PL 86-272 does not apply in Washington
Most businesses selling products across state lines are aware of PL 86-272, which is a U.S. statute that allows a business to go, or send representatives, into a state to solicit orders for goods without being subject to a net income tax. Because over 90% of states have some form of income tax, businesses which sell across state lines will normally test whether they have a duty to register in a given state under PL 86-272. But, because Washington’s B & O tax is a tax on gross receipts, not an income tax, businesses selling into Washington through representatives (whether employees or independent contractors) have to test for nexus under Washington law, not under PL 86-272. If a business has to register for B & O purposes and makes retail sales delivered in this state, it will also have to collect retail sales tax.
A typical contact letter sent by the Department of Revenue to an unregistered out of state taxpayer states that:
For your information Washington Administrative Code (WAC) 458-20-193 defines and explains nexus and delivery for businesses making sales in Washington. Because Washington does not have an income tax (Public Law 86.272), it is not necessary for an out-of-state business to have resident employees and/or an office in Washington for nexus to apply.
While it may be easy to learn from the Department’s website that Washington has a B & O gross receipts tax, it is not easy to find out from the website that PL 86-272 does not apply. As of the time this article was posted, if an interested business goes to the Department’s website, the most prominent comment which appears with respect to nexus is “economic nexus,” which links to recent legislative changes concerning apportionment of income derived from the performance of services. A reader then clicking on “out of state businesses” is led to a discussion of economic nexus, with a link to Rule 193. Only in Section 7 of Rule 193 (if the reader gets that far) is there any discussion of B & O nexus, and only in subsection (c)(iii) does the general rule appear that there is nexus if:
(iii) The order for the goods is solicited in this state by an agent or other representative of the seller.
Non-Washington businesses making sales delivered into this state should familiarize themselves with Washington nexus for B & O (and collection of sales tax) purposes under Washington law, not PL 86-272. We regularly receive calls from out of state businesses who have not registered in Washington because they believed that they were not required to. A business contacted by the Department of Revenue should seek competent tax counsel, preferably before filling out the Department’s questionnaire. An out of state business should also keep in mind that Washington law provides that a business which is registered only after it is contacted by the Department of Revenue may be exposed to 7 years of taxes, penalty and interest, as opposed to 4 years plus the current year, usually with no penalties, for businesses which register before contact.
We have represented businesses nationwide that have misjudged nexus on the assumption they were exempt from Washington’s B & O tax under PL 86-272. As suggested in this article, the best time to review your situation is before you are contacted by Revenue, but we can assist with filling out the questionnaire if you are contacted first. If an audit is already completed, we have appealed cases and have been able to limit the look back period for assessment of tax, and we have also been able to limit penalties in some cases.
Learn more about Attorney Martin Silver, PS.