Washington seeks tax revenue from out-of-state sellers
- Mar 3, 2017 | Gail Cole
Update Aug. 17, 2017: Washington has enacted legislation requiring remote sellers and marketplace providers with at least $10,000 in annual Washington sales to either collect sales or use tax, or comply with certain sales and use tax notice and reporting requirements. Learn more.
Untaxed ecommerce sales are expected to cost the state of Washington approximately $353 million in sales and use taxes in Fiscal Year 2018. The legislature says the current policy of restricting states from taxing sales by remote sellers is unfair and harms the state. Two identical measures (Senate Bill 5855 and Senate Bill 5856), both introduced earlier this week, seek to address this perceived inequity by expanding nexus in Washington.
Nexus is a connection between a seller and a state that requires the seller to collect and remit tax on sales made in that state. For sales tax, precedent requires the connection to be a substantial physical presence. Yet with ecommerce growing and sales tax revenues decreasing across the nation, many states are looking to broaden their definitions of nexus and tax more sales by out-of-state sellers.
To that end, Washington established click-through nexus as of Sept. 1, 2015. Under this policy, remote entities that enter into agreements with Washington residents and provide a commission or other consideration for referrals (such as website links) have nexus when such referrals gross more than $10,000 in sales in the state during the prior calendar year.
The two measures introduced this week would expand the definition of nexus even further. They seek to establish both economic nexus — whereby a substantial connection is created when an entity does a certain amount of business in (or has a certain number of economic ties to) the state — and affiliate nexus, whereby a tax obligation is created through ties to in-state affiliates.
In addition, the measures would impose use tax notification reporting requirements on noncollecting out-of-state vendors.
Out-of-state sellers making sales in Washington would be required to collect and remit retail sales tax when at least one of the following conditions is met:
- The seller has more than $267,000 of receipts from Washington during the current or preceding calendar year
- The seller has more than $53,000 of property in Washington
- The seller has more than $53,000 of payroll in Washington
- At least 25 percent of the seller’s total payroll, property, or receipts is in Washington
A tax collection obligation would also be established when a seller’s total gross proceeds of retail sales sourced to Washington exceed $10,000 during the current or immediately preceding calendar year, and:
- “The seller offers its products for sale through one or more marketplaces operated by any marketplace facilitator that has a substantial nexus with Washington;” or
- “The seller or another person …, including an affiliated person, other than a common carrier acting solely as a common carrier, engages in or performs any activities in the state” that are “significantly associated with the seller’s ability to establish and maintain a market” for the seller’s products in Washington
Activities by affiliates considered significant enough to trigger nexus include, but are not limited to:
- Selling a similar line of products as the seller and doing so under the same business name as the seller or a similar business name as the seller
- Using employees, agents, representatives, or independent contractors in this state to promote or facilitate sales by the seller to purchasers in this state
- Maintaining, occupying, or using an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery or sale of tangible personal property sold by the seller to the seller's purchasers in this state
- Using, with the seller’s consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller
- Delivering, installing, assembling, or performing maintenance or repair services for the seller's purchasers in this state
- Facilitating the sale of tangible personal property to purchasers in this state by allowing the seller's purchasers in this state to pick up or return tangible personal property sold by the seller at an office, distribution facility, warehouse, storage place, or any other place of business maintained by that person in this state
- Sharing management, business systems, business practices, or employees with the seller or, in the case of an affiliated person, engaging in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller's market in this state
A tax obligation could also be created for sellers whose payment methods involve ties to associations, banks, or processors with substantial nexus with Washington.
Use tax notification
Certain out-of-state sellers who do not collect and remit Washington sales and use tax would be required to comply with new notice and reporting requirements.
SB 5855 states, “For taxable retail sales made through a marketplace facilitator or other agent, the marketplace facilitator or other agent must … provide a notice to each consumer at the time of each taxable retail sale.” The notice must include all the following information:
- A statement that neither sales nor use tax is being collected or remitted
- A statement that the consumer may be required to remit sales or use tax directly to the department of revenue
- Instructions for obtaining additional information from the department regarding sales or use tax remittance
Furthermore, affected retailers must provide annual reports to each notified consumer by January 31. These reports must include a list “generally indicating the type of product purchased or leased during the immediately preceding calendar year by the consumer from the seller.”
Consumers must also be notified that the seller is required to provide the Washington Department of Revenue with:
- The total dollar amount of the consumer’s purchases from the seller
- The consumer’s name and billing and/or mailing address
- The shipping address for each product sold or leased to the consumer
- Any other pertinent information the department may require
There is no guarantee the Washington Legislature will approve one of these bills. However, vendors who make sales into Washington should be prepared for that possibility. Tax automation software facilitates sales and use tax compliance for sellers of all sizes in all states. Learn more.