(The Center Square) – People who never even set foot in Washington State might be subject to the new millionaire’s tax if the repeal movement is not successful, according to discussions at the Washington state income tax advisory group.
One potential scenario presented to the advisory group at its Monday meeting by the Multistate Tax Commission concerned a nonresident who is a partner with an LLC organized in New York State that invests in another LLC generating income in Washington. If the nonresident received income from that Washington LLC, he could potentially have to file a state income tax return.
Yet, that poses challenges over how the nonresident is informed and how to force compliance.
Ahurst and Perkins Coie Partner and U.S. Tax Lead Brian Mahon also noted that “we’ve created a lot of complexity by keeping the capital gains tax separate, and it creates some really anomalous situations for taxpayers where you really get the interplay of those two become complicated.”
He added that the result could be that individuals pay an “effective tax rate beyond the 9.9%, and so it’s something that I think the legislature should be thinking about longer term.”
State Rep. Noel Frame, D-Seattle, responded that they should not focus on hypotheticals.
“I don’t think we should spend time on trying to figure out what it should look like in the future, but rather spend our time figuring out how to administer it now,” Frame said. “But I don’t think it is a terrible thing for a group of practitioners to express an opinion about ease of tax administration would be better if something for us in a recommendation to the legislature.”
State Rep. April Berg, D-Mill Creek, said the advisory group should deal with what the law says now.
“The only caveat on that would be as long as it’s not future casting for what we will potentially do in our tax code because I I don’t want folks to think that we’re setting something up because the next step is X, right?” she said. “But I do agree what makes it easier, more administratively…but we don’t want to future cast for future legislators.”
One of the other complex aspects of administering the income tax are K-1s, which are detailed statements given to individuals for supplemental income and loss from:
Rental real estate, royaltiesPartnerships and S corporations (via K-1s)
Individuals then report that income via the Federal Schedule E Forms.
However, Mahon expressed concerns over constitutional issues due to how some partners in these “pass-through entities” may not know or have control over where the LLC invests.
“Can your partnership drag you into Washington by making an investment here, when you’re a limited partner, by definition?” he said. “You could think about whether the statue should deal with that.”
Additionally, the new tax affects how credits for the state B&O tax and public-utility tax would be reported, with Berg calling it an “administrative nightmare” for the Department of Revenue.
Owners receive a distributive share of those taxes as a potential credit on their individual Washington return, but the entities are given latitude as how to distribute them amongst the partners. With the new income tax, credits could be deliberately shifted away from those who won’t owe the tax and towards those who do.
However, Berg said that “you won’t know what that is until they get their spouse or partners’ income. I’m just saying…there’s a lot of complications as to even understanding who will owe the tax and then the ability to ratchet it down.”
Another potentially complicated scenario posed by state Rep. Ed Orcutt, R-Kalama, was if a couple that files a joint income tax return has one spouse generate income in Oregon and the other in Washington.
“My understanding is that Oregon is saying ‘All of that household income is now being subject to Oregon income tax,"” he said. “So, that’s a big question that is going to come up with a border issue.”
Mahon said that is a big concern.
“It seems like it seems like with the community property (state) versus the non-community property (state), that you can end up with some pretty big problems as well,” he added.