time and effort to analyze critical issues from every conceivable angle — angles which, according to the above, are analyzed differently by women and men. 

To be clear, a shift in hiring practices will not, in itself, result in any guaranteed financial return on a company by company basis. What has been, and will continue to be, a crucial indicator of success is company leadership’s ability to hire the best and brightest to manage the business’ affairs. Bluntly speaking, it is our belief that the best and brightest are often women, and companies paving the way to equal gender representation are currently reaping the rewards of their forward-looking hiring practices.