Three major tax bills were introduced this week as part of the governor’s budget package.  All three appear to be on a fast track and have been scheduled for a hearing before the House Finance Committee this coming Tuesday January 26, 2010 at 1:30 p.m. 

Increased Tax Liabilities for Intercompany Transactions.  HB 2970 though nominally directed at “tax avoidance transactions” contains very broad language that would give the Department of Revenue (the Department) wide ranging authority RETROACTIVE TO 2006 to tax virtually any “transaction, plan or arrangement” as if it were structured to maximize the parties’ Washington tax liabilities unless the taxpayer can prove that the tax "benefit" (of paying less than the maximum possible Washington taxes) resulting from the structure actually used has a sufficiently "substantial nontax purpose" that the taxpayer would have engaged in the transaction, plan or arrangement "absent its tax effects."  The Department would be expressly authorized to:

• Recharacterize exempt dividends as taxable “fees for providing services;”
• Disregard entities “even when the legal formalities have been observed;”
• Impute income to intercompany services when no fee is charged or the amount charged “does not reflect fair market value;” and
• “Any other steps reasonably necessary to deny the tax benefit that would otherwise result.”

Among other things, this could result in taxation of partnership allocation of profits to partners providing services to the partnership.

The bill also imposes a 35% penalty on amounts assessed under these provisions.

New Tax on Director Compensation.  HB 2972 extends B&O tax to amounts received by an individual for serving as a director of a corporation.  While the bill claims director compensation was always intended to be subject to B&O tax, it recognizes that it has not historically been so administered.  In fact, the Department has long treated director compensation as non-taxable on the theory that the activities of directors do not constitute engaging in business.  The new tax on director compensation would become effective July 1, 2010.

Other.  HB 2971, which some have called a “sour grapes” bill, is directed at three recent Washington Supreme Court decisions.  The bill would:

• Repeal the direct seller’s representative exemption effective July 1, 2010 and retroactively narrow the exemption for open tax periods; 
• Narrow the B&O tax classification for “processing perishable meat products” to exclude the production of canned meat products; and
• Narrow the deduction currently available to financial businesses for “amounts derived from interest” on residential first mortgage loans.