NW Tax Wire Is Your Unpaid Intern an Employee? Maybe . . . to - - PDF document

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miller nash llp | Summer 2010

NW Tax Wire

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School is out, and summer intern- ships are beginning across the North-

• west. Employers might not be thinking

about whether their unpaid summer interns qualify as employees under the Fair Labor Standards Act (the “FLSA”). After all, the intern and the employer are on the same page: The intern gets valuable experience, so there is no obli- gation to pay. Right . . . ? This spring, the U.S. Department

• f Labor (“DOL”) announced strict

criteria for unpaid internship positions. Scrutiny of unpaid internships is on the rise in Oregon, as recently reported by the New York Times.1 According to DOL guidance, a position will not qualify as a “training program” that is exempt from wage-and-hour rules under the FLSA unless the following six factors are met:

• The internship, even though it

includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;

• The internship experience is for

the benefi t of the intern;

• The intern does not displace

regular employees, but works under close supervision of existing staff;

• The employer that provides the

training derives no immediate advantage from the activities of the intern, and on occasion its opera- tions may actually be impeded;

• The intern is not necessarily

entitled to a job at the conclusion of the internship; and

• The employer and the intern

understand that the intern is not entitled to wages for the time spent in the internship. If any of the factors are not met, the position will be considered “employ- ment” under the FLSA, and the intern will be entitled to be paid at least mini- mum wage, plus overtime at the rate of time and a half for all hours worked in excess of 40 in a workweek. An intern program that is geared toward training the intern with general skills that could be applied in a variety of employment environments—similar to an academic experience—is more likely to meet DOL’s criteria. A program that focuses

• n the employer’s individual operations,

in which the intern performs “produc- tive work,” is less likely to meet DOL’s criteria. A fi nding that an unpaid intern is an “employee” under the FLSA could have far-reaching consequences beyond wage-and-hour claims. For example, the employer may also be in violation

• f workers’ compensation, unemploy-

ment compensation, withholding, and

• ther federal and state tax laws. It may

turn out that the intern is even eligible to participate in the employer’s benefi t plans as an employee. If a company chooses to bring on unpaid interns this summer, it should take all steps necessary to satisfy all the DOL criteria and document such steps in the intern’s fi

• le. For example, detailed

records of time spent by employees training interns should be kept. Care taken on the front end of the relation- ship can help to avoid later claims for back pay and other benefi ts.

inside this issue

2 WA State Legislative Update 3 Senate Bill 498 4 Business Energy Tax Credit

Is Your Unpaid Intern an Employee? Maybe . . .

by Wayne D. Landsverk

wayne.landsverk@millernash.com

by Merril A. Keane

merril.keane@millernash.com 1 Steven Greenhouse, The Unpaid Intern, Legal or Not, NY Times, Apr. 2, 2010, available at www.nytimes.com/2010/04/03/business/03intern.html?hp.

2 | miller nash llp | NW Tax Wire

(continued on page 5)

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Washington State Legislative Update

During the last legislative session, the Washington legislature made some signifi cant changes to Washington’s tax system. This review highlights and briefl y discusses some of the most signifi cant updates. Corporate Directors Subject to Tax on Compensation (effective July 1, 2010). The new legislation extends busi- ness and occupation (“B&O”) tax to amounts received by an individual for “serving as a director” of a corpora-

• tion. Directors will be taxed under

the “service and other” classifi cation (1.8 percent under the new legislation). Directors will also qualify for the small- business credit that will eliminate the B&O tax on total service income (including directors’ fees) of less than $46,667 per year and reduces the tax

• n service income if less than $93,333.

Employee directors will likely continue to be exempt from B&O tax as long as their pay is in the form of com- pensation received as an employee and not as an independent contractor (i.e., if the payments are separated out, the part designated as payment for services as a director would be subject to B&O tax). Nonresident directors may be subject to B&O tax even if they are not physically present in Washington, depending on the interpretation of the new nexus rules. All amounts received by the di- rectors are subject to B&O tax. This includes cash compensation, noncash compensation including stock and stock options, and amounts paid as reimbursements for the directors’ expenses. The Offi ce of Financial Manage- ment assumes that the tax will be ap- plied to corporate directors’ fees paid by corporations based or headquartered in Washington. How the tax will be administered is still to be determined. Temporary B&O Tax Increase (effective May 1, 2010, through June 30, 2013). Taxpayers in the “service and other” category, real estate brokers, and those in the “gambling contest of chance” B&O tax classifi cations will incur a temporary B&O tax rate increase from 1.5 to 1.8 percent. Corporate Offi cers Strictly Liable for Unpaid Sales Tax. Currently, responsible individuals may be personally liable for sales tax collected but unpaid upon the termi- nation, dissolution, or abandonment

• f an LLC or corporation. The new

legislation expands the defi nition of “responsible individual” to include an

• ffi

cer, manager, partner, or trustee of an LLC regardless of the individual’s tax responsibility or duty. In addition, the legislation makes CEOs and CFOs strictly liable for collected and unremit- ted sales taxes. All other responsible individuals continue to be liable for col- lected and unremitted sales taxes only if they willfully failed to remit the taxes to the Department of Revenue (“DOR”). Tax-Avoidance Transactions. The legislation requires the DOR to disregard three expressly identifi ed tax-avoidance transactions or arrange- ments: 1.

• ne that is, in form, a joint

venture or similar arrange- ment between a construction contractor and the owner or developer that, in substance, provides substantially guaran- teed payments for the purchase

• f construction services;

2.

• ne through which a taxpayer

avoids B&O tax by disguising income from third parties that would be taxable in Wash- ington if the taxpayer had not moved that income to another entity that was not taxable in Washington; or 3. those that avoid sales or use tax

• n property located in Wash-

ington that was transferred to

• r acquired by another entity,

but that the transferor effec- tively retains control over. New Treatment of Options to Purchase Entities. Parties are no longer able to avoid paying Real Estate Excise Tax (“REET”)

• n a sale or acquisition of a controlling

interest (50 percent or more) in an en- tity that owns Washington real property by using options. It is no longer the date on which an option is exercised that determines whether or not a con- trolling interest has been transferred

• r acquired within a 12-month rolling

by Monica Langfeldt

monica.langfeldt@millernash.com

| 3

(continued on page 5)

» Miller Nash’s Valerie Sasaki was elected as chair of the Oregon State Bar

Taxation Section.

» Ronald Shellan was named President and Valerie Sasaki was named Secretary

• f the recently revived Portland Tax Forum.

» On July 22, Miller Nash will host “Doing Business With the U.K.: A Case

Study in Clean Tech.”

» On August 11, Miller Nash will host a breakfast roundtable on “Health Care

Reform: Immediate Impact and Big Picture for Employers.” For details visit www.millernash.com

Announcements & Events Announcements & Events

Senate Bill 498 (2009): Life in Oregon After Total Retroactivity

One of the hallmarks of good tax policy is predictability in administra-

• tion. Practically speaking, a taxpayer

should be able to rely on the laws in effect when it fi les its tax return. The Internal Revenue Code adopts this approach in IRC § 7805(b), which prohibits any “temporary, proposed, or fi nal regulation relating to the internal revenue laws [from applying] to a tax- able period ending before the earliest

• f the following dates: (A) the date on

which such regulation is fi led with the Federal Register. (B) In the case of any fi nal regulation, the date on which any proposed or temporary regulation to which such fi nal regulation relates was fi led with the Federal Register. (C) The date on which any notice substantially describing the expected contents of any temporary, proposed, or fi nal regula- tion is issued to the public.” There are exceptions for situations in which the IRS is attempting to “prevent abuse” or “retroactively correct a procedural defect in the issuance of any prior regulation.” Many states have statutes that limit the retroactive application of tax laws to situations in which the legislature has made an informed decision to ap- ply a change in law to prior tax years. Arizona, for example, has a Taxpayer’s Bill of Rights that provides: “Unless expressly authorized by law, the [D] epartment [of Revenue] shall not apply any newly enacted law retroactively or in a manner that will penalize a taxpayer for complying with prior law.” Ariz Rev Stat § 42-2078(A). Unlike Arizona, Oregon does not have a taxpayer bill of rights. Oregon Administrative Rule (“OAR”) 150-305.100-(B) states: “Administrative rules adopted by the department, unless specifi ed otherwise by statute or by rule, shall be applicable for all periods open to examination.” The Oregon Depart- ment of Revenue has repeatedly applied new interpretations of existing laws ret- roactively to all open years. We saw this most recently in a policy statement on economic nexus that the Department issued in relation to its Tax Amnesty program. On May 1, 2008, the Oregon Depart- ment of Revenue adopted its economic nexus rule (OAR 150-317.010). This rule mirrors one of the new trends that we have seen in other jurisdictions and in several recent cases holding that a state does not violate the U.S. Commerce Clause if it seeks to tax an out-of-state corporation with no physical presence in the state, provided that the company has “substantial nexus” with the taxing state. Oregon’s tax amnesty program is applicable to all tax years beginning before January 1, 2008. On October 15, 2009, the Oregon Department of Rev- enue issued a statement that it would be applying the May 2008 economic nexus provisions to years that are open under the amnesty program. To see how this can create a problem- atical result, consider the hypothetical

• f a taxpayer ABC, Inc., that did not fi

le a return in 1992 (the year of Quill Corp.

• v. North Dakota, 504 US 298) under the

theory that it has no physical presence in Oregon. Since it had not fi led a tax return, the statute of limitations would remain open for the entire return. The Department could assert that ABC, Inc., should have done so under an economic nexus theory and assess the tax liability, 17 years of interest, substantial under- statement penalties, and (after Novem- ber 19) a 25 percent penalty for failure to participate in the amnesty program. During the 2009 session, the Oregon legislature passed Senate Bill 498 at the initial request of the Oregon Bankers Association, the Oregon Busi- ness Association, and other business

• groups. As passed, this legislation stated

that: “The Department of Revenue may not apply an administrative rule in a manner that requires a change in the treatment of an item of income or expense, a deduction, exclusion, credit

• r other particular on a report or return

fi led by a taxpayer if: (1) The taxpayer fi led the report or return by the date it was due; and (2) The treatment of the item on the report or return was consis- tent with an administrative rule adopted and in effect at the time that the report

• r return was fi

led.” Senate Bill 498 represented a signif- icant advancement from the prior law. It

by Valerie Sasaki

valerie.sasaki@millernash.com

NW Tax Wire | miller nash llp | 4 Once perceived to be a leader in renewable energy development, Oregon now risks becoming a diminishing

• market. The Oregon Business Energy

Tax Credit (“BETC,” pronounced “Betsy”) has been degraded from an effective incentive into something risky, confusing, and uncertain in application, particularly as applied to developing large renewable energy projects and renewable energy equipment manufacturing facilities in Oregon. Investment in these larger, capital-intensive projects is increasingly unattractive because of uncertainty about whether and under what circumstances a project may qualify for a BETC, and whether the rules of the Oregon Department of Energy (the “Department”) will change between the start of construction and completion

• f a project. In addition,

recent and multiple changes to the rate of return available to a BETC investor (which is set by the Department) reduced the effectiveness of the BETC as an incentive, both by injecting further uncertainty into the business community and by making the BETC essentially unmarketable. In 2009, the Department adopted temporary BETC rules that became effective November 3, 2009. For developers of large renewable energy generation projects (those with capital costs exceeding $20 million), one of the most signifi cant and disappointing changes made by the temporary rules

by Michelle Slater

michelle.slater@millernash.com

The Business Energy Tax Credit: No Longer an Effective Incentive for Renewable Energy Resource Facilities

(continued on page 6)

was amending the Department criteria in determining when multiple projects should be treated as one project for pur- poses of the BETC, i.e., determining when a proposed facility is not “separate and distinct” from one or more other

• facilities. The temporary rules expired
• n April 30, 2010, and have since been

replaced with permanent rules. Both the temporary rules and the permanent rules permit the Depart- ment to apply criteria to determine whether a facility is “separate or dis- tinct.” The previous BETC rules (effec- tive June 28, 2008) limited the Depart- ment’s review to existing and proposed facilities of the person or business fi ling an application for a BETC. Under the temporary rules, however, the Depart- ment understood that it was permitted to compare a proposed facility to any

• ther existing or proposed facility or

facilities, regardless of common owner-

• ship. In other words, the Department

could fi nd that a solar facility proposed to be developed in southern Oregon was “the same facility” as an existing wind facility hundreds of miles away owned by a completely unrelated party. With permanent rules just released, it is not yet clear how the Department will interpret its authority with respect to aggregation of projects owned by unrelated parties. The “separate and distinct” criteria in the permanent rules differ only slightly from those in the temporary rules, and there is signifi cant uncertainty about what the rules mean and how the Department will apply them to pending and new

• applications. Also unclear is how the

new rules will apply to preliminary de- terminations made by the Department under the temporary rules that are inconsistent with the permanent rules. Fortunately, the “separate and distinct” debate has less impact on energy effi ciency projects, which tend to be more succinctly defi ned in the statute and rules. This makes it easier for a developer/investor and the Department to determine which costs are allocable to a particular tax-credit applica-

• tion. In addition, the real or

perceived abuses to the BETC program that resulted in many

• f the recent rule changes were

associated with renewable energy resource facilities, causing the Depart- ment to examine those projects with greater scrutiny, at least with respect to multiple applications. Because of the overall cost of the BETC program, however, all BETC applications are be- ing reviewed very carefully. The release of permanent rules may seem to be a favorable turn of events, but it remains to be seen whether the Department will interpret the rules in such a way as to permit projects to actu- D

• “Because of the overall cost of the BETC

program, however, all BETC applications are being reviewed very carefully.”

5 | miller nash llp | NW Tax Wire

team directory

Attorneys in Miller Nash’s tax practice represent clients ranging from national companies to individuals and closely held

• businesses. We help clients plan their

business and investment activities to attain their business objectives while minimizing their local, state, and federal taxes. Members of our team are available to help you with any questions you have. E-mail us at clientservices@millernash.com

• r call us toll-free at 877.220.5858.

Portland

Jeneé L. Gifford William S. Manne Ryan R. Nisle Valerie H. Sasaki Ronald A. Shellan

Seattle

Monica Langfeldt Senate Bill 498 . . . | Continued from page 3

• period. In addition, any company own-

ing Washington real property must disclose the granting of options in its annual report if the exercise of those

• ptions would trigger REET. REET is

not due unless the option is triggered. Expanded Liability for REET. The legislation eliminated the safe harbor that allowed the buyer or transferee to avoid liability by provid- ing written notice to the DOR within 30 days of the date of sale. In addition, unpaid REET is a lien on each parcel

• f real property owned by an entity in

which a controlling interest has been transferred or acquired. Section 210 also provides that a parent corporation is liable for REET as a seller when the parent’s wholly owned subsidiary trans- fers real property or a controlling inter- est and dissolves before paying REET. Partial Repeal of Exemption for Amounts Received by On-Site Property Management. Washington Revised Code 82.04.394 used to provide an exemption from B&O tax on payments for on-site property management. The exemption is now limited to nonprofi t property management companies or to amounts received by a property management company from a housing authority. Economic Nexus Replaces Physical Presence for Services and Royalty Income (effective June 1, 2010). An out-of-state business will be subject to B&O tax on services and roy- alty income if the business meets one of these four criteria: 1. More than $50,000 of the prop- erty is located in Washington;

• 2. More than $50,000 of the pay-

roll is located in Washington; 3. More than $250,000 of receipts come from Washington; or

• 4. At least 25 percent of the

taxpayer’s total property, total payroll, or total receipts are located in Washington. Payroll includes compensation to nonemployee representatives, and prop- erty does not include software residing in servers located in the state. The bill also includes a one-year trailing period, so if a taxpayer meets the requirement in year 1, it is deemed to meet it in year 2 as well. New Single-Factor, Receipts-Based Apportionment Formula. Since 2000, Washington has ap- plied a three-factor apportionment formula for fi nancial institutions, and for the last 70 years has used a cost-ap- portionment formula for businesses re- porting under the “services and other” classifi

• cation. Now both the three-factor

and cost-apportionment formulas are replaced with a single-factor, receipts- based apportionment formula. Under this new formula, Washington’s por- tion of taxable gross income is equal to the gross income attributed to the state divided by the taxpayer’s gross income everywhere. For more information or ques- tions about changes in Washington state tax law, please contact us at clientservices@millernash.com or call us at 877.220.5858. Washington State Legislative Update | Continued from page 2 is still limited, however, in that it applies

• nly to characterization of items on a tax
• return. It does not apply to the question

whether a taxpayer should fi le a return

• r not. So situations in which an auditor

is asserting forced combination or sub- stantial nexus are outside he scope of this bill. It also applies only to “adminis- trative rules adopted or amended by the Department of Revenue on or after the effective date of” Senate Bill 498. So our hypothetical ABC, Inc., is still at risk of signifi cant assessment. The Legislative Subcommittee of the Oregon State Bar’s Taxation Section is working with the Oregon Department

• f Revenue on an administrative rule

(or rules) that will help taxpayers under- stand how the Department interprets its authority in the post-Senate Bill 498

• era. To the extent that Oregon voters

consider a taxpayer bill of rights in the future, it may include an expanded ver- sion of the parameters we saw in Senate Bill 498.

NW Tax Wire™ is published by Miller Nash LLP. This newsletter should not be construed as legal opinion on any specifi c facts

• r circumstances. The articles are intended for general informational purposes only, and you are urged to consult a lawyer con-

cerning your own situation and any specifi c legal questions you may have. To be added to any of our newsletter or event mail- ing lists or to submit feedback, questions, address changes, and article ideas, contact Client Services at 503.205.2608 or at clientservices@millernash.com.

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The Business Energy Tax Credit . . . | Continued from page 4 ally move forward. Oregon developers and investors are trying to understand which rules apply to their projects at any particular time. Until developers and investors understand the Depart- ment’s position on how the permanent rules will be applied, development

• f large renewable energy projects in

Oregon will likely continue to decline. On top of this, adverse economic conditions are forcing elected offi cials to examine every program that impacts the general fund, including the BETC program (which reduces the amount

• f tax revenue received by the state).

When the legislature convenes in 2011,

• ne of the issues that it will consider is

whether to let the BETC program expire in 2012 as scheduled.1 The legislature may extend some or all of the program, but it is unlikely to remain in its current

• form. In this revenue-constrained

environment, the larger incentives (those for renewable energy resource and manufacturing facilities) will likely be removed from the BETC program. Ideally, new incentive programs will be adopted for those types of projects to enable further renewable energy development in Oregon and add to the strength of Oregon’s reputation as a leader in conservation, effi ciency, and renewable development. Michelle Slater focuses her practice on the energy and sustainability industries. She is a member of the Oregon State Bar Sustainable Future Section Executive

• Committee. Michelle can be reached at

(503) 205-2565 or at michelle.slater@ millernash.com. This article also appeared in the Future of Energy newsletter at www.futureofenergypdx.org

1 The portion of the BETC program for manufacturing facilities does not expire until 2014.