On July 1, Washington Governor Jay Inslee signed a series of bills resolving the Washington state budget. The legislation includes click-through nexus provisions, extends the existing economic nexus provisions to wholesalers with no physical presence in Washington for purposes of the state's Business & Occupation (B&O) tax, and repeals the preferential B&O tax rate applied to royalty income.1 These changes generally are effective August 1, 2015, except for the nexus provisions which take effect September 1, 2015. In addition, Governor Inslee signed legislation generally preserving certain industry-specific tax preferences, with varying effective dates.2

Sales and Use Tax Click-Through Nexus

Beginning September 1, 2015, an out-of-state retailer is presumed to be doing business in Washington and is required to impose, collect, and remit sales and use taxes if the retailer enters into an agreement with a resident of Washington under which the resident receives consideration for referring potential customers, directly or indirectly, to the retailer through a link on the resident's Internet Web site or otherwise.3 This provision only applies if the cumulative gross receipts from sales by the retailer to customers in Washington through all such referrals exceed $10,000 during the preceding calendar year.4

The presumption may be rebutted by submitting proof that the residents with whom the retailer has an agreement did not engage in any activity in Washington on behalf of the remote seller that would satisfy the nexus requirement of the U.S. Constitution during the calendar year in question.5 The retailer may prove this by establishing, in a manner acceptable to the Washington Department of Revenue, that each in-state person with whom the remote seller has an agreement is prohibited from engaging in any solicitation activities in Washington that refer potential customers to the remote seller, and such instate person or persons have complied with that prohibition, or any other means as may be approved by the Department.6

Changes to Sales and Use Tax Exemptions for Software Manufacturers

The sales and use tax exemption applicable to manufacturing machinery and equipment is substantially amended as of August 1, 2015.7 The definition of "manufacturer" is expanded to include persons engaged in the "development of pre-written computer software that is not transferred to purchasers by means of a tangible storage media."8 However, the available sales and use tax exemption for manufacturers under this expanded definition is unavailable to members of an affiliated group of taxpayers meeting all of the following criteria: (i) at least one member was registered to do business in Washington on or before July 1, 1981; (ii) as of August 1, 2015, the combined employment in Washington of the affiliated group exceeds 40,000 full-time and part-time employees; and (iii) the business activities of the affiliated group primarily include development, sales, and licensing of computer software and services.9

Business and Occupation Tax

Economic Nexus for Out-of-State Wholesalers

Economic nexus is extended to out-of-state wholesalers that do not have a physical presence in Washington.10 Specifically, the definition of the term "engaging within this state" with respect to a taxpayer engaging in wholesale sales is modified to include persons who generate gross income from sources within Washington, such as customers or intangible property, regardless of whether the person is physically present in Washington.11 Also, for purposes of meeting the economic nexus thresholds,12 the gross proceeds from Washington sales by wholesalers are included.13

Royalty Income

The preferential B&O tax rate of 0.484 percent for royalty income is eliminated. The new B&O tax rate is 1.5 percent, which is the current rate applicable to "other business or service activities."14

Late Payment Penalties

Finally, late payment penalties generally applicable to Washington taxes are increased to 9 percent (previously, 5 percent) of tax if not received by the due date, to 19 percent (previously, 15 percent) if not received by the last day of the month following the due date, and to 29 percent (previously, 25 percent) if not received by the last day of the second month following the due date.15

Clarification and Extension of Certain Tax Preferences

In contrast to the revenue-generating provisions addressed above, Washington adopted legislation that offsets a portion of the revenue by clarifying and extending certain tax preferences to a variety of industries. Generally, the legislation:

  • Measures substantial nexus based on "the immediate preceding" tax year and not "any tax year;"16
  • Extends the expiration date of tax preferences for food processing;17
  • Provides a sales and use tax exemption for eligible server equipment installed in certain data centers;18
  • Creates a pilot program providing incentives for investments in Washington job creation and economic development;19
  • Continues tax preferences for aluminium smelters;20
  • Clarifies the definition of a newspaper and extends the newspaper preferential B&O tax rate;21
  • Provides a reduced public utility tax for log transportation businesses;22
  • Increases jobs in the maritime trades industry;23
  • Provides a B&O tax credit for businesses that hire veterans;24
  • Defines honey bee products and services as an agricultural product;25
  • Clarifies the taxation of wax and ceramic materials used to make molds;26
  • Clarifies the exemption from the hazardous substance tax for certain agricultural crop protection products warehoused but not otherwise used, manufactured, packaged, or sold in Washington;27
  • Clarifies taxation of certain rented property owned by non-profit fair associations;28 and
  • Addresses administration of unclaimed property laws.29

Commentary

Washington anticipates a significant increase in tax revenue as a result of these newly adopted provisions. The specific exclusion provision for software manufacturers from the sales and use tax exemption applicable to manufacturing machinery and equipment will certainly impact one prominent software company headquartered in the state, and it is intriguing that such exclusion was done through specially tailored language. In many cases, this type of language is used to provide significant tax incentives to one or a select number of companies. In this case, however, the software company impacted by the software manufacturer provision should receive a fair amount of benefit through the sales and use tax data center exemption, so no significant controversy surrounding this change is expected.

By enacting click-through nexus provisions designed to improve sales and use tax collections, Washington follows Nevada's recent adoption of a similar statute.30 Both states have adopted click-through statutes which are similar to the language adopted by New York, possibly in an attempt to inoculate these statutes from constitutional challenges. The New York State Court of Appeals, the state's highest court, has held that New York's click-through nexus statute does not facially violate the U.S. Constitution under either the Commerce or Due Process Clauses.31

Along with the various states that have proposed or enacted sales tax nexus laws, the Marketplace Fairness Act is currently being considered by the U.S. Senate.32 The House of Representatives is considering a similar bill recently introduced by U.S. Representative Jason Chaffetz (R-Utah).33 Generally, both bills would allow states meeting certain requirements to require remote sellers to collect and remit sales tax to jurisdictions in which their customers are located. Online retailers with out-of-state sales of no more than $1 million a year would be exempt for at least some period of time. Presumably, if federal legislation addressing this issue is enacted, the need for the states to enact separate clickthrough nexus legislation will fade.

Footnotes

1 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session.

2 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session.

3 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 202. An out-of-state retailer engaging in such agreements with Washington residents would also be presumed to have substantial nexus for purposes of Washington's B&O tax.

4 Id.

5 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 202(1).

6 Id. "Remote seller" is defined to include a seller that makes retail sales in Washington through one or more agreements with Washington residents, and the seller's other physical presence inWashington, if any, is not sufficient to establish a retail sales or use tax collection obligation under the Commerce Clause of the U.S. Constitution. Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 202(2).

7 WASH. REV. CODE § 82.08.02565.

8 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 301(2)(d)(ii).

9 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 301(4).

10 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 203.

11 WASH. REV. CODE § 82.04.066.

12 Generally, companies with more than $53,000 of Washington payroll, $53,000 of Washington property, or $267,000 of Washington receipts, or at least 25 percent of the person's total property, payroll, or sales are to Washington, are considered to have nexus for B&O tax purposes. These thresholds are effective as of 2013. ETA 3195.2015 provides minimum economic nexus thresholds for periods prior to 2013.

13 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 204(4)(c).

14 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 101.

15 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 401(1).

16 Ch. 5 (S.B. 6138), Laws 2015, 3rd Special Session, § 204 (effective August 1, 2015).

17 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 201 et seq. (effective July 1, 2015).

18 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 301 et seq. (effective July 1, 2015).

19 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 401 et seq. (effective September 1, 2015).

20 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 501 et seq. (effective July 1, 2015).

21 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 601 et seq. (effective September 1, 2015).

22 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 701 et seq. (effective August 1, 2015).

23 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 801 et seq. (effective September 1, 2015, and expires July 1, 2019).

24 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 1001 et seq. (effective October 1, 2016).

25 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 1101 et seq. (effective July 1, 2015, except § 1105, which is effective January 1, 2016; § 1104 expires on January 1, 2016).

26 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 1201 et seq. (effective June 30, 2015).

27 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 1901 et seq. (effective September 1, 2015).

28 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 2001 et seq. (effective January 1, 2019, except § 2004, which is effective January 1, 2022; § 2003 expires on January 1, 2022).

29 Ch. 6 (S.B. 6057), Laws 2015, 3rd Special Session, §§ 2101 et seq. (effective July 1, 2015; § 2108 effective July 1, 2016, but effective date subject to delay until July 1, 2017 if the Washington Department of Revenue determines that it cannot efficiently and effectively implement § 2108).

30 Nevada Ch. 219 (A.B. 380), Laws 2015. For a discussion of this legislation, see GT SALT Alert: Nevada Enacts Rebuttable Presumption of Sales and Use Tax Nexus. The following states have enacted click-through nexus laws: Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Kansas, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, Tennessee and Vermont.

31 Overstock.com, Inc. v. New York State Department of Taxation and Finance, 987 N.E.2d 621 (N.Y. 2013); cert. denied, 134 S. Ct. 682 (2013). For a discussion of this case, see GT SALT Alert: New York State Court of Appeals Holds Click-Through Nexus Statute Is Facially Constitutional and GT SALT Alert: U.S. Supreme Court Declines to Consider Whether New York's Click-Through Nexus Statute Is Facially Constitutional .

32 S. 698, "Marketplace Fairness Act of 2015," introduced March 10, 2015. Currently referred to the Committee on Finance for consideration. A previous version of this bill, S. 743 (113th) passed the U.S. Senate in 2013 but failed to pass the U.S. House.

33 H.R. 2775, "Remote Transaction Parity Act of 2015," introduced June 16, 2015.

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