Location, Location, Location! Tax Considerations for Locating and Operating Your Business
As businesses grow and expand, customer bases widen, sales cross state lines and soon a business is no longer necessarily a “hometown” company. Consider as well that in many closely-held companies, the owners are not necessarily located in the same geographic area. Expanding one’s market and incorporating owners from various locations can be very beneficial to a business’s growth. However, with expansion come consequences – namely taxes. This article gives a brief summary of the differences between Oregon and Washington business-oriented taxes. In particular, how the location of the business, as well as the owners, employees, and sales market influences the applicability of such taxes. The tax implications can also vary depending on the type of entity in which the business operates; whether a C corporation, S corporation, Limited Liability Company (“LLC”) or partnership.
OREGON INCOME TAX
While most are familiar with Oregon income tax generally, the overall impact that some interstate business taxes may have is often overlooked. The current rate of corporate business tax is 6.6%. Beginning with the 2003 tax year, the $10 minimum Oregon Corporate Excise Tax will be revised to be based on the amount of Oregon sales/business income apportionable to Oregon. The new minimum tax runs a scale from $250 for income of $20,000 or less, to a $5,000 minimum tax for sales over $25,000,000. For S corporations, the minimum tax will either be $250 for sales of $1,000,000 or less, or $500 if sales exceed $1,000,000.
The Oregon personal income tax rate is 9%. Oregon residents are taxed on all income generated, regardless of where that income comes from; whether as an employee, member of an LLC, or shareholder. For example, an Oregon resident who works for a business in Vancouver, Washington will be taxed by Oregon on all income generated from the Washington employment. Generally, there is a credit given for any income taxes that a taxpayer pays to another state. Unfortunately, Washington’s most prevalent tax, the Business and Occupation (B&O) tax, is not an income tax. Therefore, Oregon does not give a credit for payment of Washington B&O tax. Oregon also apportions taxes to non-residents, taxing them on any income generated from Oregon sources. Therefore, a member of an LLC who lives in Washington will be taxed by Oregon on any income of the company generated from Oregon sources.
WASHINGTON BUSINESS & OCCUPATION TAX
Washington’s B&O tax applies to every single entity “engaging in business” in the state. While the definition of “engaging in business” is too expansive to detail in this article, suffice it to say, if you have sales of any type in Washington, or even if you are just trying to maintain a market for sales (with no actual sales occurring), you may be subject to the Washington B&O tax. B&O taxes are assessed upon the gross receipts of a business; therefore, it is not an income tax. Additionally, there are no deductions for business expenses and the tax must be paid, even if the business is operating at a loss. The tax also applies to non-profit corporations.
Various “activities” of a business are taxed separately and at different rates. For example, the extracting of a mineral is taxed, then the manufacturing is taxed, then the wholesaling, and then the retail sale of the item. Each particular activity must be accounted for and taxed separately. Washington assigns the responsibility of reporting taxes to the taxpayer. In short, an Oregon entity with sales in Washington must be aware of the potential B&O tax liabilities. Failure to do so may result in penalties and retroactive assessment.
WASHINGTON SALES AND USE TAX
A taxpayer will additionally pay either a sales tax or a use tax on items sold and consumed in Washington. The sales tax applies to the final retail sale of any item. The use tax applies to sales made outside Washington but consumed within the state. Similar to the B&O tax, if you have any sales occurring in Washington, you are likely liable for sales and use taxes.
Both the state and each Washington county apply a sales tax. For example, the combined sales tax in King County is 8.8%. The taxpayer is required to collect the tax from the customer and remit it to the Washington Department of Revenue. The taxpayer is liable for the tax, regardless of whether it is collected. Sales tax owed is deemed to be held in trust for the Department of Revenue. As a result, a business that collects but does not remit the tax, or that coverts the tax and uses it for its own benefit, subjects its directors and officers to personal liability for the tax. Personal liability is imposed under Washington law regardless of whether the failure to remit the tax was due to acts beyond the seller’s control or not.
WASHINGTON REAL ESTATE EXCISE TAX
Washington’s Real Estate Excise Tax is imposed on any sale or transfer of real estate. The tax is generally applied to any sale or exchange of property for value. Like-kind exchanges are subject to the tax. The tax is also applied if there is a transfer of a controlling interest in an entity that owns Washington real property. A business that owns real property in Washington, including an Oregon business, will pay an excise tax of at least 1.28% of the selling price of the property. The transfer of high-value properties can create a significant tax liability for the seller.
EFFECT ON TAXPAYER
Depending on the state of incorporation or organization, where the shareholders, members or employees live, and where sales occur, the tax implications for a business can vary greatly. Choice of entity can also dramatically alter the tax liability. For example, a Washington C corporation that has sales and staff located in Washington but that is owned by Oregon shareholders can have some tax benefits by retaining business earnings rather than distributing dividends to the shareholders. If the corporation distributes the income, then the shareholders will be taxed by Oregon on those distributions. If employment functions can be maintained in Washington, the employees will avoid personal tax liability since wages and salaries are exempt from the B&O tax.
The same business organized as an LLC will cause its members to be taxed on all income generated by the entity, regardless of whether the income is distributed. Members of an Oregon LLC are taxed on all of the business’s income, not just distributions. Therefore, there is no tax benefit for keeping money within the entity because the members are taxed regardless. Both business entity structures are subject to Washington B&O and sales taxes as well.
The topics covered in this article are only intended to provide an overview. Our office has attorneys licensed in both Oregon and Washington who help clients structure their business operations in a manner designed to minimize state and federal tax liabilities.