In an article I posted on Nov. 13, 2013 (“The Continuing Debate over Defining Taxable Income”) I discussed the 2011 case of Getty Images (Seattle), Inc. v. City of Seattle, where a Washington Court of Appeals agreed with the City of Seattle that amounts received by Getty were taxable income and not non taxable loans. The City action was part of an effort undertaken by both the State and the City of Seattle to attack certain transaction between affiliated companies as tax avoidance transactions. The Court of Appeals decision was based on the law in effect during the years for which the City had audited Getty (2002-2006) and therefore did not take into account later legislation the City had passed in 2009, which had specifically authorized the City to avoid exactly the kind of transaction at issue in Getty. That law, SMC 5.45.085(A) empowered the City to review affiliated company transactions to determine whether income between them reflected fair market value.
Both the Getty court decision and the 2009 legislation, Seattle Municipal Code s. 5.45.085(A), continued to be the subject of debate and discussions between the City of Seattle, business groups and the Department of Revenue. On December 16, 2013, The Seattle City Council repealed SMC 5.45.085(A) in Council Bill 117975. The City Council cited 2010 Washington State Legislation that “directed the Washington Department of Revenue to conduct a review and provide a report on the state’s taxation of transactions between affiliated persons,” adding that “both Washington Department of Revenue and the [Seattle] Director of Finance and Administrative Services have engaged in meetings with taxpayers to examine the taxation of businesses engaged in transactions between affiliated person.” The repealing legislation also directed the City office of Finance and Administrative Services to adopt rules to determine the proper amount of the Seattle business license tax due under the Seattle Municipal Code for person engaged in business activities or transactions with related, controlled or affiliated persons.
This repeal is good news for large businesses which actually have intercompany transactions, but will have little impact on smaller businesses that do not engage in complex affiliated entity transactions. Thus, the repeal of SMC 4.45.085 does nothing to reign in the persistent lack of uniformity between other B & O taxes of Seattle, and the State B & O statutes. This is because Seattle, and other cities in the State, continue to argue their need for autonomy in defining tax classifications (only somewhat curbed by recent state legislation and the advent of the “Model Ordinance,” which applies to cities in the State that have B & O tax systems). While there is some merit to the argument that cities have to design their tax structure to meet their unique needs, there is a stronger argument, in my view, that the growing number of smaller and medium size businesses that operate in multiple cities need a fast and relatively inexpensive way to predict their tax bill from each city. It is hard, for example, to see why each city needs the autonomy to design its own system for appealing a negative audit result, so that businesses must consult tax professionals concerning the procedure for appealing a particular city’s bill, often after an important deadline has been missed.
Uniformity is not inconsistent with efficient city tax administration, but lack of uniformity of tax laws is inconsistent with fairness to taxpayers.
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