Washington, DC to tax remote internet sales
Update 1.3.2019: The Internet Sales Tax Emergency Amendment Act of 2018 (B22-1070) was signed into law on December 31, 2018. Economic nexus and the tax on sales of digital goods and services took effect January 1, 2019. Marketplace facilitators will be required to collect and remit tax on behalf of third-party sellers starting April 1, 2019.
Washington, D.C. is adapting its sales and use tax laws in response to South Dakota v. Wayfair, Inc. In its June 2018 decision, the Supreme Court of the United States overruled a long-standing physical presence rule, thus allowing states to tax remote sales. Like many states, the District of Columbia intends to do so.
Under current law, only businesses with a physical presence in the District have an obligation to collect and remit sales tax. The Internet Sales Tax Amendment Act of 2018 would require certain persons or retailers with no physical presence in the District to collect and pay sales tax on retail sales. It would also expand the definition of “retailer” to include marketplace facilitators and marketplace sellers, and clarify that electronically delivered products (digital goods) are subject to sales or use tax (not the gross receipts tax).
The Council of the District of Columbia voted 8-4 (with one absent) to approve the measure on December 4, 2018. It now needs the approval of Mayor Muriel Bowser and Congress.
New sales tax requirements for out-of-district sellers
The Internet Sales Tax Amendment Act of 2018 imposes economic nexus on remote retailers: It requires out-of-district sellers with substantial economic activity in Washington, D.C. to collect and remit sales tax in the District.
It also provides a small seller exception. Out-of-district retailers with no physical presence in the District must collect and remit sales or use tax in the District only if, in the current or previous calendar year, they have or had either:
- Gross receipts of more than $100,000 from all retail sales delivered into the District, or
- 200 or more separate retail sales delivered into the District
There will be no retroactive enforcement of economic nexus. In other words, the District will enforce it only from its effective date forward.
New sales tax requirements for marketplace facilitators and sellers
The act also requires marketplace facilitators to collect and remit sales tax on all their sales into the District, both their own and those by third-party sellers. This is true even if the marketplace seller would have been required to collect the tax itself (i.e., under the new economic nexus provision) had the sale not been through a marketplace.
Marketplace sellers would have to collect and remit tax on sales into the District made through non-marketplace channels if its sales surpass the small seller exception.
Digital goods subject to sales and use tax
The act also expands sales tax to retail sales of digital goods. These include the following:
- Digital audiovisual works (e.g., shows, movies, videos)
- Digital audio works (e.g., music)
- Digital books
- Digital codes
- Digital applications (apps) and games
- “Any other otherwise taxable tangible personal property electronically or digitally delivered, whether electronically or digitally delivered, streamed, or accessed and whether purchased singly, by subscription, or in any other manner, including maintenance, updates, and support”
Because of its unique role as our nation’s capital, the process for approving such changes is unique in Washington, D.C.
The proposed act must first be approved by Mayor Bowser or allowed to become effective without her signature. If she vetoes it, the Council of the District of Columbia may override the veto with a two-thirds majority.
Assuming it makes it through this first hurdle, the measure is subject to a 30-day period of congressional review beginning on the day it’s presented to the House and Senate. Congress could pass a joint resolution disapproving the act. If it doesn’t, the act would be published in the District of Columbia Register and allowed to become law.
Alternatively, an emergency regulation requiring immediate enforcement of the act could be adopted.
The act provides an effective date of January 1, 2019, for the economic nexus provision and the tax on digital goods, and April 1, 2019, for the tax on marketplace facilitators.
Close to 30 states have already adopted economic nexus in the wake of Wayfair, and 13 states have codified the sales tax obligations of marketplace facilitators and marketplace sellers. Find out where you’re at risk for establishing economic nexus in this state-by-state guide to sales tax economic nexus rules.
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