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: Navigating Environmental Regulations

Legal Briefs: Navigating Environmental Regulations

Tips for staying in compliance.
| FROM THE PRINT EDITION |
 
 
Our state’s ever-changing regulatory environment makes it hard to stay on the right side of the law. Here are some simple steps to help keep your business in compliance:
 
1. Ignorance Is Not Bliss. Take time to research which environmental regulations apply to your operations. Consider all relevant media — air, water and land. For example:
 
• Does your facility emit air pollutants? Consult with the local air pollution control agency.
• Are you planning construction near a shoreline or wetland? Consult with the Washington Department of Ecology’s Shorelands and Environmental Assistance Program.
• Do your operations require a stormwater permit? Consult with the Washington Department of Ecology’s Water Quality Program. 
 
As a starting point, review the Regulatory Handbook prepared by the Governor’s Office for Regulatory Innovation and Assistance (oria.wa.gov). When in doubt, it is best to consult experienced environmental counsel to determine which regulations apply. Once you have this information, you can develop the appropriate compliance programs.
 
2. Uncover Your Property’s History. Under the Model Toxics Control Act, RCW 70.105D, a business that owned or operated a facility where hazardous substances have come to be located may be liable for cleaning up the property. To manage this risk, it is essential to conduct due diligence before entering into a lease or buying a commercial or industrial property. A reputable consulting firm can assist. If any notable conditions arise, a subsurface investigation may be warranted. Frequently, businesses negotiate environmental indemnity agreements to address this kind of liability, but it is important to do so before you lease or buy, not after.
 
3. Identify Your Waste Streams. Every business generates waste, whether from an office building or a manufacturing facility. Be sure to review your local rules, since some jurisdictions mandate recycling. It is also critical to determine whether a waste is “dangerous” under WAC 173-303. This is more common than you think. Most businesses generate some type of dangerous waste, including adhesives, aerosol cans, paints, solvents, fertilizers and cleaners. You can start by taking a look at the materials you use and the wastes that remain. If you have products labeled “DANGER,” “FLAMMABLE,” “WARNING” or “POISON,” they may become a dangerous waste if discarded or mixed with other wastes. Electronic waste, such as batteries, mercury-containing equipment and light bulbs, are also regulated. If used oil, batteries and other wastes are recycled, they may be partially or fully exempt from the regulations.
 
4. Recordkeeping Is Essential. You should live by the mantra: “If you don’t write it down, it never happened.” The key to compliance is meticulous recordkeeping. Keeping records up to date, organized and readily available for an inspector is critical. Create easy-to-use logs to track internal inspections, monitoring programs and the use of best management practices.  
 
5. Violation Issued. Now What? If you get a notice of violation from an agency or a citizens’ suit notice, immediately take note of the deadlines to respond and any procedures for contesting or appeal. Contact a lawyer to discuss your rights, whether there may be other parties at fault and settlement options. Once you have established the deadlines and determined the best course of action, evaluate what circumstances led to the violation. Plan a debriefing session with your employees to discuss how to prevent future violations. Establish what changes can be implemented to ensure compliance, which may involve enhanced training requirements or the development of an internal auditing program. Use this as a learning opportunity for your business.
MICHAEL A. NESTEROFF is a member of Lane Powell’s Construction and Environmental Practice Group and has handled numerous environmental claims and litigations. Reach him at 206.223.6242 or nesteroffm@lanepowell.com, or follow him on Twitter @MikeNesteroff. 
JULIE S. NICOLL is a member of Lane Powell’s Construction and Environmental Practice Group and has extensive experience advising clients on environmental compliance matters. Reach her at 206.223.7118 or nicollj@lanepowell.com.