Sales tax often emerges as a topic of conversation when I’m around — an occupational hazard, I suppose. So, I wasn’t surprised the other day when, after ringing me up (and charging me tax), the mom half of a nearby mom-and-pop store wondered aloud why Amazon often didn’t charge her tax. After all, we live and shop in Washington, where Amazon is based.
What’s going on? Why wouldn’t Washington-based Amazon charge a Washington resident Washington sales tax?
By a curious twist of fate, most of my retailer friend’s purchases are sold not by Amazon itself, but by third-party sellers who use Amazon’s platform to reach customers. Although Amazon sells plenty of its own products (which are subject to tax in Washington), about half of all its sales are by third-party vendors. It’s a perfectly legal arrangement and a smart sales strategy for a growing number of sellers. According to a recent report by Internet Retailer, “sales on online marketplaces crossed $1 trillion in 2016.”
By an even more curious twist of sales tax law, Amazon isn’t required to collect Washington tax on its third-party sales. No marketplace provider is. For now.
However, Washington’s new budget includes a provision to tax sales by most marketplace providers, including Amazon, and indeed most remote sales. Unless the law is challenged (a distinct possibility) my retailer friend should be charged tax on all (taxable) Amazon purchases starting January 1, 2018. And now for the final curiosity: she’ll be happy to be charged tax.
The newest tactic in state efforts to capture remote sales tax revenue
Taxing marketplace providers is the newest tactic in the states’ battle to collect more tax revenue from remote sellers, those lacking a physical presence in the state. Indeed, Washington is only the second state to enact a tax on marketplace providers, following the path blazed by Minnesota.
Yet, Washington’s new policy differs from that of Minnesota in a few key ways. Notably, it considers a marketplace facilitator or referrer “an agent of any marketplace seller making retail sales through the marketplace facilitator’s physical or electronic marketplace or directly resulting from a referral of the purchaser by the referrer.” Furthermore, marketplace facilitators may be required to “make available to the department [of revenue] any information the department determines is reasonably necessary to enforce the provisions” of the bill.
Taxing remote sales is controversial and can open a state up to a lengthy legal battle. That’s because the Supreme Court of the United States ruled in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) that a state cannot impose a tax obligation on a business lacking a substantial connection (nexus), defined as a physical presence, with the state. Minnesota hopes to sidestep, or at least delay, legal troubles by delaying implementation unless the Supreme Court modifies its decision on Quill or Congress authorizes states to tax remote sales. Washington is giving qualifying sellers a choice.
A choice: Collect tax or fulfill use tax reporting and notification requirements
House Bill 2163 provides two options for remote sellers that have either a physical presence in the state (e.g., Amazon) or meet the state’s new economic nexus threshold, as specified in the bill. Beginning January 1, 2018, remote sellers and marketplace facilitators with at least $10,000 in Washington gross receipts in the current or preceding calendar year must either:
- Collect Washington retail sales or use tax on taxable retail sales, or
- Comply with certain sales and use tax notice and reporting provisions
For marketplace providers, the $10,000 threshold refers to all Washington sales made through the marketplace — its own and third-party sellers. Referrers with gross business income from referral services sourced to Washington of at least $267,000 in the current or preceding calendar year are subject to the same choice.
Use tax notification and reporting requirements
Washington’s new use tax notification and reporting provisions are similar to Colorado’s use tax notice and reporting law, which took effect July 1, 2017. In brief, qualifying marketplace providers and remote sellers who opt to not collect sales or use tax on taxable retail sales must inform their customers that use tax is due directly to the state if sales tax isn’t collected at the time of sale. They must also send, by February 28 of each year, a report of a consumer’s sales activity (purchases along with the date sold and purchase price) to the consumer and the Washington State Department of Revenue (WDOR). This should help the department ensure consumers pay the use tax they owe on remote sales.
Qualifying remote vendors that choose not to collect and fail to comply with the use tax notification requirements face stiff penalties. For example, sellers with in-state gross receipts of at least $300,000 are subject to fines that include:
- $20,000 for failure to provide the required notice to consumers at the time of sale
- $100,000+ for failure to provide consumers with annual reports
- The greater of $20,000 or $25 per customer for failing to provide WDOR with an annual report
However, marketplace providers won’t be held liable for failure to collect if the decision to not collect was based on incorrect information provided by an unaffiliated seller.
Sales and use tax compliance could get more complicated
The new policy isn’t set to take effect until January 1, 2018. For sales of digital products and digital codes — other than specified digital products and digital games — collection and reporting requirements won’t take effect until January 1, 2020. This gives affected companies time to come up with a plan and execute it.
It also means that my Main Street retailer friend won’t be happy for at least six more months. She wants to pay tax when she purchases items from Amazon marketplace sellers because she has to charge her customers tax when we shop at her brick-and-mortar store. For her, it’s a question of fairness.
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