Washington Law Expands B&O Tax Obligations to Out-of-State Retailers

04.09.18

Effective as of April 6, 2018, the Washington Department of Revenue updated its regulations governing the threshold level of business activity that may be conducted in Washington without triggering Washington's business and occupation tax (“B&O tax”). The regulations reflect changes mandated by a new law that went into effect on July 1, 2017, applying B&O tax to retailers located outside Washington State. Under prior law, a retailer was subject to B&O tax only if the retailer had a physical presence in Washington. The new law and regulations require that any retailer must pay B&O tax not only if the retailer is physically present in Washington, but also if it is a participant in the Washington market by virtue of selling to Washingtonians (a concept often referred to as "economic nexus"). A retailer has economic nexus with Washington if it receives more than a certain dollar figure, or more than 25 percent of its gross receipts, from sales of tangible property that will be used, located, or licensed (in the case of vehicles) in Washington. The receipts threshold is indexed to inflation, and is set at $285,000 for 2018.

Even though the law affects only receipts earned after July 1, 2017, the economic-nexus calculation is based on the retailer's total gross receipts during the whole calendar year. So any retailer with more than 25 percent of its gross receipts or $285,000 of gross receipts from Washington customers from January 1 to December 31, 2017, that will be required to begin reporting and paying B&O tax, starting after July 1, 2017. For example, assume that an Oregon retailer had $300,000 of gross receipts from Washington customers in March 2017, and $100,000 of gross receipts from Washington customers in August 2017. Under the new law, the retailer would be subject to the B&O tax because of the revenue earned in March, but would pay the B&O tax only on the August revenue because only the August revenue was received after July 1, 2017.

Another complicating factor is that the new law applies a concept commonly known as "trailing nexus," which means that if a retailer had sufficient receipts to justify imposition of the B&O tax in the immediately prior calendar year, then the retailer has a B&O tax filing obligation in the current year. Assume, for example, that an Oregon retailer had $300,000 of gross receipts from Washington customers in March 2016 and $100,000 of gross receipts from Washington customers in August 2017, and that the retailer's Washington receipts were less than 25 percent of the retailer's total receipts. Under the existing trailing-nexus concept and the new economic-nexus law, the retailer would still be obligated to pay B&O tax on the $100,000 of gross receipts received in August, even though the retailer had less than $285,000 in Washington-sourced receipts in 2017 and wouldn't otherwise have economic nexus in 2017.

Because of these developments, out-of-state retailers should review their sales records for both 2016 and 2017 to determine whether they are now subject to Washington B&O tax. To the extent that they are deemed to have economic nexus or trailing nexus with Washington, the retailers would be well advised to establish recordkeeping policies designed to capture source information for all sales and to review Washington's B&O tax reporting requirements.

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