Washington State’s business and occupation (B&O) tax applies to sellers with no physical presence in the state, according to a recent court ruling.

Tax strategies

Washington State Sales Tax Ruling Part of a Trend

  • Dustin Hubbard
  • 8/19/2016

When it comes to remote sales, courts across the country are sending a clear signal: pay state and local tax. The latest ruling applies to foreign and out-of-state companies that have no physical presence in Washington state but receive royalty income of greater than $267,000 from sales to Washington customers. There are several nuances to how nexus is determined and applied in Washington.

“The issue is that if your company is making sales to a state but has no in-state physical contact, it may have a tax liability,” says Dustin Hubbard, a state and local tax director with CLA.

States determine whether a company’s business activities result in state tax nexus within their jurisdiction in different manners. As demonstrated by the recent ruling, Washington’s business and occupation (B&O) tax is applicable when certain economic presence thresholds (i.e., amounts of in-state sales) are met. No physical presence in required for the state to assert nexus for certain business activities.

“Complicating the scenario is the fact that B&O tax nexus circumstances and rates vary depending on your business activities,” says Steve Jensen, a state and local tax director with CLA. “Some business activities result in B&O tax nexus even when there is no physical presence in the state. The situation is complex and many foreign and out-of-state companies are surprised when they receive a nexus questionnaire from the Washington State Department of Revenue.”

The ruling affirms Washington state B&O tax

In the most recent ruling, a German pharmaceutical company received royalty income based on product sales to Washington customers. The company did not have any physical presence in Washington and was not registered in the state. Washington law imposes B&O tax on gross income received from royalties (and other service and wholesaling receipts) when that income is generated from sources within the state and when those sales exceed the state’s economic nexus criteria ($267,000 —an amount that is periodically indexed for inflation).

The German pharmaceutical company received royalties in excess of the economic nexus criteria, so the Washington State Department of Revenue (department) ruled that the taxpayer had nexus in the state, and was subject to B&O. The company countered, claiming the state’s economic nexus criteria are unconstitutional. The appeals division within the department has no authority, however, to decide on constitutionality matters, so the issue was not considered in its decision.

In the ruling, the department affirmed the application of the state’s B&O tax. The department also ruled there was no double taxation of the German company because a provision of a U.S. treaty with Germany excludes any “income from sources within the United States that may be taxed [in the] United States.”

What this means to you

Companies that receive income from Washington state customers are potentially subject to the state’s B&O tax, even if they do not have a physical presence in the state, and even if their home country has enacted a comprehensive tax treaty with the United States. Businesses that are most often impacted by Washington’s economic nexus criteria are those that engage in online sales and/or services, royalty income, and wholesaling activities with Washington customers. Washington’s economic nexus conditions are not limited to foreign (non-U.S.) entities. Any non-Washington company with Washington customers and receipts should consider whether it has a B&O tax obligation.

While not at issue in this case, Washington’s economic nexus rules became applicable to wholesalers starting on September 1, 2015, and to companies who earn service and/or royalty income starting on June 1, 2010.

How we can help

If your company has income resulting from Washington business activities, you may be affected by Washington’s economic nexus rules. Any business that operates in multiple states — particularly if selling online — should be aware of the evolving nexus laws in the states in which they operate. Our tax professionals can help you determine your state nexus situation based on your unique circumstances.