Nexus Changes in Washington
Posted Friday, July 23, 2010 by Ronald L. Bueing
In the last legislative session Washington adopted “economic performance” as the nexus standard for certain apportionable service activities. However, Washington retained its “physical presence” nexus rules for all other B&O taxes, retail sales taxes and other excise taxes.
“Economic performance” nexus rules provide that a company with $50k of Washington based payroll, $50k of Washington based property or $250k of sales to Washington customers of certain apportionable services (or have 25% of the total of either their payroll, property or sales in Washington) will be subject Washington B&O tax on that apportionable income. Companies with less than these amounts of property, payroll and sales in Washington are deemed not to have nexus with Washington in spite of the physical presence that they maintain within the state, but only with respect to the taxation of these apportionable services.
Meanwhile, “physical presence” nexus continues as the standard for retail sales tax, B&O tax on other activities and other excise taxes. “Physical presence” nexus as interpreted by the Washington DOR requires an extremely limited amount of physical presence satisfied by as little as 2-3 visits by an employee or independent contractor.
Another recent change is that Washington has eliminated its notorious 5 year nexus rule, for Washington B&O tax. This rule provided that a taxpayer was presumed to have nexus in Washington for the year in which nexus was established and for each of the next four years unless the taxpayer could prove that the nexus creating activity was not a factor in making the sales in the future years. This proved to be a difficult, if not almost impossible, burden of proof to sustain with almost all Washington auditors. The recent legislative changes reduce this “trailing” nexus to one year, but only for Washington B&O taxes, not for retail sales tax collection.
These changes could lead to some bizarre situations where taxpayers have nexus for B&O tax for some sales, but not for others and still different nexus for retail sales tax. Let’s look at the following hypothetical.
In year 1 Taxpayer sells $4M of retail goods to Washington consumers over the internet. Taxpayer also provides $200k of training and support services to Washington customers, of which $20k are performed in WA on four separate days in Year 1 by an independent contractor hired by Taxpayer to teach four different customers how to use the retail products. This is the only physical presence in WA for the taxpayer ever. Taxpayer has -0- Washington payroll for any of its employees and -0- property in Washington during years 1 through 5. Taxpayer has total sales over $12M everywhere, which includes 2M of training and support services. Taxpayer provides no training services in WA in years 2 through 5, but provides $200k of online support and training for WA customers in year 2, $300k in year 3, 200k in years 4 and 5. Otherwise, Taxpayer continues to make similar online retail sales and service sales throughout the remainder of the five year period.
Year 1 - Taxpayer has nexus for retail sales tax (RST) and Retailing B&O tax (RBO) because the temporary physical presence of the independent contractor trainers creates physical presence nexus, but taxpayer does not have economic presence nexus for the apportionable services which consequently are not subject to services B&O tax (SBO) as there is only $20k of WA payroll, -0- WA property and $200k of WA apportionable service sales and less than 25% of totals for WA payroll, property and sales.
Year 2 - Taxpayer has trailing physical presence nexus for RST & RBO, but no nexus of any type for SBO.
Year 3 - Taxpayer has trailing physical presence nexus for RST & economic performance nexus for SBO ($300k of sales of apportionable services), but no nexus of any type for RBO.
Year 4 - Taxpayer has trailing physical presence nexus for RST & trailing economic performance nexus for SBO, but no nexus of any type for RBO.
Year 5 - Taxpayer has trailing physical presence nexus for RST, but no nexus of any type for RBO & SBO.
How is that for complicated?
For more information, please contact Ron Bueing at 206-340-2008.