1. New Developments & Trends in State Tax
Presented by Brett Durbin, Chauncey MacLean ACC Business Summit Mini-MBA
September 6, 2017

2. Washington’s Two Major Taxes Affecting Businesses
Business and Occupation (“B&O”) tax – gross receipts excise tax on business activities. Accounts for approximately 18% of Washington state tax revenue ($9.6 billion)
Sales and Use Tax – taxes imposed on the purchase or use of tangible personal property in the state. A seller with substantial nexus is required to collect and remit to the state, or pay the tax that was not collected. The state cannot require a seller that does not have substantial nexus to collect and remit the tax. In Washington, sales and use tax accounts for 47% of state tax revenue ($3.6 billion)

3. Washington Use Tax Notice & Reporting Legislation

4. Use Tax Notice & Reporting Bill
In 2017 Washington State faced major budget deficit due to State Supreme Court decision related to education funding
EHB 2163 was omnibus revenue enhancement legislation designed to help reduce the deficit
Major component (Part II) imposed use tax notice & reporting requirement on out-of-state companies
Designed to force out-of-state sellers to collect sales tax

5. EHB 2163 (Part II) Overview
Beginning January 1, 2018, remote sellers with over $10,000 of retail sales into Washington must choose to:
Collect and remit sales or use tax OR
Comply with use tax notice and reporting requirements
If company does not an affirmatively notify DOR, presumed that seller elects to comply with use tax notice and reporting requirements

6. EHB 2163 (Part II) Background
Legislation modeled on Colorado legislation passed in 2010
Requiring out-of-state sellers to comply with burdensome notice and reporting requirements designed to get around US Constitutional limitations
Under Quill Corp. v. North Dakota (1992) Commerce Clause prevents states from imposing sale tax collection on companies that do not have a physical presence in state

7. EHB 2163 (Part II) Scope Companies Subject to Requirements
Remote Sellers (out-of-state retailers)
Marketplace facilitators
Referrers
Companies Affected
WA customers of remote sellers
Review of use tax reports from vendors
More rigorous use tax audits
WA companies selling on marketplaces

8. Remote Sellers Remote sellers defined as:
Any company that does not have a physical presence in Washington
AND
Makes retail sales into the state
If remote seller has more than $10,000 of sales in to Washington during a year subject to Notice & Reporting Requirements
Can only change election once a year

9. Remote Seller Requirements
Use Tax Notice and Reporting Requirements
Provide Consumer Notice
Post conspicuous notice on its website, catalog, or order materials
Provide notice to each customer at time of sale
Provide Annual Reports to:
Consumers; and
WA Department of Revenue

10. Remote Seller Penalties
Use Tax Notice and Reporting Penalties
Failure to provide notice
$20,000 per year
Failure to provide annual reports to customers
Penalty tied to sales into state (roughly 15% - 40% of gross sales)
Failure to provide annual report to DOR
$25 per customer (min. $20,000)

11. Remote Seller Penalties
Penalty Example
Seller with $1,000,000 of sales into WA
Notice Penalty $20,000
Customer Report Penalty $380,000
DOR Report Penalty $20,000
Total Penalty $420,000
Total Penalty approx. 42% of gross sales into WA

12. Marketplace Facilitators
Facilitates sales through a marketplace; and
Engages in specific activities bringing the buyer and seller together; and
Engages in activities related to the seller’s products

13. Marketplace Facilitators
Activities Bringing The Buyer And Seller Together
Transmitting / communicating offers or acceptance between buyer and seller
Owning/operating infrastructure
Providing Virtual Currency
Developing software or R&D activities related to seller’s products that are directly related to marketplace

14. Marketplace Facilitators
Activities Related to Seller’s Products
Payment processing
Fulfillment or storage
Listing products
Setting prices
Branding sales as marketplace facilitator’s
Taking orders
Advertising or promotion
Providing customer support

15. Marketplace Facilitators
Reporting Requirements
Facilitators must make election if they have:
Physical presence in WA, or
Retail sales into WA of more than $10,000
By the marketplace facilitator themselves; plus
Sales on behalf of marketplace sellers

16. Marketplace Facilitators
Facilitators must make election if they have:
Physical presence in WA, or
Retail sales into WA of more than $10,000
By the marketplace facilitator themselves; plus
Sales on behalf of marketplace sellers
Reporting requirements and penalties the same as remote sellers

17. Referrers Who is a “referrer”? Person who contracts with a seller
To list or advertise for sale items in any medium
Reporting requirements and penalties the same as remote sellers

18. Sales Tax Collection Developments in Other States

19. Other States
South Dakota – SB 106 (2016) requires sales tax collection by remote sellers if annual sales exceed $100,000, or more than 200 transactions in a year. Ruled unconstitutional by South Dakota Sixth Judicial Circuit; currently before the South Dakota Supreme Court, oral arguments August 29
Alabama -  Administrative Rule requires out-of-state sellers that sell more than $250,000 of goods into the state annually to collect and remit sales tax on those transactions. Currently before the Alabama Tax Tribunal with possible hearing date late 2017

20. Wyoming – HB 19 (2017) patterned after the South Dakota legislation
Wyoming – HB 19 (2017) patterned after the South Dakota legislation. Requires sales tax collection by remote sellers if annual sales exceed $100,000, or more than 200 transactions in a year
Massachusetts – Directive 17-1 (April 3, 2017) required remote sellers with more than $500,000 in Massachusetts sales and delivery into the state in 100 or more transactions to collect and remit sales tax. Ruled void on procedural grounds;  replacement regulation anticipated

21. Ohio – ASHB 49 (June 30, 2017) provides that an out-of-state seller has substantial nexus in Ohio if the seller uses “in-state software” to sell or lease TPP or services and has gross receipts of $500,000 or more in the current or preceding year
North Carolina – SB 81 (pending 2017) failed to pass in regular session but pending in special session. Patterned after South Dakota legislation requiring sale tax collection if annual sales exceed $100,000 or more than 200 transactions in a year. Also would extend the obligation to marketplace facilitators

22. Rhode Island - H.B (Aug. 3, 2017) provides that “using information or software, including cached files, cached software, or ‘cookies’ or other data tracking tools, that are stored on property in or distributed within” Rhode Island creates nexus for purposes of sales tax collection. Also added a new Chapter 18.2 to Title 44 that imposes notice and reporting requirements on “non-collecting retailers, referrers, and retail sale facilitators” with either $100,000 in annual gross sales, or 200 or more transactions

23. Minnesota – HF 1 (May 30, 2017) Provides that a retailer making sales through a marketplace provider that has a place of business in Minnesota is considered as maintaining a place of business in the state for purposes of sales tax, and imposes the duty to collect and remit the tax on the marketplace provider

24. Economic Nexus in Washington State

25. Economic Nexus Standard Adopted
Washington adopted an economic nexus standard for apportionable activities effective June 1, 2010.
“Apportionable activities” are generally those that would be subject to B&O tax under the “service and other” classification and royalty classification.

26. As Part of Factor Nexus
Economic Nexus is determined by having any of the following in Washington during the prior calendar year:
Legal or commercial domicile in Washington
More than $267,000 of gross receipts in Washington
More than $53,000 of payroll in Washington
More than $53,000 of property in Washington
At least 25 percent of total property, payroll, or receipts in Washington

27. Wholesale
Wholesale sales became subject to the economic nexus standard effective September 1, 2015.
Out-of-state companies are now considered subject to Washington B&O tax if their wholesale sales to Washington customers exceed $267,000 in the prior calendar year.

28. Click-Through Nexus
Also effective September 1, 2015, remote retail sellers are presumed to have substantial nexus in Washington if they have an agreement with a Washington resident to refer customers through a link on an internet website, pay a commission or other consideration, and the remote seller had $10,000 or more in Washington “click-through” sales in the preceding calendar year

29. Retail
Retail sales became subject to the economic nexus standard effective July 1, 2017.
Out-of-state companies are now considered subject to Washington B&O tax if their retail sales to Washington customers exceed $267,000 in the prior calendar year.

30. Physical presence is no longer required to establish nexus for apportionable activities, wholesaling activities, or retailing activities.
$267,000 of gross receipts from Washington sources is sufficient to establish nexus and require registration and payment of tax.

31. Sourcing Activities
Interstate wholesale and retail sales are generally sourced by destination and receipt by the customer. RCW
Gross receipts from services are generally apportioned to where the customer received the benefit of the taxpayer’s services, rather than where the services were performed. RCW
Gross receipts from royalties are now generally apportioned to where the intangible property is used, rather than the commercial domicile of owner. WAC

32. Apportionment Rules

33. Apportionable Services
Gross receipts from services are generally apportioned to where the customer received the benefit of the taxpayer’s services, rather than where the services were performed. RCW ; WAC (301)
Taxpayer may use a method to “reasonably determine” where a specific benefit is received
If unable to do so and the service related to multiple states, then to where the benefit of the service was primarily (50%+) received

34. Apportionable Services
Where the benefit of the service is received:
If related to real property, then where the real property is located
If related to tangible personal property, then where the TPP is located or expected to be located
If neither of the above, and the service is related to a customer’s business activities, then to where those activities occur

35. Apportionable Services
If not related to a customer’s business activities, or to real and tangible personal property, then the benefit of the service is received:
Where a customer is required to be physically present, or
To a specific, known location, or
If neither of the above apply, then to where the customer resides

36. Apportionable Services
If unable to attribute the benefit of the service as noted above, then in descending order:
To where the customer ordered the service, then
To where the invoices are sent to the customer, then
To where from the customer sent payment, or
To where the customer is located by address.
If none of the above apply, then to the commercial domicile of the taxpayer

37. Royalty Receipts What are Royalty Receipts
Royalties are compensation for the use of intangible property
Copyrights, patents, licenses, franchises, trademarks, trade names, and other similar intangible property/rights
Does not include licensing software or digital products to end-users

38. Royalty Receipts How are Royalty Receipts Apportioned
Apportioned to where intangible is “used”
Different treatment depending on what intangible is used for
Marketing Use
Non-Marketing Use
Mixed Use

39. Royalty Receipts Marketing Intangibles
Intangibles used by customer for purposes of selling products
Trademarks, logos, etc.
Apportioned based on location of customer’s sales (where they sell their products)
Non-Marketing Intangibles
Intangibles used by customer in house
Patents, designs, etc.

40. Royalty Receipts Non-Marketing Intangibles
Intangibles used by customer in house
Patents, designs, etc.
Apportioned based on where customer’s facilities are located
Mixed Use
Presumed to be sourced to location of customer’s market, unless can demonstrate amount associated with non-marketing use

41. Digital Products Act

42. Digital Products Act Background Passed in 2010
Imposed sales tax on wide range of digital products
Designed to treat sellers of online media and SaaS providers the same as brick and mortar sellers
iTunes vs. CD
Boxed software vs. SaaS

43. Digital Products Act What is a Digital Product?
Digital Good or Digital Automated Service
Digital Goods
Sounds, images, data, facts, or information transferred electronically
iTunes, digital books and magazines, movies
Car history report, mapping data
Does not include computer software professional services

44. Digital Products Act Digital Automated Service
Service transferred electronically using one or more software applications
Most SaaS products
Online Games
Westlaw (search function)
Exclusions
Remote access software, payment processing, lending, online marketplaces, advertising services

45. Digital Products Act Tax Consequences
All digital products and remote access software subject to sales tax
Different exemptions / exclusions
Digital goods purchased for business purpose exempt
DAS exclusions allow sellers to avoid sales tax (don’t apply to remote access software)
Services performed in connection with products treated differently (taxed if DAS)

46. Digital Products Act Tax Planning Considerations
Sales to non-end users treated as royalties or wholesaling subject to apportionment
DAS exclusions may put sales in to Service & Other category (subject to higher B&O rate, but no sales tax)
Bundling services with information may convert digital goods in to DAS, lose business purpose exemption

47. Digital Products Act Tax Planning Considerations (cont.)
After January 1, 2020, sellers of digital products subject to EHB 2163 Use Tax Notice & Reporting Requirements
If law upheld sellers would need to choose to whether to collect and remit or file use tax notices if they have customers that use product in Washington

48. Questions? Brett Durbin 206.386.7555 brett.durbin@stoel.com
Chauncey MacLean