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May 11, 2016
When Your Business Records Are Not Good Enough For Washington State Tax Purposes
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Recently, I wrote an article for State Tax Notes (Tax Analysts, March 14, 2016).  It describes a trend by Washington State to determine your tax liability by actions that others have taken or will be taking.  In other words, your tax consequences are not based on your actions, but based upon another’s actions.  Often, you will have no way of proving what that third-party did or did not do so that you can know how to report your tax liability.

In the article, I list some examples from 1983 to a 2016 ballot measure this fall that illustrate this trend, and the difficulty for a taxpayer to know how it should report its taxes.  It’s a troublesome trend, and there are some legitimate questions about whether the practice meets due process clause requirements.

The most recent example is Initiative 732 that will be on the November 2016 ballot.  If approved by the voters, it will add a carbon tax, reduce the manufacturing B&O tax, reduce the state’s share of the sales and use taxes by 1% and fund a remittance program for low income citizens.  (Based on my cynicism, I predict that the 1% reduction in the sales tax and the remittance program will tip this initiative in favor of passage, and the overall merits of his initiative tax will be irrelevant.) 

Because the tax is on carbon-related products, the tax does not apply if the product was produced by non-carbon means.  Let’s take electricity purchased from out-of-state brokers as an example.  The presumption is that electricity is produced by a carbon process (e.g., coal or other fossil fuels), so all electricity is subject to the carbon tax.  However, you can claim a carbon tax credit for electricity to the extent the electricity was produced by non-carbon means (e.g., hydroelectric, solar and wind).  The credit will likely be illusory because it will be difficult for you to know if the electrons that you theoretically consumed came from carbon or non-carbon means unless all of your power came from a single generator. How will you know which of those electrons that you used to run your manufacturing operations came from non-carbon sources?  Typically, power is not purchased from the generator but from a broker who has many different sources.  The mix of the power source in the grid is not static and the percentage of the source changes every time more power is added to the grid, unless the generators add power to the grid in the same proportion and at the same time.  That’s not likely.  And with brokers buying power many times within a day from different sources, your mix of creditable power theoretically change several times a day.  How can you know what your carbon tax credit should be when producers are adding power to the grid and brokers are buying and selling power from the grid at random times?  Good luck with that.

You can read the article by clicking on the link above labeled “Files.”

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