Washington State recently passed legislation extending its Business & Occupation (B&O) tax economic nexus provisions to retailers, expanding its sales/use tax nexus provisions to remote sellers, marketplace facilitators, and referrers as well as creating new use tax reporting requirements.
Economic Nexus for B&O Tax
Effective July 1, 2017, the B&O tax economic nexus provisions were expanded to include retailers; historically, the economic nexus rules only applied to wholesalers and service providers. Retailers will be deemed to have substantial nexus for Washington B&O tax purposes if they have—
- $267,00 of Washington gross receipts;
- $53,000 of either property or payroll in Washington; or
- At least 25% of their total property, payroll, or total receipts in Washington.
If a retailer has substantial nexus with Washington during the calendar year solely based on the property, payroll, or receipts provision, the B&O tax will only be imposed on business activity occurring on and after the date the substantial nexus with Washington was established.
Nexus for Sales and Use Tax
Beginning January 1, 2018, remote sellers, marketplace facilitators, and referrers that meet the economic nexus threshold below, or have a physical presence in Washington, must elect to either—
- collect and remit Washington retail sales/use tax on taxable sales into the state, or
- comply with notice and reporting requirements (see Exhibit).
EXHIBIT
Notice and Reporting Requirements by Taxpayer Type
For purposes of the election requirement, “remote seller” means any seller, other than a marketplace facilitator or referrer, who does not have a physical presence in this state and makes retail sales to purchasers. “Marketplace facilitator” means “a person that contracts with sellers to facilitate for consideration … the sale of the seller’s products through a physical or electronic marketplace operated by the person, and engages … directly or indirectly, through one or more affiliated persons” in certain activities, including any of the following:
- Transmitting or communicating the offer or acceptance between the buyer and seller
- Owning or operating the infrastructure (electronic or physical) or technology that brings buyers and sellers together
- Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller
- Payment processing services
- Fulfillment or storage services
- Listing products for sale
- Setting prices
- Branding sales as those of the marketplace facilitator
- Order taking
- Advertising or promotion
- Providing customer service or accepting or assisting with returns or exchanges
- Software development or research and development activities related to the activities listed above.
“Referrer” means “a person, other than a person engaging in the business of printing a newspaper or publishing a newspaper … who contracts … with a seller to list or advertise for sale … items in any medium, including a website or catalog; receives a commission, fee, or other consideration from the seller for the listing or advertisement; transfers, via telephone, Internet link, or other means, a purchaser to a seller or an affiliated person to complete the sale; and does not collect receipts from the purchasers for the transaction.”
The election requirement has a delayed effective date of January 1, 2020, for retail sales of most digital products and digital codes, with limited exceptions.
Use Tax Notice Requirements
Remote sellers and marketplace facilitators that elect to comply with the notice and reporting requirements must—
- post a conspicuous notice on their website, marketplace, platform, or catalog stating that sales/use tax is due on certain purchases and that Washington requires the purchaser to file a use tax return when sales tax was not charged;
- provide a notice to each customer at the time of sale regarding sales/use tax; such notice must be prominently displayed on all invoices, order forms or sales receipts provided to the customer;
- provide each Washington customer with an annual report no later than February 28 of each year stating that the seller did not collect sales/use tax on the customer’s purchases, along with the customer’s detailed information regarding each transaction for the year; and
- file an annual report with Washington’s Department of Revenue by February 28 of each year with detailed information regarding each Washington customer’s transactions and an affidavit affirming that reasonable efforts were made to comply with notice requirements.
Referrers that elect to comply with notice and reporting requirements must—
- post a conspicuous notice on their platform regarding use tax obligations stating that sales/use tax is due on certain purchases and Washington requires a purchaser to file a use tax return if sales tax was not charged;
- by February 28 of each year, provide a notice to the referrer’s marketplace sellers who potentially had Washington customers which includes certain information regarding Washington transactions and a statement that a seller with $10,000 in Washington-sourced sales must either collect tax on its sales or comply with the use tax notice and reporting requirements; and
- submit an annual report to the Washington Department of Revenue by February 28 of each year with a list of sellers who received a notice as outlined above and an affidavit affirming that the referrer made reasonable efforts to comply with notice and reporting requirements.
A remote seller, marketplace facilitator, or referrer who fails to elect to collect or to comply with the notice requirements will be presumed to have elected to comply with the notice requirements.
Penalties for Failure to Comply with Use Tax Notice Requirements
Significant penalties exist for failure to comply with the notice reporting requirements. Remote sellers are subject to the following penalties, which vary slightly depending on whether the taxpayer is a referrer:
While economic nexus rules for sales tax collection remain unconstitutional, it is not year clear how the notice reporting provisions will ultimately be judged.
- Failure to provide notice to consumers at time of purchase—annual penalty of $20,000
- Failure to provide annual report to each purchaser listing sales in the previous calendar year—penalties range from $5,000 (less than $50,000 in Washington receipts) to $100,000, plus $20,000 for every $50,000 in gross receipts more than $300,000
- Failure to file an annual report with the Washington Department of Revenue—penalty of $25 multiplied by the number of buyers that should have been included ($20,000 minimum penalty).
Washington joins a number of states enacting economic nexus or notice reporting rules. While economic nexus rules for sales tax collection remain unconstitutional, it is not year clear how the notice reporting provisions will ultimately be judged. These latest changes may be significant for online sellers with Washington customers and could have significant ramifications on how remote sellers do business, as they allow Washington to assess significant penalties for non-compliance. CPAs with clients who may fall within the new nexus guidelines should review their activities to determine if they have any Washington filing and/or reporting responsibilities.
