On June 30, 2015, Washington state Governor Jay Inslee signed into law Engrossed Substitute Senate Bills (ESSB) 6138 and 6057 as a new two-year budget bill.
The new law affects Washington companies, but more important, it also affects out-of-state businesses that currently may not be considered as doing business in the state. Below, we answer some of the key questions organizations are asking about the main provisions of the new law.
Provisions Effective September 1, 2015
Will I be subject to wholesaling B&O tax?
Under current law, Washington applies two different standards to determine nexus for B&O tax purposes: physical nexus and economic nexus. Taxpayers engaged in nonapportionable activities, such as retailing and wholesaling, are deemed to have physical nexus in the state only if they have a physical presence in the state. Taxpayers engaged in apportionable activities, such as service and other activities, are deemed to have economic nexus in the state if they meet any of the following criteria:
- They have more than $267,000 of Washington receipts.
- They have more than $53,000 of Washington property.
- They have more than $53,000 of Washington payroll.
- At least 25 percent of their total receipts, payroll, or property is in Washington.
What’s changed is this: Now that the bright-line test includes not only apportionable activities but also wholesaling activities, taxpayers making wholesale sales to Washington no longer need a physical presence in the state to be subject to wholesaling B&O tax.
Will I be obligated to collect and remit sales tax from Washington customers on Internet sales?
Historically, many states have interpreted the physical presence prerequisite for nexus to include not only a taxpayer’s direct activity within the state, but also any indirect activity the taxpayer conducts through other entities or persons. Washington, until now, hasn’t been one of them.
This interpretation of nexus includes, for example, situations in which an out-of-state seller enters into an agreement with a state resident such that the resident refers potential customers to the remote seller through a Web site link in exchange for a commission. This is commonly referred to as click-through nexus; the seller in this example would have click-through nexus to the advertiser’s state and therefore would be required to collect and remit sales tax to that state.
Under the new law, Washington’s legislature clarified that the state will now apply click-through nexus standards to remote sellers if the aggregate sales from all such agreements exceed $10,000 during the preceding calendar year. This means some out-of-state sellers that haven’t had an obligation to collect and remit sales tax from Washington customers may become obligated to do so on September 1.
In summary, your company may now be required to collect and remit state sales tax if a Washington resident (either a company or an individual) refers customers to you through a Web link for a fee.
Provisions Effective August 1, 2015
How will my royalty income be taxed?
Royalty revenue will be taxed at 1.5 percent starting August 1. Under current law, royalty revenue has been taxed at a special preferential B&O tax rate of 0.484 percent. The new Washington law repeals this preferential rate.
What are the changes to late filing penalties?
ESSB 6138 increases late filing penalties by 4 percent. Previously 5 percent to 25 percent depending on the lateness of the return, the penalties will now range from 9 percent for one day late to 29 percent for 60 or more days late.
Provisions Effective July 1, 2015
Which tax incentives have been extended or changed?
With Washington’s new state operating budget enacted, extensions and changes to several tax incentives became effective on July 1, 2015.
One incentive was extended until July 1, 2025, and that’s the B&O tax exemption for manufacturing seafood products and sales of wholesale seafood to persons who transport the goods out of state in the ordinary course of their business.
Two valuable former incentives that expired December 31, 2014, weren’t renewed by the legislature: the High Technology B&O Tax Credit and the High Technology Sales and Use Tax Deferral.
For a list of changes to other existing incentives effective July 1, 2015, visit the Department of Revenue’s Web site, or contact your Moss Adams professional.
We Can Help
Whether you’re based in Washington or are based in another state and have operations in Washington, we can help you understand how your organization may be impacted by the new legislation and manage your state tax liabilities. For more information, reach out to your Moss Adams professional, or contact:
Marke Greene, Partner
Adam Cline, Senior Manager