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Tuesday, January 17, 2012

Give Washington tax auditors a taste of their own medicine

A faithful reader of this blog with a wealth of first-hand experience in interstate and international tax matters wrote us with a brilliant insight over the weekend. As illustrated by the recent case involving the demise of the Mattress World store empire, the State of Washington is getting aggressive with Oregon businesses about collecting its state sales tax on sales to Washington residents. We're not sure whether Mattress World had that decent a case, but we've heard stories about other Oregon companies who are being subjected to intense sales tax scrutiny from Washington State, all of a sudden and without good cause.

Even if an Oregon business doesn't deliver into Washington, lately the revenue folks in Olympia are seeking to force it to collect sales tax. The federal constitution (as interpreted by the courts) says Washington can't do that unless the Oregon business has a "nexus" with Washington, but the tax-hungry revenuers up there are asserting "economic nexus" in cases in which the seller's contact with their state is minimal.

Well, as the reader points out, two can play that game. When they audit Portland businesses on sales tax issues, Washington revenue agents often visit the businesses' headquarters on this side of Columbia. Indeed, for complicated audits, the agents sometimes spend many days in Oregon. And they come from all over the country. "The auditors generally spent a week or longer in our office while gathering information," reports our reader. "Many states also schedule audits with other Oregon-based companies at the same time to lessen their travel expense. That means that some must have spent two or three weeks in Oregon during the year."

Now, under the Oregon income tax system, nonresidents must pay income tax to Oregon on their Oregon-source income. And any money they make by performing services in Oregon is treated as Oregon-source, regardless of where their employer is and regardless of where their home office is. Just ask Kobe Bryant, or Charlie Hales, about that. And so when the Washington state tax folks drive down to Oregon to conduct their investigations here, they subject themselves, personally, to Oregon income tax.

How many of them do you think are paying it? Maybe it's time for the Oregon Department of Revenue to find out.

Comments (13)

Years ago, Massachusetts had very high alcohol and cigarette taxes, and New Hampshire had low alcohol and cigarette taxes. Unsurprisingly, there were big liquor/cigarette stores in New Hampshire at the Massachusetts border.

Massachusetts sent tax agents to record the license numbers of cars with Massachusetts plates parked in the lots of these stores, so they could impute a big liquor/cigarette tax liability to the car owners. New Hampshire made it a crime to loiter in the parking lot of these stores, and started arresting the Massachusetts tax agents.

Of course, the Oregon Department of Revenue will do nothing to the Washington state tax people - professional courtesy, you see, even if Washington's zealous tax enforcement starts damaging retail business in Oregon's border areas.

Question.... Do Oregon businesses that don't have brick & mortar in Washington have to yield to an audit by WA state revenuers? That seems a bit odd. Can any state just send their CPAs out on hunting expeditions?

Yeah, If I don't have a presence in Washington, why would I have to open my books to their auditors.

Why couldn't I tell them to go pound sand?

pacnwjay: Companies are somewhat at the mercy of state auditors. If a company refuses to allow an audit or provide necessary documentation, most if not all states can impose what is called a jeopardy assessment. That leaves to company in the position of having to fight an expensive legal battle if they don't comply.

In an income tax situation, the typical jeopardy assessment simply denies all expenses.

On the other hand, this rarely happens.

In the past Oregon has been quite aggressive when it came to collecting income taxes from Washington residents working in Oregon. Some years ago Oregon decided that when a Washington married couple with one partner working in Oregon filed a joint return their entire AGI, including the income of the spouse who never worked in Oregon, was subject to Oregon income tax. This of course didn't survive, but the folks at ODR were trying hard.

Although at once amusing and thoughtful, the post raises one query that stands out: is it reasonable to include Kobe in the same breath as Charlie?

Max -

No, its not reasonable. Kobe has far more integrity and class than Charliar Hales.

So, what about all of those other retailers that Washingtonians flock across the river to visit - Costco, Ikea, Home Depot, Walmart, etc. etc. etc. ?? If those businesses have a "nexus", read "store location" in the State of Washington, aren't those businesses also required to collect Washinton sales taxes ???

Frank: Please go to this site: http://dor.wa.gov/content/findtaxesandrates/bandotax/economicnexus.aspx

You will note under the title "IMPORTANT" that "Businesses making retail or wholesale sales continue to be governed under the physical presence nexus standards outlined in WAC 458-20-193 for such sales. If physical presence nexus standards apply then the business and occupation (B&O) tax under the retailing and wholesaling classification and the obligation to collect and remit retail sales tax on sales to Washington buyers will apply".

"Note that a business may have physical presence nexus, but not economic nexus and visa versa".

BEST.POST.EVER, Faithful Reader wins the week and maybe all of 2012.

Oh! I wish I had thought of that. When I had my business, a Washington revenue agent would come to my corporate office every quarter and manually sort through all the sales invoices, inputting all the sales to Washington addresses into his computer. We were charged sales tax on everything that we delivered into Washington. The ones we did not deliver, the clients usually received a demand for use tax. It was very time consuming and annoying. I would have loved to see those guys' response if I had picked up the phone and rat them out to the ODR for working in Oregon in their presence.

Um... it appears to me that WA state is way overreaching and likely afoul of the doctrine that states may not interfere with interstate commerce which is the upshot of the actions being undertaken by the tax bullies in WA state.

...states may not interfere with interstate commerce which is the upshot of the actions being undertaken by the tax bullies in WA state

Oregon has it's own history of "bullying" Washington residents tax-wise. It's a sport to some legislators in Salem and Olympia.

Inasmuch as Oregon has no sales tax and Washington has no income tax, it creates an unusual dynamic along the border.

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