If you are selling goods or products online and some of your customers are located in Washington, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, physical presence means having:
The corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state. However, Washington has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see Washington’s Amazon law, below).
Examples of Physical Presence
Example 1: You are an online retailer located in Savannah, Georgia and make a sale through your website to a customer in Bellevue, Washington—a state where your business has no physical presence: You are not required to collect sales tax from the Bellevue customer (except for sellers who fall under Washington’s Amazon law).
Example 2: You are an online retailer located in Yakima, Washington and make a sale through your website to a customer in Tacoma, Washington: You are required to collect sales tax from the Tacoma customer.
Example 3: After several years of operating solely out of a warehouse in Savannah, Georgia, you open a one-room satellite office just outside of Seattle, Washington—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Spokane, Washington: You are required to collect sales tax from the Spokane customer.
A new law went into effect in Washington law in September 2015 which added a provision covering remote seller nexus. Under this law, larger Internet sellers with no physical presence in the state are required to collect and pay Washington’s sales tax under certain conditions. Specifically, an out-of-state seller must collect sales tax from Washington customers if that seller:
Similar laws have been enacted in other states; they are commonly referred to as Amazon Laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
The new law is codified at RCW 82.08.052 (the Revised Code of Washington or RCW). The DOR also has a webpageexplaining the details of the click-through nexus provision, including how out-of-state sellers might prove they are not subject to the provision.
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Washington, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
Washington’s sales tax laws (RCW 82.08) and use tax laws (RCW 82.12) do not provide detailed guidance on how physical presence is defined. However, legislative notes on Washington’s Amazon law state, “The legislature recognizes that under the United States supreme court’s decision in Quill Corp. v. North Dakota . . . a substantial nexus for sales and use tax collection purposes requires that the taxpayer have a physical presence in the taxing state.” At the same time, the legislative notes also state, “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.”
Separate guidance on what counts as physical presence—or nexus—in Washington is available in Section 458-20-221(2) of the Washington Administrative Code (WAC). That section defines the phrases “maintains a place of business in this state” and “engages in business activities within this state.” The definition of the first phrase includes maintaining a place of business directly or indirectly, or through a subsidiary, or agent, and the definition of the second phrase effectively includes out-of-state businesses that are controlled “by the same interests” as control the same or a similar business in-state. In addition, WAC 458-20-193 provides a so-called nexus standard. According to that standard, “a person who sells tangible personal property is deemed to have nexus with Washington if the person has a physical presence in this state, which need only be demonstrably more than the slightest presence.” The standard also includes other situations, some of which are similar to the guidelines under Quill.
The Washington Department of Revenue (DOR) also publishes several documents in plain English that discuss nexus in relation to sales tax requirements, including:
Under Washington law, some items may be exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, most food and food ingredients are exempt from sales tax. The DOR publishes a webpagetechnically concerned with deductions, but which includes, in a long list, many of the items that are exempt from sales tax in Washington, along with brief explanations and links to relevant statutes and administrative rules. For the actual laws, check RCW sections 82.08.0203 through 82.08.036 and 82.08.700 through 82.08.9995.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. The DOR’s webpage on the use tax provides various of examples of when use tax is due, including when “Goods are purchased out of state by subscription, through the Internet, or from a mail order catalog company.” As the webpage goes on to state, “Many of these companies collect Washington’s sales tax, but if the company from which you order does not, you owe the use tax.” For additional information, you can consult the use tax statute (RCW 82.12).
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses, it is the long established physical presence rule that will apply to Internet sales to customers in Washington. Larger online retailers and those with possible in-state affiliated status should check the rules more carefully. Also, because Internet sales tax is a subject of ongoing debate, you should check in periodically with the Washington Department of Revenue to see if the rules have changed.
Updated: April 14, 2016