Q&A: DOR’s Janetta Taylor on the 68 tax changes coming to Washington

This week’s Q&A is with Janetta Taylor with the Department of Revenue. I was interested in finding out how the department is dealing with nearly 70 changes to the tax code worth $800 million that go into effect on a handful of different dates — including tomorrow, when cigarettes will cost $1 more per pack.

Taylor told me about some big changes to the tax code that could help local businesses, what it would take to implement an income tax, and much more.

Q: How many changes did the Legislature make, and what does the DOR have to do to implement those changes?

Taylor: With this session we have 68 changes that came through, which is quite a few. It will be a challenge for the department to make sure that we contact all the businesses that are affected. That really is our focus: educate, educate, educate.

We have a wide variety of mechanisms to do that. In Washington, most businesses and household are connected to the Web. The first thing we did is post the information on our Web page. There’s a link to all the information with the write-ups. Of course, also some of Mike’s (Mike Gowrylow, communications director at DOR) media releases. And we also try to target mailings to the specific businesses that are impacted. We have about 450,000 registered businesses. Not all of these changes affect all businesses. We look at businesses by their activity and we tailor specific mailings to them and try to get them all the information they need.

We also have special things going on with electronic filing. A large number of our tax payers actually file electronically so we can send them e-mails or send them alerts in the system.

Q: The $1 per pack addition to the cigarette tax goes into effect tomorrow (May 1). What did you have to do to implement something like that?

Taylor: The ones that start tomorrow were quite challenging because we did have a short time frame. We actually started planning before the bill was signed. We pulled a team together across all the divisions and we started devising ways to communicate with taxpayers. We’ve done a lot of media releases. And the tax package naturally got a lot of media attention. But you know, we have quite a few small businesses – the grocery stores, etc. that sell cigarettes – even though they don’t have to do a lot of changes, what they had to do was a cigarette floor stock inventory. We had all the forms designed, all the mailing lists ready to go so the minute the bill was signed, everything had to go out. We also communicate with associations. So we did get all those mailings out. Right around the day I think that the governor signed that, we sent those out. It was several thousand (mailings).

Q: What’s a “floor stock inventory”?

Taylor: Those cigarettes (that are currently in stock) were bought from distributors at the lower rate. So when they make the sale, because it transitions into the tax period, they have to send back the difference. It happens once. It can be an inconvenience for a big business – but for a very small grocery store, the owner would have to stay late and they would have to do that manually.

Q: What are some of the biggest tax changes?

Taylor: Interestingly enough, a lot of the changes this year are policy changes. So they’re not necessarily that we have to change a tax return or form. The really big one is the economic nexus. I think what a lot of in-state businesses don’t understand is that this bill is quite beneficial to in-state business. What it allows them to do is reduce the amount of income that they pay the B&O tax on.

Say you’re a lawyer and you have in-state customers and out-of-state customers. Instead of paying the B&O rate on the services you provide to all of those customers, you only have to pay on your in-state customers. So that’s what’s called apportionment.

The governor was brilliant in devising this bill because it shifts the burden to the larger out-of-state businesses who have not been paying taxes and it eases the burden on in-state business.

Everyone’s been very focused on the out-of-state portion. If you’re an out-of state lawyer providing services to in-state clients, you may owe tax. Before, unless you moved into the state or visited, you wouldn’t have to pay tax. There hasn’t been a lot of coverage for the benefits to the in-state businesses.

Q: How do you know if out-of-state service businesses who have one or two clients here will pay that? Do you track them down?

Taylor: Well, there’s a dollar amount associated with the increased revenue – $84 million. The largest chunk, based on our estimate, actually comes from the big banks and their credit card operations. Historically, they were not paying B&O taxes on the credit card fees that they were collecting. They haven’t been paying taxes on that. A number of other states have already imposed taxes on those credit card fees. We already have knowledge of who those big banks are and who those players are.

When you get down to the smaller businesses, there are thresholds – the really small ones won’t have to pay.

Another area that’s impacted is franchises. If you’re an out-of-state company and you sell a franchise in this state, the franchise fees will be taxable. That’s nowhere near the money as the bank fees, we think.

Q: Are there changes to the tax code that will affect people, but you think haven’t gotten enough attention?

Taylor: Unless you drink a bunch of beer or candy or pop or smoke cigarettes, most of these changes are not going to affect the average person in this state. Because we didn’t get a general sales tax increase, a lot of people aren’t going to be aware of the changes.

One item is the Working Families Tax Credit. The Legislature funded us to get a system in place for the program. They may fund the program next year, we don’t know. The way that’s designed to work is, it’s like getting a rebate on the sales tax you paid the previous year, but it’s based on a federal income tax return. That’s a very new thing for us, but we’re starting to work on building a system. They funded us to build the system and their plan — at least what they said last session – was to provide the funds in future years.

Q: What about an income tax? There was some discussion of that in the Legislature, and now there’s an initiative to create a high-earners income tax. What would have to change at DOR in order for that to be possible?

Taylor: That would be a substantial change for us. Currently we don’t have individuals registered with the state. I haven’t seen an estimate for how many people that would affect. Obviously it’s not everyone.

We would have to set up data-sharing agreements with the IRS so that we could get access to the federal returns, which is how most income tax states do it. Some states have a combined filing process; other states get the information and use it for the basis of their returns.

It is such a different animal. It would take us quite a bit of time to set up. We would have to set up receivables, billing, all our taxes now are business taxes – unless they use the same kind of business rules for penalty and how you bill, which I’m sure they wouldn’t, it would require a lot …

We could do it. The Department of Revenue, I believe, is the best in the nation and we’ve won a lot of awards. The governor and the Legislature have funded the department properly to implement programs. We would just need more time.

Q: Anything else you want to let people know about?

Taylor: I think for us, it’s been a really exciting session. There have been a lot of things that have happened over the last couple of years with court cases that have eroded or reduced the tax base and those things really did need to be addressed because those things are providing funding for services like education and the Basic Health Plan. And those are things people want. We’re all tax nerds over here and we think tax things are exciting. I’m not sure the average person on the street is too excited with policy changes.

It’s a big workload but it’s also a very exciting time. The governor did a fabulous job… I’m glad she didn’t raise the sales tax overall. I think that does negatively impact your average family.

Q: The soda tax has made some headlines because small distributors said they were supposed to be exempt, but the language doesn’t do that. Any insight on that?

Taylor: My understanding is that there are some small distributors that either call themselves bottlers or perceive themselves to be bottlers but their actual bottling activity is separate. But a couple have joined together to form a firm or LLC. That bottling industry will be eligible. I think they were thinking that each individual distributor would also be eligible.

The way the law is written today, it’s the bottling industry that gets the credit. That doesn’t mean the Legislature can’t decide next year that they want to extend the exemption further up the production chain. But the way the law is written today it’s only the bottling industry. Those distributors – their expectation was clearly different.

Tags: Department of Revenue, income tax, Legislature, taxes