Washington REMINDER: Board of Director Compensation Subject to B&O Tax July 1, 2010!

As stated in earlier posts, Washington has enacted several changes recently. One of those changes or clarifications is the taxation of board of director compensation.Sec. 701 of SB 6143 clarifies that amounts received by an individual from a corporation as compensation for serving as a member of the corporation's board of directors are subject to B&O tax under the services classification.Employee Exemption Does Not Apply to Independent Contractors

One of the major business and occupation tax exemptions is provided in RCW 82.04.360 for income earned as an employee or servant as distinguished from income earned as an independent contractor. The legislature's intent in providing this exemption was to exempt employee wages from the business and occupation tax, but not to exempt income earned as an independent contractor. The legislature finds that corporate directors are not employees or servants of the corporation whose board they serve on, and therefore, are not entitled to a business and occupation tax exemption under RCW 82.04.360.

Tax on Director, NOT CompanyTherefore, beginning July 1, 2010, compensation paid to board of directors will be subject to the Washington Business and Occupation (B&O) Tax. The tax is imposed on the board of director and not the company or payor.

Director Subject to Economic Nexus StandardBoard of directors will be subject to the new economic nexus standards enacted on June 1, 2010. Therefore, the director will be deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state.
Sourcing Based on Where Benefit DerivedThe sourcing of the compensation will be under the new sourcing rules for services which hold that the income should be sourced to where the benefit of the service is derived. Sourcing is always an issue of debate, however, it is most likely that the benefit will be determined to be primarily received by the corporation's headquarters, not where the board of directors hold their meetings.

If you have any clients who are board of directors of Washington based companies, please contact me at brian.strahle@bakertilly.com for assistance in determining how this change will impact their tax situation.

For more information, go to Washington Director Fees Special Notice.

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Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States.  He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect."  For more info, visit his website: www.leveragestateandlocaltax.com

You can reach Brian at strahle@leveragesalt.com.

Connect with Brian on LinkedIn. Follow Brian on Twitter. Join the Leverage | SALT LinkedIn Group, connect and contribute with your colleagues!  

Because state and local taxes are deceptively simple and endlessly complicated.

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