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. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Washington. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.
The General Rule: Physical Presence in the State
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, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
While the physical-presence rule may seem clear, in the case of Washington, as well as quite a few other states, it is necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was based on the Commerce Clause of the Constitution, which—as described by the Supreme Court—means physical presence. However, many states, including Washington, have used the term “nexus” rather than “physical presence” in their sales tax laws, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
Washington’s statutes (the Revised Code of Washington or “RCW”) on the state’s sales tax (RCW 82.08) and use tax (RCW 82.12) do not provide detailed guidance on how physical presence is defined specifically under Washington law. There is only a broad statement that the phrase “engages in business activity within this state,” which effectively means being required to collect Washington sales tax, “includes every activity which is sufficient under the Constitution of the United States for this state to require collection of tax under this chapter.”
However, basic 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), which 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 that 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. Additional guidance is available in WAC 458-20-193(9), which lists various conditions under which out-of-state sellers are required to collect and remit tax, including such things as maintaining inventory or stock within the state, and delivering items into the state other than by U.S. Mail or other independent delivery service.
The Washington Department of Revenue (DOR) also publishes several documents that discuss nexus in relation to sales tax requirements, including:
- a webpage regarding online sales of goods with several sections discussing nexus in conjunction with retail sales
- a webpage tax guide for out-of-state businesses that provides a bullet list of “nexus-creating activities”
As you might expect, 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.
Example 1: You are operating solely out of a warehouse in Savannah, Georgia and make a sale 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.
Example 2: You are operating solely out of an office in Yakima, Washington and make a sale 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 to a customer in Spokane, Washington: You are required to collect sales tax from the Spokane customer.
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 webpage technically 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.
The Customer’s Responsibility
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 also check the DOR’s use tax brochure or consult the use tax statute (RCW 82.12).
While you might not know it from looking solely at Washington’s sales tax laws, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time Washington has not enacted any law that would require out-of-state retailers to collect sales tax from Washington customers.
In Washington, the physical-presence rule applies for Internet retailers. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the Washington Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.