On July 7, 2017, Governor Jay Inslee signed HB 2163 (Ch. 28, 2017 Laws 3rd Special Session), key provisions of which expand the state's sales and use tax nexus provisions to require marketplace facilitators to collect and remit tax or comply with notice and reporting requirements. The new law also expands the business and occupation (B&O) tax economic nexus provisions to retailers, repeals tax preferences for bottled water and narrows the preference for self-produced fuel. In addition, Inslee vetoed in part SB 5977, specifically provisions that would have reduced the B&O tax rate for manufacturers and provided sales and use tax exemptions to entities that convert coal-fired electric generation facilities to natural gas-fired generation plants or biomass energy facilities.

Sales and use tax nexus

Starting January 1, 2018, remote sellers, referrers and marketplace facilitators that meet the economic nexus threshold or have a physical presence in Washington must elect to either: (1) collect and remit Washington's retail sales or use tax on taxable sales into the state; or (2) comply with notice and reporting requirements. Until January 1, 2020, these requirements do not apply to retail sales of digital products and digital codes, other than: (a) specified digital products and digital games; and (b) digital codes used to redeem specified digital products and digital games, by a marketplace seller through a marketplace facilitator or directly resulting from a referral.

The election requirements apply to remote sellers and marketplace facilitators who, in the current or immediately preceding calendar year, have gross receipts from retail sales sourced to this state of at least $10,000. For referrers, the threshold amount, for the current or immediately preceding calendar year, is the business's gross income from the referrer's referral services apportioned to Washington and from retail sales sourced to the state of at least $267,000.

For marketplace facilitators, the election requirement only applies to: (1) retail sales made through a marketplace facilitator's marketplace by (or on behalf of) a marketplace seller who is not physically present in the state; and (2) a marketplace facilitator's own retail sales, if the marketplace facilitator is not physically present in the state.

For referrers, the election only applies to: (1) retail sales directly resulting from a referral of the purchaser to a marketplace seller who is not physically present in the state; and (2) a referrer's own retail sales, if the referrer is not physically present in the state. The referrer can make different elections with respect to sales described in (1) and (2).

An election to collect tax is binding on the remote seller, referrer and marketplace facilitator until January 1 of the calendar year that is at least 12 consecutive months after the remote seller, referrer and marketplace facilitator began collecting sales and use tax under the election. An election to collect or to comply with the notice requirement may be changed by providing the written notice to the Washington Department of Revenue (Department). (Changing an election from complying with the notice requirement to collecting tax can be made at any time by collecting and remitting tax on taxable retail sales sourced to the state.)

A remote seller, referrer, or marketplace facilitator that fails to elect to collect or to comply with the notice requirement will be presumed to have made an election to comply with the notice requirements.

For purposes of these provisions, a marketplace facilitator or referrer is deemed to be an agent of a marketplace seller making sales through the marketplace facilitator's marketplace or directly resulting from a referral.

The new law defines key terms, provides for relief from liability (in full or in part) for failure to collect the correct amount of tax, provides exceptions for when a marketplace seller is not required to collect and remit tax, and establishes notice and reporting requirements as well as return due dates.

The Department will assess a penalty (that could exceed $100,000) on remote retailers, referrers and marketplace facilitators that fail to comply with these new requirements. The Department may waive penalties under certain circumstances.

B&O nexus

Effective July 1, 2017, the law updates the B&O tax economic nexus provisions and expands them to include retailers. As originally enacted, and amended in 2015, the economic nexus provisions applied only to B&O taxes imposed on apportionable activities as defined in RCW 82.04.460 (e.g., generally businesses that sell services and other business activities, but not businesses that sell tangible personal property) and wholesalers. Under the revised provision, the economic nexus standard is expanded to apply to selling activity taxable under RCW 82.04.250(1) (e.g., retailers, except those taxed under other provisions of the B&O law). Retailers will be deemed to have substantial nexus if they have $267,000 of receipts from this state or 25% of their total receipts in this state.

The law also changes the period used to determine whether the substantial nexus threshold is met to "the current or immediately preceding calendar year" (from, "the immediately preceding tax year"), and updates the threshold amounts (i.e., the original $50,000 property/payroll and $250,000 receipts threshold adjusted annually based on changes to the consumer price index) to reflect the current threshold as follows:

— $53,000 of property in this state
— $53,000 of payroll in the state
— $267,000 of receipts from the state or
— 25% of the person's total property, total payroll, or total receipts in the state

Persons establishes nexus during the calendar year based solely on their property, payroll or receipts are subject to B&O tax for the current calendar year only on the business activity occurring on and after the date nexus is established. This provision, however, does not apply to certain persons that had substantial nexus with the state in the immediately preceding calendar year or the current calendar year.

Tax preferences

Effective August 1, 2017, the law:

— Repeals the sales and use tax exemption for bottled water. The exemption, however, still applies to bottled water dispensed under a prescription for medical use, or to sales of bottled water to persons whose primary source of drinking water is unsafe.
— Narrows the use tax exemption for self-produced fuel to only apply to biomass fuel (wood waste, other wood residuals, partially organic by-products of pulp, paper, and wood manufacturing processes). To qualify, the biomass fuel must be used by extractors or manufacturers directly in the operation of the particular extractive operation or manufacturing plant that produced or manufactured the same.

The law also establishes the use tax rates that apply to refinery fuel gas as follows: (1) 0.963% in 2018, (2) 1.926% in 2019, (3) 2.889% in 2020, and (4) 3.852% in 2021 and thereafter.

Implications

HB 2163 has significant ramifications for online sellers with customers in the state. Washington has joined other states that have adopted economic nexus provisions for sales/use tax despite the US Supreme Court's decision in the Quill case. In recent years, the Department has been increasingly aggressive in its attempts to impose collection and filings obligations on out-of-state companies.

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