The Washington State Legislature currently is considering House Bill 2970 and Senate Bill 6714, which, with all the subtlety of a Mid-Atlantic snowstorm, would change the way the Washington Department of Revenue enforces the tax laws. HB 2970 and SB 6714 give the Department the authority to invalidate “abusive tax avoidance transactions” and to assess a 35% penalty on the additional tax obligation if a taxpayer is found to have engaged in abusive tax avoidance. An abusive tax avoidance transaction is defined as any transaction that lacks economic substance. The total Washington State penalties imposed on perceived abusive transactions could reach 60% (or more).
This legislation would create uncertainty for companies doing business in the state. There are provisions of HB 2970 directing the Department to adopt rules explaining its interpretation of an “abusive tax avoidance transaction,” but the uncertainty that is sure to exist in the interim is likely to hinder major corporate investment in the state. This legislation is worth watching – stay tuned.