Washington State E-Fairness Legislation
- Feb 23, 2015 | Gail Cole
Update, 8.12.2015: Click-through nexus takes effect in Washington on September 1, 2015. Read more.
Lawmakers in Washington State are considering legislation that seeks to improve tax fairness for businesses engaged in electronic commerce.
Senate Bill 5541 would accomplish this in several ways:
- Eliminate inconsistent tax treatment of digital business inputs
- Ensure prewritten computer software developers remain eligible for the manufacturing machinery and equipment sales and use tax exemption
- Provide greater clarity for out-of-state sellers concerning their tax obligations
Inconsistent tax treatment of digital business inputs eliminated
Under current Washington law, retail sales of digital goods such as ebooks and music files are subject to tax unless specifically exempted. However, businesses may purchase digital goods exempt from sales tax when those goods are used solely for business purposes.
The Washington legislature now “finds that there has been a significant migration of digital business inputs from digital goods to digital automated services in the past several years…. [and] this migration has significantly undermined the effect of the legislature’s policy choice to provide substantial sales and use tax relief for the acquisition of digital business inputs.”
SB 5541 would therefore “reaffirm and restore the … substantial sales and use tax relief to businesses for their acquisition of digital business inputs” by providing a sales and use tax exemption for digital automated services--not simply digital goods--used solely for business purposes. A business purchasing such goods and services must provide the seller with a properly completed exemption certificate in order for the exemption from sales and use tax to be valid.
Eligibility for the manufacturing machinery and equipment sales and use tax exemption expanded
SB 5541 adds the following to the definition of manufacturer eligible for the above-mentioned exemption:
“Is engaged in the development of prewritten computer software that is not transferred to purchasers by means of tangible storage media.”
Tax obligations for out-of-state sellers clarified
The legislature recognizes that under the commerce clause of the United States Constitution, Washington State may not impose an obligation on out-of-state sellers to collect sales and use tax unless the business has substantial nexus. However, the legislature points out that “frequent conflicts [over that policy] have arisen throughout the country” because the United States Supreme Court “has not clearly defined the circumstances under which a physical presence is sufficient to establish a substantial nexus for tax purposes.”
Clarification in Washington will be provided by SB 5541, which provides “clear statutory guidelines for determining when these out-of-state sellers are required to collect Washington’s retail sales tax.” These are as follows (language taken directly from bill):
- A remote seller is presumed to have a substantial nexus with this state and is obligated to collect retail sales tax if the remote seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet web site or otherwise, to the remote seller, if the cumulative gross receipts from sales by the remote seller to customers in this state who are referred to the remote seller by all residents with this type of an agreement with the remote seller exceed ten thousand dollars during the preceding calendar year.
- "Remote seller" means a seller that makes retail sales in this state through one or more agreements described in subsection (1) of this section, and the seller's other physical presence in this state, if any, is not sufficient to establish a retail sales or use tax collection obligation under the commerce clause of the United States Constitution.
The legislation allows for a rebuttal presumption. It also clarifies that substantial nexus exists if a person is (language taken directly from bill):
(a) An individual and is a resident or domiciliary of this state;
(b) A business entity and is organized or commercially domiciled in this state; or
(c) A nonresident individual or a business entity that is organized or commercially domiciled outside this state, and in any tax year the person has:
(i) More than fifty thousand dollars of property in this state;
(ii) More than fifty thousand dollars of payroll in this state;
(iii) More than two hundred fifty thousand dollars of receipts from this state; or
(iv) At least twenty-five percent of the person's total property, total payroll, or total receipts in this state.
Numerous states have enacted similar affiliate nexus legislation and yet the issue of remote sales tax has been stalled at the federal level. The Marketplace Fairness Act of 2013, approved by the Senate in May 2013, has been effectively tabled in the House, where two lawmakers are circulating legislation promoting online sales tax based on origin sourcing.
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