Washington State Amongst Best States to Incorporate an IC-DISC
Recent changes to the Washington State B&O tax apportionment rules, and a taxpayer favorable ETA released by the Washington State Department of Revenue make Washington State amongst the best states to incorporate an interest charge domestic sales corporation ("IC-DISC").
The interest charge domestic international sales corporation (“IC-DISC”) is a powerful export tax incentive used by U.S. based exporting companies to reduce their federal income tax obligation (more information at: http://www.internationaltaxseattle.com/#!ic-disc-the-exporters-tax-ince/c1gb1).
Once IC-DISC eligibility is determined, careful thought should be given in determining which state the IC-DISC should be incorporated. One important factor in determining the state of incorporation should be state and local tax laws. Based on Washington State’s apportionment rules, and a recent ETA provided by the Washington State Department of Revenue, Washington State IC-DISCs can provide additional tax savings at the state & local tax level.
Initially, it is important to note that Washington State is one of only seven states that does not impose an income tax on its residents. Therefore, an IC-DISC incorporated in Washington State would not be subject to Washington State income tax.
Washington State does assess B&O tax on companies engaged in business within the State. Since June of 2010, Washington has moved to a single factor apportionment formula in determining where service receipts should be sourced for the purposes of Washington’s B&O tax (see WAC 458-20-19402 http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-19402).
Recently, the Washington State Department of revenue provided a taxpayer favorable Excise Tax Advisory (“ETA”), whereby the Department categorized IC-DISC commissions as apportionable out of state.
ETA 3178.2013, issued on July19, 2013, provided as its purpose: “This Excise Tax Advisory (ETA) explains the Department’s position regarding the business and occupation (B&O) tax on Domestic International Sales Corporations (DISCs) after the adoption of Economic Nexus and Single Factor Receipts Apportionment.”
The ETA also clarified that the commissions received by an IC-DISC are subject to the service and other activities B&O classification.
In discussing the attribution of IC-DISC receipts, the Department provided the following analysis:
WAC 458-20-19402 (Rule 19402) explains how receipts subject to apportionment are attributed. The first step is where the customer (in this case the Parent) receives the benefit of the service. The benefit of a service that relates to tangible personal property is received where the property is located or will be located. Rule 19402(303)(b).
Rule 19402(304)(b) Example 13 states that when the service is commission sales, the benefit is received where the tangible personal property is delivered. In the case of a DISC, the tangible personal property is always delivered to a foreign location. Therefore, a DISC will not have any receipts attributed to Washington.
The Department’s analysis in ETA 3178.2013 stops just short of stating that an IC-DISC is not subject to B&O tax in Washington State. This is important, because under WAC 458-20-19402, merely having receipts apportionable to a non-Washington source may not be enough to eliminate Washington B&O tax liability. Specifically, there are a detailed interplay between the apportionment rules and Washington State Nexus rules under WAC 458-20-19401 (see http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-19401) that must be considered as well.
Taken as a whole, generally Washington State rules provide that a Washington State company must have “nexus” with another state in order to be eligible to apportion under apportionment rules. A company can establish sufficient nexus with any jurisdiction by showing that it has either: (1) $50,000 of property in that specific jurisdiction; (2) $50,000 of payroll in that jurisdiction; or (3) $250,000 of receipts in that jurisdiction. These numbers are indexed to inflation, as provided in WAC 458-20-19405 (see http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-19405).
The fact that an IC-DISC is typically a mere paper company, without employees or property, it is likely that only the receipts factor listed above would apply. Therefore, to the extent the IC-DISC is able to establish receipts of $250,000 or more in a jurisdiction outside of Washington, it should be eligible to apportion receipts. This threshold is met in most IC-DISC scenarios. However, careful analysis should take place.
Based on the taxpayer favorable analysis in ETA 3178.2013, Washington State is tax friendly jurisdiction to incorporate an IC-DISC. While consideration should be given to the rules above, in most cases the B&O receipts should be apportionable out of the State.
IC-DISC tax attorneys
Our greater Seattle IC-DISC Tax Attorneys at can help you determine whether your company qualifies for IC-DISC export tax benefits. If able to establish eligibility, IC-DISC tax attorneys at Harlowe & Falk can help maximize IC-DISC benefits by helping reduce state and local tax, and maximizing your overall IC-DISC structure.
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Mehrdad is a partner at the law firm of Harlowe & Falk LLP. Based in the greater Seattle area, but with clients internationally, Mehrdad's practice includes international tax consulting. This includes consulting with clients on inbound transactions, outbound transactions, mergers & acquisitions, and IC-DISC....