Washington: Department of Revenue affirms denial of sales tax deferral

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We recently addressed a new disclosure rule put forth by the Governmental Accounting Standards Board (GASB) that will require state and local governments to disclose information about tax incentive agreements. The rule represents the GASB’s attempt to increase the transparency of the deals that governments make with businesses and others, ultimately in order to make it possible to assess the impact of these agreements on state budgets. This rule is seen as an appropriate step by groups, like Good Jobs First, that oppose costly corporate welfare programs to benefit businesses because they may be “real deterrents to true economic development.” 

In addressing what it called a “seismic shift in corporate tax breaks,” Governing.com underscored the need for a system that forces states to come to terms with how much revenue they are losing – or not – to tax incentive agreements. In so doing, it pointed to Washington as an example of what is right with this kind of follow-up mechanism, noting that the Evergreen State has been calculating the impact of its tax incentive programs for a decade. The publication explained the following with respect to Washington’s scheme with Boeing:

Earlier this year, Washington state lawmakers got a wake-up call. A tax incentive package they’d approved in 2013 for aerospace giant Boeing -- largely regarded as the most expensive incentive deal in history -- was actually on pace to surpass its estimated $8.7 billion cost. According to a Department of Revenue report, the deal, which extends to 2040, had already amounted to half a billion dollars in giveaways in just the first two years alone. In other words, the state was losing out on a whole lot more money than it had planned.

And the kicker? Just months earlier, Boeing had announced plans to cut roughly 4,000 jobs in Washington. The year before, the company had transferred thousands more jobs out of the state.

Though some were angry about the job losses, Governing.com contended that “[t]he fact that Washington lawmakers can even have this conversation puts them at an advantage over most other states’ legislators [because] [i]n the vast majority of states, officials simply do not know how well their tax incentives programs are working, or how much the deals are actually costing them. They don’t have the data. Washington does.”

The Department of Revenue’s denial 

Washington’s Department of Revenue (Department) recently released Determination No. 16-0074 (Determination), from which the real-life impact of the state’s discipline with respect to tax incentives becomes clear. In the Determination, a manufacturer that makes product in Washington applied for and received a tax deferral for employing individuals in a Community Empowerment Zone (CEZ). The deal called for the firm to hire a certain number of employees in the CEZ, in return for which it could forego paying retail sales tax and/or use tax on equipment it purchased using its CEZ certificate. 

More specifically, in June 2009, the Department’s Special Programs Division (SPD) issued the CEZ certification after approving the company’s application. The taxpayer anticipated building a new facility in the CEZ, and hiring 10 new full time workers. 

In 2012, upon reviewing the results the taxpayer committed to in the application, the SPD required the taxpayer to hire four qualified employment positions by the end of 2012, and keep them employed for 12 months. 

In 2013, the taxpayer contacted the Department and reported that it had not hired the required four employees in the CEZ. The SPD conducted a check and concluded that indeed, only one employee lived in the CEZ, while three lived in a county containing the CEZ. Nevertheless, the taxpayer argued, this constituted its fulfillment of “the spirit of the deferred sales tax program,” entitling it to its deferral. In the alternative, the taxpayer suggested, it deserved a pro-rated deferral based on the one employee that satisfied the program’s conditions. 

The statute that established the tax deferral program in the first place was designed to promote economic stimulation, create employment opportunities, and reduce poverty in rural or distressed areas of the state, like those where CEZs exist. 

In analyzing the purpose of the deferral program and the facts of this case, the Department agreed with the SPD in ruling against the taxpayer, citing several factors:

  1. Both the application form and the SPD’s 2009 Approval letter unambiguously provided that if the taxpayer did not fill the qualified employment positions, “all deferred taxes are immediately due.” 
  2. The taxpayer was not the employer of record for the three employees who did not live in the CEZ. On this point, the taxpayer argued that the three workers were contractors over which it maintained control, such as where, when and how they worked. The Department noted that an independent contractor who billed the taxpayer actually paid these three workers. 
  3. The applicable statute does not allow for prorating tax deferral amounts. 

In the end, the three workers outside of the CEZ were not employed by the taxpayer, in contradiction to the statutory requirements. Accordingly, the taxpayer failed to hire four qualified employees in the required location and time frame, as set forth in the certification, so the SPD properly precluded it from taking advantage of the tax deferral program.

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