by Michael Millender
Mattress World, whose radio ads told listeners “it’s not too late to sleep like a baby,” recently announced that it owes the State of Washington approximately $1.7 million in uncollected sales taxes and will be shutting down its business.
Mattress World had Washington tax nexus – the minimum connection needed for a state to impose and collect taxes – because it used company trucks to deliver merchandise sold in Oregon to Washington customers. Mattress World’s troubles are a reminder that no Oregon business should ignore the possibility that it has Washington tax nexus.
Sales Tax. Washington imposes sales tax on retail sales of tangible physical property and a range of digital products. An out-of-state retailer is required to collect sales tax if it has “more than a slightest” physical presence in Washington. The Washington Department of Revenue (DOR) contends that even brief visits to Washington by a seller’s employees or independent contractors can satisfy this standard. In one case, the DOR found that artisanal foodmakers established nexus by selling their wares to the public for a few days during their convention at a Washington hotel. Once nexus is established, a seller has “trailing nexus” – i.e., is required to continue collecting sales tax – for four years after the end of the year in which it ceases to have a physical presence in Washington.
Business and Occupation Tax. Out-of-state retailers and wholesalers are required to pay Washington business and occupation (B&O) tax if they satisfy the physical presence standard described above.
Other businesses, including those that provide services, are required to pay B&O tax if they satisfy an “economic nexus” standard adopted in 2010. A business that is organized and commercially domiciled outside of Washington has B&O tax nexus if it has any of the following:
- More than $50,000 in property value in Washington;
- More than $50,000 in annual payroll in Washington;
- More than $250,000 in annual receipts from Washington; or
- At least 25% of its property, payroll or receipts in Washington.
For example, a consulting firm with over $250,000 in annual receipts from Washington clients would have B&O tax nexus, even if its employees never step foot in Washington. “Trailing nexus” for B&O tax continues for one year after the end of the year in which the taxpayer ceases to engage in activities that establish nexus.
Many attorneys suspect that Washington’s new “economic nexus” standard violates the Commerce Clause of the U.S. Constitution, but this argument has not yet been tested in court.