United States

Washington State: Proposed Legislation Would Adopt Economic Nexus Standard for Sales and Use Taxes

Apr 06, 2015
From KPMG TaxWatch

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Recently introduced Washington House Bill 2224 would, per the bill’s analysis, “improve the fairness of Washington’s tax system” and “implement marketplace fairness.” Marketplace fairness would apparently be accomplished by adopting several new criteria under which out-of-state businesses could establish nexus with Washington, including adopting click-through nexus, attributional nexus, and affiliate nexus provisions. Nexus could also be established if a remote seller made sales through a marketplace facilitator with Washington nexus, or used a credit card or other payment facilitator that had physical presence nexus in Washington.  The bill recognizes that per the Quill and Bellas Hess U.S. Supreme Court precedents, substantial nexus under the Commerce Clause requires that a remote seller have a physical presence in the taxing state. Despite this acknowledgement, House Bill 2224 would extend the state’s Business and Occupation (B&O) tax economic nexus provisions to remote sellers. As such, a remote seller with over $267,000 of sales to Washington customers would be required to collect and remit Washington sales and use tax. Interestingly, the motivation behind this proposed change appears to have come from Justice Kennedy’s concurring opinion in the recent DMA v. Brohl case. In his concurring opinion, Kennedy stated that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill” and that the “legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.” House Bill 2224 is intended to address the “significant harm and unfairness brought about by the physical presence nexus rule by testing the boundaries of the rule.”

Other proposed changes in the bill include adopting a 0.3 percent B&O surtax on service activities, and eliminating preferential B&O tax rates for travel agents, sellers of prescription drugs, and taxpayers earning royalty income.  One of Governor Inslee’s proposed tax changes―imposition of a five percent capital gains excise tax on resident individuals, trusts, and estates―is also included in the bill. Washington State does not currently impose a personal income tax. The bill would also eliminate a sales and use tax exemption for bottled water and make certain changes to the nonresident sales and use tax exemption. Please stay tuned to TWIST for future updates on Washington House Bill 2224.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.