Washington 2015 Tax Legislation: More Economic and Click-Through Nexus Provisions

On July 1, 2015, Washington’s governor signed two tax bills as part of the state’s budget package. These new bills contain a number of provisions that may impact your business.

On July 1, 2015, Washington’s governor signed two tax bills, Engrossed Substitute Senate Bills 6138 and 6057, as part of the state’s budget package. A summary of the significant provisions of each bill is provided below.

ESSB 6138

Repeal of Preferential Business & Occupation (“B&O”) Tax Treatment for Royalties
Effective Aug. 1, 2015, the B&O tax rate for royalty income increases from 0.484 percent to 1.5 percent.

Nexus Changes
This bill makes a several nexus changes for B&O and retail sales tax purposes that are effective on Sept. 1, 2015. [1] First, prior to ESSB 6138, Washington utilized an economic nexus standard for B&O tax purposes with respect to certain tax classifications, most notably the Services and Other Activities tax classification. Under the current economic nexus standard, taxpayers within that classification had nexus for Washington B&O tax purposes if they had the following factors in Washington: (i) $53,000 of property, (ii) $53,000 of payroll, (iii) $267,000 of sales or (iv) 25 percent of any of those factors. [2] Effective on Sept. 1, 2015, ESSB 6138 adds the Wholesaling tax classification to the list of taxpayers subject to economic nexus standards.

Second, the bill changes the measurement period for purposes of determining if a business has exceeded any of the economic nexus thresholds from the current tax year to the immediately preceding tax year.

Finally, ESSB 6138 adopts “click-through” nexus for both the retail sales tax and the retailing classification under the B&O tax. Therefore, a remote seller is presumed to have nexus in Washington if the seller enters in an agreement with a Washington resident whereby such resident will receive a commission or other consideration for referring potential customers to the remote seller. Such referrals can be through a link to the remote seller that is located on the resident’s webpage, and they must generate more than $10,000 in Washington sales during the prior calendar year. That presumption may be overcome by proving that the resident did not engage in any solicitation activities in Washington on behalf of the remote seller that would satisfy the nexus requirement of the United States Constitution. Proof may be shown by establishing that (i) the resident was prohibited from engaging in any solicitation activities in the state on behalf of the remote seller and (ii) the resident did not violate that prohibition.

Manufacturing Machinery and Equipment Exemption
Effective Aug. 1, 2015, for purposes of the sales and use tax exemption for manufacturing machinery and equipment, the bill amends the definition of “manufacturer” to include a person that develops prewritten software that is delivered electronically (i.e., not transferred to purchasers on a tangible storage media). The bill also excludes from that exemption certain large prewritten computer software developers.

Penalty Increases
For both B&O tax and sales/use tax purposes, late tax payments face new penalties as of Aug. 1, 2015, as follows:

  1. Tax not paid by due date – 9 percent (increased from 5 percent)
  2. Tax not paid by last day of month following due date – 19 percent (increased from 15 percent)
  3. Tax not paid by last day of second month following due date – 29 percent (increased from 25 percent)

ESSB 6057

This bill addressed extended several B&O tax preferences/exemptions for several business classifications, including processors of fruits and vegetables, dairy products and seafood, aluminum smelters and newspaper printers/publishers (including electronic versions).

In addition, the bill expands a sales and use tax exemption for certain data centers on purchases of server equipment and power infrastructure as well as installation costs. For detailed information, see the Special Notice issued by the Washington Department of Revenue on July 27, 2015.

Finally, effective Oct. 1, 2016, a business that hires unemployed veterans will be allowed a non-refundable credit against B&O tax and the public utility tax. The credit is equal to 20 percent of wages and benefits paid per qualified employee (defined as an unemployed veteran who is employed in a permanent full-time position for at least two consecutive calendar quarters), with a maximum credit of $1,500 per qualified employee. The credit is available on a first-come, first-served basis, and there is an annual statewide cap of $500,000. Credits may be carried over until used, but may not be claimed after June 30, 2023, and may not be earned after June 30, 2022. For any qualified employee, the credit may be taken against either the B&O tax or the public utility tax.

As a result of these tax bills, a business may be subject to Washington B&O tax without being physically present in the state. HA&W’s SALT group can assist companies with understanding the impact of these legislative chances on their business operations as well as their tax compliance processes. In our next newsletter, we plan to address tax legislation in Connecticut and Alabama.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at [email protected] for more information.

[1] More information can be found on the Washington Department of Revenue’s website.

[2] Economic nexus was first adopted in 2010, and the amounts are indexed for inflation.

This article was featured in the
August 2015 SALT Newsletter.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.