Washington responds to Wayfair decision with new economic nexus standards

Update 3.19.2019: The Washington Legislature has removed the 200 transactions threshold. Effective March 14, 2018, a remote seller triggers economic nexus in Washington when it has more than $100,000 in annual gross retail sales to Washington consumers in the current or previous calendar year. Starting January 1, 2020, the $100,000 threshold will be based on cumulative gross receipts, not just taxable retail sales. Additional information.

Businesses with no physical presence in Washington state may soon be required to collect and remit Washington sales tax.

New requirements for remote sellers in Washington start October 1, 2018

The Washington State Department of Revenue has published new thresholds for remote sellers. Effective October 1, 2018, businesses located in another state that have no physical presence in Washington but make sales to Washington consumers must follow tax collection laws in Washington if, in the current or previous calendar year, they have:

• More than $100,000 in annual gross retail sales to Washington consumers; or
• More than 200 annual transactions with Washington consumers

This new requirement applies to marketplace facilitators as well as remote sellers. For marketplace facilitators, the thresholds are based on their own sales as well as sales made on behalf of all their marketplace sellers.

South Dakota v. Wayfair snapshot

Washington’s $100,000/200 transactions threshold was inspired by South Dakota v. Wayfair, Inc., the Supreme Court ruling that turned the sales tax world on its head.

For decades, sales tax was based solely on physical presence; states could tax sales by businesses with a physical presence in the state, but not those by businesses without one. On June 21, 2018, the Supreme Court of the United States overturned the physical presence rule via its decision in South Dakota v. Wayfair, Inc. Physical presence still triggers a tax collection obligation, but it’s no longer the sole prerequisite.

The ruling was quite broad; it included no bright-line test like physical presence. Yet it was prompted by South Dakota’s economic nexus law, which requires a business with no physical presence in the state to collect and remit South Dakota sales tax if, in the current or previous calendar year, it has:

• Gross sales into South Dakota exceeding $100,000; or
• 200 or more separate transactions into South Dakota

The Supreme Court found “the economic and virtual contacts” Wayfair and the other respondents had with South Dakota to be a sufficient basis for taxation. It also applauded the law’s small seller exception and the fact that South Dakota’s law is not retroactive.

With little else to go on, a growing number of states are modeling their remote sales tax policies on South Dakota’s law. Washington is now among them.

Another threshold for remote sellers in Washington

Yet the economic nexus policy taking effect in Washington on October 1, 2018, isn’t the only tool the state has to increase remote sales tax collections.

As of January 1, 2018, remote sellers and marketplace facilitators making $10,000 or more in retail sales to Washington purchasers are required to “make a retail sales tax choice”:

• Register with the state and collect and remit sales or use tax on Washington sales; or
• Comply with use tax notice and reporting requirements (learn more about use tax reporting requirements for non-collecting sellers)

Now that the new threshold has been established, the Department of Revenue notes: “Once a business exceeds that $100,000 in retail sales, or 200 transactions, as of October 1, 2018, the business no longer has a choice and must register and collect retail sales/use tax.”

Furthermore, Washington adopted new economic nexus standards for business and occupation (B&O) tax as of July 1, 2017. Learn more here.

Streamlined Sales Tax

Both South Dakota and Washington are members of the Streamlined Sales and Use Tax Agreement. This means they’ve taken steps to reduce the complexity and costs of sales tax compliance for remote businesses.

In Wayfair, the Supreme Court noted that, as a Streamlined Sales Tax (SST) state, South Dakota is working “to prevent discrimination against or undue burdens upon interstate commerce.” It pointed out that SST membership requires:

• A single, state level tax administration
• Uniform definitions of products and services
• Simplified tax rate structures and other uniform rules

Furthermore, SST provides sellers access to sales tax administration paid for by the state, and protects them from audit liability.

Avalara is an SST Certified Service Provider (CSP), meaning it has been certified under the Streamlined Sales and Use Tax Agreement to perform all the seller’s sales and use tax functions, other than the seller’s obligations to remit tax on its own purchases. Learn more about Streamlined Sales Tax at the Avalara Help Center.

You’ll find more information about South Dakota v. Wayfair, Inc., including a list of states with South Dakota–style economic nexus laws, here.