Ensuring fair treatment in our state’s tax system

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Imagine you’re a business owner who discovered a clerical error on tax reporting papers. You decided to do the right thing and report it to the state Department of Revenue (DOR). Your reward is a fine of hundreds of thousands of dollars.

Doesn’t seem fair, right? Unfortunately, that’s exactly what happened to an Eastern Washington company.

Washington has nearly 700 tax preferences, which are defined as an exemption, exclusion or deduction from the base of a state tax, a credit or deferral of a state tax, or a preferential state tax rate. These tax incentives are frequently provided to attract and grow jobs, and to make it financially easier to do business in our state.

Beneficiaries of the tax incentives have certain reporting requirements, often to prove they are meeting the state’s intended goals to qualify for that preferred tax rate. One of those beneficiaries was an Eastern Washington food-processing firm.

In 2011, a bookkeeper for that firm filled out a report to DOR so the company could continue its eligibility for the lower tax rate. Unfortunately, she put a correct number on a wrong line of the form.

DOR never noticed the clerical error. When the food-processing firm audited its books in 2015 – some four years later – company officials discovered the inadvertent error. They notified DOR. The state agency responded by issuing a fine of $660,000 for a simple error voluntarily brought to DOR’s attention by the company.

Some may think DOR was being hard-nosed. The reality, however, is the agency was following state law, which required a fine of 100 percent of the tax preference the company received. DOR had no choice in the matter.

Company officials notified Rep. Terry Nealey about what they felt was an excessive fine for a simple error. Nealey, ranking member of the House Finance Committee, agreed and introduced House Bill 2540. The bipartisan measure sought to enact a more reasonable response in state law, reducing the penalty to 35 percent of the tax preference claimed. More than 20 lawmakers signed on to co-sponsor the legislation.

The bill passed the House and Senate unanimously. The governor signed the measure and it went into effect on July 1, 2016.

As Nealey noted in an opinion editorial, “People who do the right thing should not be thrown out of business because of a simple clerical error.” He added House Bill 2540 was a small, but important way to ensure a more equitable tax system throughout the state.