The standard effective date for new legislation is 90 days after the legislature adjourns sine die. Few bills are passed, signed into law, and take effect before the legislative session adjourns. Two bills have that honor so far this year. The first was HB 1064 – the “fix” to Initiative 940, addressing the use of deadly force by law enforcement personnel. That bill became effective on February 4th.
The second sports an initial effective date of March 14th. SSB 5581 – Improving the effectiveness and adequacy of state tax laws by clarifying and simplifying nexus provisions, by decreasing compliance and administrative burdens for taxpayers and the department of revenue, by facilitating the collection of new tax revenue resulting from the United States supreme court’s decision in South Dakota v. Wayfair, Inc., by providing more consistent tax obligations for both domestic and foreign sellers, and by simplifying the expiration of sales tax sourcing mitigation payments to local governments on September 30, 2019 – is called the Wayfair bill for short.
The tax laws applying to remote sellers are as long and as complicated as the bill’s title. But the Final Bill Report for SSB 5581, more or less, explains it as follows:
“Nexus” is required before a taxing jurisdiction may impose taxes on an entity. In the case of sales or use taxes, nexus is necessary for determining whether an out-of-state business selling products into a state is liable for the collection of sales or use taxes for that state.
Washington adopted “click-through nexus” in 2015. Under that nexus standard, certain remote sellers were required to collect and remit Washington sales tax for sales made into the state and may have had to pay B&O tax on their Washington sales.
A remote seller was covered by click through nexus if the remote seller entered into agreements with Washington residents (aka marketplace facilitators) who, for a commission or other consideration, referred potential customers to the remote seller, such as by a link on a website; and generated more than $10,000 in gross receipts during the prior calendar year under such agreements from sales into this state.
In 2017, the Legislature enacted marketplace fairness laws and started requiring remote sellers, marketplace facilitators, and referrers that meet the statutory criteria to remit retail sales or use tax, or comply with certain notice and reporting requirements.
On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair, Inc., et al. (Wayfair) and overturned the physical-presence nexus requirement established under Quill Corp. v. North Dakota (Quill). The Quill decision prohibited states from requiring mail-order businesses to collect sales tax from customers located in the state unless those sellers had a physical presence within the state.
Quill has since been interpreted as applying to all types of remote sellers. Under Quill, no state could require remote sellers to collect retail sales tax unless they had a physical presence within that state. Wayfair created a new substantial nexus standard. Under this new standard, a state can require a remote seller to collect sales tax “when the [remote seller] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”
Wayfair also upheld South Dakota’s law establishing dollar and transaction thresholds for mandatory retail sales tax collection. This law imposes a collection obligation on remote sellers with gross sales over $100,000 or 200 or more transactions in the state in the current or prior calendar year.
In 2007, the Legislature fully adopted the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA included provisions for determining where a sale is deemed to occur for local sales and use tax purposes. As part of that legislation, the Streamlined Sales and Use Tax Mitigation Account was created to mitigate the effect of the change in sourcing rules on negatively impacted local jurisdictions.
The state treasurer transferred amounts determined by the Department of Revenue to fully mitigate negatively impacted local jurisdictions. In 2017, the Legislature repealed local mitigation payments, effective October 1, 2019. Until that time, payments must be adjusted to reflect the impact of marketplace fairness on local tax revenues and will be made only to cities, counties, and public facilities districts.
The bill itself is 53 pages long, and it is difficult to condense tax law into a blog post. Suffice it to say, the Wayfair bill changes Washington’s nexus requirement to comply with the Supreme Court decision for remote sellers and so-called “marketplace facilitators.” It eliminates the option for marketplace facilitators and remote sellers to elect to not collect tax and requires them to instead comply with notice and reporting requirements. It limits the import tax exemption to import sales involving a parent company and a wholly owned subsidiary. And, it clarifies certain provisions under the Streamlined Sales and Use Tax Agreement and repeals sections related to local jurisdiction mitigation payments.
The nexus standard applies retroactively beginning October 1, 2018. An individual or business establishing nexus must begin paying tax only on business activity occurring on and after the date nexus is established. A business that establishes nexus in one year is deemed to have nexus for the remainder of that year and the entire subsequent year. Any person or business entity establishing nexus for business and occupation and retail sales tax purposes is required to pay all other applicable taxes and fees administered by the Department of Revenue (DOR).
So, what all that means is that under the new law, the state is predicted to gain revenue in amounts nearing $200 million in the 2021-2023 biennium and surpassing that mark in the 2023-25 biennium. In the near term, the bill should raise upwards of $115 million for the state in sales & use and B&O taxes this biennium. Equally, if not, more importantly, the Local Government Fiscal Note predicts counties will see tax revenues amounting to:
FY 2020 – $5,157,893
FY 2021 – $9,037,599
FY 2022 – $9,868,724
FY 2023 – $10,785,421
FY 2024 – $11,099,409
FY 2025 – $11,374,317
Cities and special districts will see similar revenues. That’s an impressive collection. On one sour note, it’s not as great as some might believe, however, because it’s been said more than once by important legislators that local governments, specifically counties, shouldn’t be complaining about the costly legislation that’s on the verge of becoming law because we will reap so much new revenue under this new law.
While the Wayfair bill mitigates some of the new costs, it most certainly does not amount to more than the unfunded mandates that have been heaped upon cities and counties over the years. As the legislature contemplates raising taxes over and above the Wayfair revenue to address their budgetary shortfalls, they are not considering picking up the tab for important expenses like their fair share of election costs or trial court public defense.
Nonetheless, the Wayfair decision and its codification in law will provide marketplace tax stability and fairness as we continue forward in the age of digital shopping as well as providing a level of revenue respite to local governments.