Washington state simplifies sales tax compliance for out-of-state sellers
Update 3.20.2019: The effective date of the non-collecting use tax notice and reporting changes has been updated.
Washington was one of the first states in the nation to jump on the economic nexus bandwagon in the wake of South Dakota v. Wayfair, Inc. Now it’s leading the charge on a new trend: simplifying sales tax compliance for remote sellers.
In the Wayfair decision (June 21, 2018), the Supreme Court of the United States overruled a long-standing physical presence rule, thus allowing states to base a remote seller sales tax collection obligation solely on economic activity (economic nexus). The South Dakota law that triggered the case uses two thresholds to determine whether economic nexus has been met: $100,000 in sales or 200 separate transactions in the state in the current or previous calendar year.
Washington quickly responded to the decision by setting economic nexus thresholds similar to those established in South Dakota: more than $100,000 in annual gross retail sales in the state or 200 transactions in the state in the current or previous calendar year. Sales tax economic nexus took effect in Washington on October 1, 2018.
Tracking sales and transactions in one or two states might not be that big of a deal for a business, though it would be a hassle. Tracking sales and thresholds in more than 30 states, many of which have different thresholds (e.g., $250,000 or 200 transactions), is flat-out challenging; and that’s the reality many businesses now face.
So, Washington has acted fast again.
On March 12, 2019, the Washington Legislature passed a measure (SB 5581) clarifying and simplifying nexus provisions “by facilitating the collection of new tax revenue resulting from the United States supreme court’s decision in South Dakota v. Wayfair, Inc.” Governor Jay Inslee signed it into law on March 14, and it took effect immediately.
The new law simplifies Washington’s economic nexus law by:
- Changing the economic nexus sales threshold for the retail sales tax and B&O tax
- Eliminating the transactions threshold
- Eliminating click-through nexus
- Eliminating non-collecting seller notice and reporting requirements
Details on each of the above changes are provided below. For simplicity’s sake, the key takeaways are:
- As of March 15, 2019, a remote seller is required to register with the state and collect and remit sales tax if it has more than $100,000 in annual retail sales to Washington.
- As of January 1, 2020, a remote seller is required to register with the state and collect and remit sales tax if it has more than $100,000 in cumulative gross income in Washington annually.
New economic nexus sales thresholds for retail sales tax and B&O tax
Different states with economic nexus calculate their sales thresholds differently. For example, some include all sales into the state (South Dakota), some specifically exclude sales for resale (Illinois), and some include only taxable sales of goods (New York).
Washington has changed the type of sales that trigger the threshold as follows.
Retail sales tax: October 1, 2018 through December 31, 2019. The $100,000 threshold for retail sales tax is based on cumulative gross receipts from retail sales in Washington.
Retail sales tax: From January 1, 2020, forward. The $100,000 threshold for retail sales tax is based on cumulative gross income in Washington.
B&O tax: July 1, 2017, through December 31, 2019. Economic nexus for B&O tax is established when an out-of-state business meets either of the following thresholds:
- More than $267,000 of yearly gross receipts sourced or attributed to Washington in 2017/more than $285,000 of yearly gross receipts sourced or attributed to Washington in 2018; or
- At least 25 percent of total yearly gross receipts sourced or attributed to Washington.
B&O tax: From January 1, 2020, forward. The economic nexus threshold for B&O tax matches the retail sales threshold of $100,000, which is based on all gross income, not just retail sales.
Transactions threshold eliminated for sales tax economic nexus
As of March 15, 2019, the transactions threshold is removed from Washington’s economic nexus law, and the sales threshold is amended. Thus, economic nexus is established as follows.
October 1, 2018, through March 14, 2019. A remote retailer establishes economic nexus when, in the current or previous calendar year, it has either:
- More than $100,000 in cumulative gross receipts from retail sales in Washington; or
- 200 transactions with Washington customers.
March 15, 2019, through December 31, 2019. The 200 transactions threshold is eliminated. A remote retailer establishes economic nexus when, in the current or previous calendar year, it has more than $100,000 in cumulative gross receipts from retail sales in Washington.
The $100,000 threshold applies to all retail sales, including sales made through a marketplace facilitator. And as stated above, the $100,000 threshold will be based on cumulative gross income in Washington effective January 1, 2020.
Click-through nexus eliminated
Before the Supreme Court gave tacit approval to economic nexus, many states sought to tax remote sales via click-through nexus (basing a sales tax collection obligation on referrals from in-state businesses).
September 1, 2015, through March 14, 2019. Washington’s click-through nexus law requires a remote seller to collect and remit sales tax if:
- The remote seller enters into an agreement with Washington residents and paid a commission or other consideration for referrals to the remote seller; and
- The cumulative gross receipts from such referrals exceed $10,000 during the preceding calendar year.
From March 15, 2019, forward. Click-through nexus in Washington is eliminated. Additional information.
Non-collecting seller use tax reporting requirements eliminated
In yet another effort to enhance remote sales tax collections, Washington developed use tax notification and reporting requirements for non-collecting sellers, effective January 1, 2018. These have now been removed.
January 1, 2018, through June 30, 2019. 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 non-collecting sellers
From July 1, 2019, forward. The non-collecting seller use tax notice and reporting requirement has been removed, as has the $10,000 threshold for remote sellers. From July 1, 2019 on, the only threshold remote sellers need to worry about in Washington is the $100,000 threshold. Additional information.
All these changes can make one’s head spin. In the long run, however, they’ll simplify Washington sales and use tax compliance for remote businesses.
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