Washington has a confusing set of tests for determining whether an out of state business must pay B & O tax to this state on sales of tangible personal property delivered here or for services rendered. First, a “physical presence” nexus standard has historically applied to businesses engaging in sales of tangible personal property either at retail or wholesale. There is a variety of activities which may create physical presence under the physical presence standard, perhaps the most surprising of which is the use by a wholesaler of independent sales reps who visit Washington to make sales which are delivered to this state. While there are other forms of “traditional” nexus (again, physical presence), such as visits by officers of an out of state visit to meet and greet Washington State customers, the fact that under Washington law the presence of even an independent, non employee rep would in and of itself raise nexus come as a shock because it appears to be contrary to a federal statute, PL 86-272, with which most larger interstate vendors are familiar. As discussed in our blog of September 12, 2o13, however, 86-272 applies only in states which impose an income tax, while Washington has no income tax.
Second, businesses engaging in service type activities are said to have “apportionable” activities and have nexus for B & O tax purposes if they met “economic nexus” standards. Economic nexus is established if certain dollar thresholds are crossed for sales of services made here, or a company has defined amounts of property or payroll in Washington, or 25% or more of total receipts, payroll or property in Washington.
Confusing as all of this is for out of state businesses making wholesales exclusively through catalogs or the internet, or through reps, the Legislature has added still a new level of nexus creating activity. Effective September 15, 2015, SB 6138, “economic nexus” standards (previously applied only to out of state businesses performing service activities) will also apply to wholesalers. The most significant impact of this extension will mean that wholesalers with sales of more than $267,00 will now be subject to B & O wholesale tax (the amount stated in the bill is actually $250,000 but the bill requires CPI adjustments which create the $267,000 threshold presently in effect).
Why are wholesalers subject to the new nexus test, but not retailers? This is complicated to explain, but the likely reason is that by definition retailers must also collect retail sales tax on retail sales, but under current law a state cannot require an out of state retailer having no physical presence in a state to collect its sales or use tax. Because of the link of B & O tax and sales tax in the case of retailers, extending the B & O tax to retailers solely on an economic nexus basis would conflict with the fact that retailers without physical presence nexus cannot be required to collect sales tax.
Wholesalers who are unaware of the complexity of Washington’s B & O tax, and who may have nexus with this state, will find that if the Department of Revenue contacts them before they register, they will face an extraordinary 7 year audit look back period and be subject to both penalties and interest. It is advisable, therefore, for any business which makes wholesales delivered into Washington to periodically consult a tax adviser knowledgeable in Washington taxes to determine their exposure to the B & O tax.