In February of 2015, an e-fairness bill began working through the Washington state Legislature that goes beyond the online sales tax fairness measures that other states have taken.
The bill features a multi-part expansion of the “nexus” that would trigger a sales tax liability in Washington state. One of these parts seeks to go beyond the physical presence precedent, and establish an “economic nexus.” This would apply to out-of-state sellers that have more than $267,000 in receipts from Washington customers, more than $53,000 of payroll or property in Washington, or 25 percent or more of their total payroll, property, or income in Washington. Other pieces of the bill include more familiar strategies, such as an affiliate nexus law that would cover out-of-state sellers that generate more than $10,000 in receipts via in-state affiliates.
“The legislature finds that because the United States supreme court has not clearly defined circumstances under which a physical presence is sufficient to establish a substantial nexus for tax purposes, frequent conflicts have arisen throughout the country among state taxing authorities, taxpayers, tax practitioners, and courts,” the bill reads. “Therefore, the legislature intends to provide more clarity for out-of-state sellers.”
Should the legislation be enacted, Washington would become the first state to establish an “economic nexus” standard for tax purposes based on the amount of revenue a company earns from state residents. The measure would likely be subject to a court challenge. At least one U.S. Supreme Court Justice has declared a strong interest in hearing such a case. “It is unwise to delay any longer a reconsideration of the court’s holding [limiting the power of states to require remote sellers to collect sales tax],” Justice Anthony M. Kennedy wrote in a concurrent opinion to a recent ruling on another sales tax matter.
Excerpts of S.B. 5541:
III: Remote sellers
NEW SECTION. Sec. 301. (1) The commerce clause of the United States Constitution as currently interpreted by the United States supreme court prohibits states from imposing sales or use tax collection obligations on out-of-state businesses unless the business has a substantial nexus with the taxing state.
(2) The legislature recognizes that under the United States supreme court’s decision in Quill Corp. v. North Dakota, 504 U.S. 2984(1992), a substantial nexus for sales and use tax collection purposes requires that the taxpayer have a physical presence in the taxing state.
(3) The legislature further recognizes that the requisite physical presence can be established directly through a taxpayer’s own activities in the taxing state, or indirectly, through independent contractors, agents, or other representatives who act on behalf of the taxpayer in the taxing state.
(4) However, the legislature finds that because the United States supreme court has not clearly defined the circumstances under which a physical presence is sufficient to establish a substantial nexus for tax purposes, frequent conflicts have arisen throughout the country among state taxing authorities, taxpayers, tax practitioners, and courts.
(5) Therefore, the legislature intends to provide more clarity for out-of-state sellers that compensate Washington residents for referring customers to the out-of-state seller by providing clear statutory guidelines for determining when these out-of-state sellers are required to collect Washington’s retail sales tax.
(6) Nothing in Part III of this act may be construed as relieving in-state businesses and other businesses having a substantial nexus with Washington through a direct physical presence in this state from their Washington sales and use tax collection obligations.
Sec. 303. RCW 82.04.067 and 2010 1st sp.s. c 23 s 104 are each amended to read as follows:
(1) A person engaging in business is deemed to have substantial nexus with this state if the person is:
(a) An individual and is a resident or domiciliary of this state;
(b) A business entity and is organized or commercially domiciled in this state; or
(c) A nonresident individual or a business entity that is organized or commercially domiciled outside this state, and in any tax year the person has:
(i) More than fifty thousand dollars of property in this state;
(ii) More than fifty thousand dollars of payroll in this state;
(iii) More than two hundred fifty thousand dollars of receipts from this state; or
(iv) At least twenty-five percent of the person’s total property, total payroll, or total receipts in this state.