Recent 2015 Washington State Tax Legislative Changes

Summary
 

On June 30, 2015, Washington State Governor Jay Inslee signed into law Engrossed Substitute Senate Bills (ESSB 6138 and 6057) as a new two-year budget bill. The tax bills in the 2015 3rd Special Session include numerous changes to Washington State’s excise tax statutes. The new law affects Washington companies as well as out-of-state business that otherwise may not be deemed to be doing business in the state. Specifically, ESSB 6138 increases the Business and Occupation (B&O) tax rate on royalty income and establishes a sales tax click-through nexus standard effective September 1, 2015. Following is a brief summary of the key B&O tax and sales and use tax provisions of the recent legislative changes.

Discussion

Economic Nexus expanded to Wholesalers

Currently, Washington law imposes a B&O tax economic-nexus standard that applies to business activities consisting primarily of services, royalties, and income of financial institutions. An out-of-state business engaging in these activities that lacks physical presence in Washington is deemed to have substantial nexus with Washington if the company meets the following criteria during the tax year:

• More than $53,000 of property in this state;
• More than $53,000 of payroll in this state;
• More than $267,000 of receipts from this state; or
• At least 25% of the person's total property, total payroll, or total receipts in this state. See ETA 3195.2015.

Effective September 1, 2015, the economic-nexus standard which have previously only applied to these limited business activities is extended to wholesalers including wholesalers of tangible goods, digital goods, digital codes, digital automated services, or services described in Revised Code of Washington (RCW) 82.04.050 (2)(g) or (6)(b) making sales to Washington State customers. Previously, wholesalers were only subject to a physical presence nexus standard. Additionally, RCW 82.04.067 is revised to state that the factor-presence standards are measured by a taxpayer’s activities in the immediately preceding tax year rather than the current tax year. Therefore, a business with Washington wholesale sales exceeding $267,000 in a calendar year would trigger nexus in Washington for the subsequent calendar year. Note that a taxpayer who stops the nexus-creating business activity in Washington continues to have nexus for the remainder of that calendar year plus one additional calendar year (also called trailing nexus) for B&O tax purposes. See RCW 82.04.220.

Click-through Nexus for Remote Sellers

Washington adopted a rebuttable presumption under which a remote seller is presumed to be engaged in business in Washington State if (1) the seller enters into an agreement with one or more Washington residents who, for a commission or other consideration, refer(s) prospective customers, directly or indirectly, to the remote seller, and (2) the cumulative gross receipts from the retail sales to customers in the state through such agreements exceed $10,000 during the preceding calendar year. The referral of customers may be by a link on their website or other means. This click-through nexus provision is effective September 1, 2015.

A taxpayer can rebut the presumption by providing proof that the Washington resident did not engage in any solicitation in the state that was significantly associated with the remote seller so as to establish nexus under the U.S. Constitutional standards. Proof may be evidenced in a manner acceptable to the Department of Revenue (DOR) whereby (1) that in-state resident with whom the remote seller has an agreement is prohibited from engaging in solicitation activities, and (2) the resident has complied with the restriction. Also, note that the trailing nexus period for sales tax purposes is still four years plus the current year. See Washington Administrative Code (WAC) 458-20-193.

Royalty Income Tax Rate Increased

The new law eliminates the preferential B&O tax rate of 0.484% on royalty income. Effective August 1, 2015, royalty income will be taxed at the Service and Other Activities tax classification rate of 1.5%.

Manufacturing Machinery and Equipment (M&E) Sales and Use Tax Exemption Revised

Effective August 1, 2015, Washington has expanded the definition of manufacturer for sales and use tax purposes. An M&E sales and use tax exemption is now available to manufacturers that develop and sell prewritten software that is transferred electronically. The bill also eliminates the sales and use tax exemption for certain large prewritten software businesses.

Extended Tax Preferences

• The B&O tax exemptions for processors of fruits and vegetables, dairy products, and seafood are extended to July 1, 2025.
• Tax incentives for aluminum smelters, including a preferential B&O tax rate, B&O tax credit on property taxes paid, and the natural gas use tax exemption are extended to January 1, 2027.
• A preferential B&O tax rate of 0.3527% for businesses in printing or publishing a newspaper is extended to July 1, 2024, at which time the tax rate will increase to 0.484%. The bill also clarifies that the electronic version of a newspaper also qualifies for the reduced tax rate.

New or Revised Tax Preferences

• Certain data centers may be eligible for sales and use tax exemption on the purchase of server equipment, power infrastructure, and the installation cost. A sales and use tax exemption is provided for up to eight new data centers with some changes to the prior incentive if commencement of the construction took place between April 1, 2012, and July 1, 2015.The limitation is expanded to 12 new data centers for constructions taking place between July 1, 2015, and June 1, 2025. The deferral is limited to the first $10 million of costs for qualified buildings and M&E property. For more information, please see Special Notice issued on July 27, 2015.
• Effective October 1, 2016, a business can benefit from a tax credit that is available to offset B&O taxes and public utility taxes for hiring unemployed veterans into full-time positions for at least two consecutive calendar quarters. The credit amount is equal to 20% of wages and benefits paid to or on behalf of such employees up to a maximum credit of $1,500 per employee. The credit is available on a first-in-time basis, and the total amount of credits available is limited to a maximum of $500,000 per fiscal year.

Other Noteworthy Changes

• Effective August 1, 2015, penalty on late tax payments increases by 4%.
• Effective July 1, 2015, a reduced public utility tax rate of 1.28% applies to log transportation businesses.
• Unclaimed property, such as money or intangible property held by businesses, is required to be reported to the DOR after a certain holding period. Beginning July 1, 2016, S.B. 6057 made multiple changes to the current unclaimed property statutes. These changes include electronic reporting requirements, revised penalty provisions, new refund and appeal provisions, and an unclaimed property amnesty program. A penalty provision includes that a holder of unclaimed property who willfully fails to file a report or to provide written notice to apparent owners as required under the law is subject to a $100 per-day penalty (limited to $5,000 in total). Moreover, for the failure to file any report or to pay or deliver any amounts or property when due, the DOR imposes a penalty equal to 10% of the amount unpaid and the value of any property not delivered.

The Takeaway for Out-of-State Businesses

Out-of-state businesses providing services, wholesaling, or remote sales to Washington customers may now have B&O and/or Sales and Use tax filing obligation despite not having physical presence in the state.