Last night and this morning there was an ongoing discussion about taxes and teleworking on one of my groups– especially for small firms (LLC often). All of the folks are based in WA-state and thus subject to B&O and sales tax. The discussion also caused me to look at the future of taxation – why, governments are slow to adapt to technological change.
First item was simple: in WA state an individual or business that buys stuff on the internet is suppose to self-report and pay tax to Olympia. It is unlikely that individuals will be audited on this (cost benefit is negative unless they can get massive cooperation from credit card companies); businesses are a different issue – if you are registered in Olympia and file B&O, then they know the size of revenue target that you present. My own solution is to buy items from Amazon if it is for business use because they charge me tax (thus saving the cost of tracking and self-reporting).
Second item is B&O, there was an opinion on the ability to apportion the tax for services done out of state. IMHO, there’s a gotcha, if it is programming services producing a product for sale, it borders close to manufacturing that does not allow apportioning. The second issue is that you will likely have to declare jurisdiction – this opens up the risk of the taxation authority in the other jurisdiction being informed (perhaps not this year, but perhaps next year). You may now be under double-taxation jeopardy – and states do not have treaties dealing with this area.
One of my favorite sites in dealing with the complexities of cross border taxation in http://www.centa.com and I have several time corresponded with the tax specialists there. While country by country rules cannot be summarized, the reality of how laws are written is simple: if you attend at the customer site for any reason, then you are likely required to do a tax filing in their jurisdiction. The tax filing may also trigger a demand to obtain a business license (and fines for not obtaining one first). You may also require an appropriate VISA – a tourist visa may be insufficient and could result in being barred indefinitely (some Canadians going to customer meetings in the US have been hit by this). The positive thing is that at present the cost-benefit of government doing this is negative – but with technology changing and lean taxation closets – this may change quickly.
I expect tax laws will change to define 'residency' in the near future as being 'electronically connected' to a machine in the country or state for a portion of the day. You are electronically doing work in that location and thus governments want to tax (especially as it's not collecting taxes from someone who could do the same and be in the country). All of the information is easily available on demand from corporate IT departments and it represent an easy way to collect tax – especially from work being done off-shore (hence it’s taxation without representation – always popular with your voters!).
I would actually deem such laws to be rational and appropriate for the times. An employee must obtain proof of a right to work if the person is in the US, it is not required if he is offshore. You could have your entire IT department offshore – even if they were paid the same take-home – you have saved a mountain of taxes to the local governments. The problem is that someone needs to pay taxes to support programs, etc. Requiring offshore folks to have a Tax Identification Number (TIN) would now facilitates taxation of them. The offshore folks may be a company, which means that the company is obligated (no change in the contract price) – most US folks would deem it appropriate to tax fees going offshore for programming etc. after all those fees can be deducted from a business revenue just like wages can.
The tax-code has not kept up with technological change and globalization. Many approaches are untaxed simply because they were too small revenue in the past to bother with. In the future, I see radical change happening – often forced by financial desperation of government – especially mechanism of taxing non-resident, non-voters… i.e. teleworkers and offshore resources.
How if WA dept of Revenue decides to hire me as a consultant – be scared, very very scared!