On June 30, 2015, Washington state expanded the substantial nexus standard to wholesaling activities, which are subject to a 0.484 percent business and occupation (B&O) tax rate imposed on Washington-source gross receipts. This change was part of a new two-year budget bill.
In 2010, Washington state adopted substantial nexus standards for apportionable B&O tax classifications that included service, royalties, and other apportionable activities. The state continued to apply a physical-presence nexus standard for wholesaling and retailing activities. With the new legislation, far more taxpayers will be impacted—particularly those outside of Washington.
Effective September 1, taxpayers engaged in wholesaling or apportionable activities are now deemed to have substantial nexus in Washington if they have:
- More than $267,000 of Washington receipts
- More than $53,000 of Washington property
- More than $53,000 of Washington payroll
- At least 25 percent of total receipts, payroll, or property in Washington
Because this is a gross receipts tax, the B&O tax is imposed on in-state and out-of-state businesses, even if the business isn’t profitable.
An out-of-state business, for example, may be subject to Washington B&O tax simply by deriving service or wholesaling income from the state, although the business may have never had physical contact with the state. A Washington business with apportionable income, on the other hand, could possibly benefit from economic nexus by sourcing its revenue outside of the state, thereby reducing its Washington B&O tax.
Failure to File Consequences
A Department of Revenue (DOR) internal work team is focusing on enforcement efforts for the new provisions and creating a tax discovery unit to pursue wholesalers now subject to taxation, according to Kim Schmanke, DOR communications director, in a press release dated August 10, 2015. If you're contacted by the state, penalties can typically run up to 39 percent for unregistered taxpayers notified of filing obligations by the DOR. In addition, the statute of limitations may be longer if the DOR contacts a nonfiling taxpayer prior to voluntary registration with the DOR.
This new legislation isn’t unique to Washington. As more businesses expand their footprint through e-commerce and away from the more traditional brick-and-mortar model, more and more states are adapting to collect tax from businesses that have no physical location in the state yet derive economic gains from the state’s economy. This so-called economic nexus standard is one way that states can mitigate the effect of a shifting market.
We're Here to Help
It’s important to act quickly with the September 1 deadline behind us. Whether you’re physically present in Washington or merely selling into Washington, we can help you understand how Washington taxes—or any other state taxes—apply to your organization. For more information, reach out to your Moss Adams professional.