All of the energy and focus on the Marketplace Fairness Act (MFA) has lulled many online sellers into a false belief that they do not need to collect retail sales tax on their online sales until Congress takes action on the MFA. What many online sellers forget is that states can still require online sellers to collect retail sales tax if the online sellers have physical presence nexus in a state. Further, this physical presence nexus need not be necessarily connected with their online sales.
Recently, I have worked with a number of companies facing significant tax exposure for uncollected retail sales tax on their online sales. Although these sales are generated exclusively from customers developed over the Internet, these companies failed to recognize that physical presence of their employees or representatives pursuing wholesale sales created physical presence nexus for their online consumer sales.
Consulting on state and local taxes in the state of Washington, I regularly receive inquiries from out-of-state businesses contacted by the Washington Department of Revenue, which aggressively pursues online sellers located outside of the state of Washington. In many cases, these companies have hired a representative to help them develop sales with some of the leading retailers located in Washington, such as Amazon, Costco, Nordstrom and REI. Unfortunately, these representative arrangements, generally performed to cultivate wholesale sales in Washington and elsewhere, can create physical presence in Washington.
As I have written previously, Washington is one of the most aggressive, if not the most aggressive state when it comes to establishing physical presence nexus. Washington blithely asserts that a single visit can create physical presence nexus that it believes will last for a period of up to five years for purposes of collection of retail sales taxes (trailing nexus for B&O taxes is only one year). Further, once Washington has sent you or an affiliated business a business activities questionnaire they will doggedly pursue uncollected retail sales tax, B&O tax, penalties and interest for as far back as seven years.
Washington has also championed the concept established in Scripto Inc. v. Carson that nexus can be created by independent representatives. Few people realize that a commissioned representative selling on behalf of multiple independent businesses can create nexus in Washington. Further, it is not even necessary that these independent representatives solicit sales in Washington, it is merely necessary that they engage in an activity that helps the taxpayer to establish or maintain a marketplace in Washington. Washington auditors are so ingrained with this concept, that they routinely assert nexus based on any visit of any sort by an employee or representative into Washington.
In addition, activities of an affiliate on behalf of a taxpayer can create nexus. Also, the use of in-state companies to perform activities such as warranty repairs can create nexus. However, it is not true that looking cross eyed at the state of Washington can create nexus. It only seems that way. Do not be confused by Washington’s economic nexus rules. Unless your business is engaged in “apportionable activities,” which do not include sales of tangible personal property and other retail sales, Washington’s economic nexus rules do not apply. Granted, service businesses need to worry about Washington’s economic nexus rules and exposure to Washington B&O tax, but for retailers the test is physical presence nexus, not economic nexus.
Interestingly, Washington recently revised their voluntary disclosure program to supposedly streamline, standardize and ensure more efficient and consistent customer service. These “customer service” enhancements championed by the state of Washington remove virtually all protections for taxpayers seeking voluntary tax disclosure. The enhancements include such gems as encouragement to taxpayers to disclose their identity at the time of application. The new rules even provide non-disclosing taxpayers with an entire 15 days for the taxpayer to disclose their identity before Washington comes hunting for them.
What is especially troubling is that Washington appears to no longer seriously consider a taxpayer’s request to avoid liability for retail sales taxes that had not previously been collected from customers. It would also appear that taxpayers may now have a very difficult time negotiating any sort of reasonable payment plan on significant liabilities. Fifteen days is simply not much time to negotiate. While the voluntary disclosure program was once seen as a way to encourage taxpayers to come into compliance, it now appears to be a warning: we intend to catch you. Here is your deal take it or leave it.
So what is a taxpayer to do? If you have received a business activities tax questionnaire from the state of Washington, speak with a knowledgeable representative. I have seen many taxpayers incorrectly answer questions that have resulted in unnecessary battles with the Washington Department of Revenue. Also, I have seen taxpayers facing significant assessments merely because they failed to present the information in a manner that allowed for correct assessment of Washington excise taxes. Also, remember that Washington auditors engaged in taxpayer discovery are on a mission to create revenue for the state of Washington; they wish to maximize, not minimize those taxes.
If you have not been contacted by the state of Washington, expect that this will probably happen. Although Washington’s voluntary disclosure program is less flexible, it does still provide for elimination of up to three years of liability and all penalties. If you have not established any sort of physical presence in Washington, take measures to make certain that you do not establish physical presence nexus unless you intend to collect retail sales tax in Washington. This means avoid hiring any representatives to call on customers in Washington, do not allow employees to travel into Washington to meet with customers and avoid trade shows in Washington.
If you have established nexus in Washington, merely ending your nexus creating activities is not enough. First, Washington can still go back into prior years if they find that physical presence nexus existed and Washington asserts that physical presence nexus lasts for one additional year in the case of Washington B&O tax and four additional years for retail sales tax collection purposes. While the five-year nexus rule for retail sales tax collection purposes is likely unconstitutional, Washington continues to push this rule. Washington’s voluntary disclosure program is certainly worth considering.
Finally, even though Washington is one of the most aggressive states at asserting physical presence nexus, Washington is not alone. Most other states with a retail sales tax assert physical presence nexus on visits of representatives, warranty repair work, etc., although most states are not as aggressive as Washington and do not have Washington’s unique and arguably unconstitutional trailing nexus rules. Online sellers should take a good hard look at their activities and either plan in advance to avoid physical presence nexus or consider voluntary disclosure programs offered by the various states.
Original Source By: Ron Bueing
This article was originally published by TaxConnections
Author: Ron Bueing has over 30 years of experience in the field of taxation. His primary area of tax expertise is Washington excise taxes, including the B&O tax, sales and use tax, utility taxes, real estate excise tax and local B&O taxes. His primary area of practice is taxpayers who are currently involved in a controversy with the state of Washington or a local municipality—audits, appeals and court cases.