If you don’t know much about sales tax nexus – even as a business owner offering goods and services throughout the country – you are not alone.
According to the Sales Tax Institute: “Sales tax nexus defines the level of connection between a taxing jurisdiction such as a state and an entity such as your business. Until this connection is established, the taxing jurisdiction cannot impose its sales taxes on you.”
While nexus level is primarily controlled by the U.S. Constitution, according to the Institute, interpretation and lawmaking happens at the state level, and sales tax nexus laws differ widely from state to state. What’s more, they are changing fast.
“It’s a trend,” said Scott Salsbery, a Certified Public Accountant with Peterson and Associates, “and it’s super difficult for small businesses.”
His associate CPA Colin Nishitani concurred. “We’re headed toward this global idea, where every business is going to pay and report in every state,” he said. “The trend is leading toward everybody filing in every state.”
A 2018 U.S. Supreme Court ruling in S. Dakota v. Wayfair set a new precedent for establishing nexus. Most states are using this to widen the scope of businesses that must collect sales tax and pay income tax.
The Court ruled a state may collect sales tax from taxpayers located outside the state if they are selling to state residents and there is a sufficient connection between the taxpayer and the state. For example, under the South Dakota law, a company must collect sales tax for online retail sales if the company’s gross sales exceed $100,000, or the company conducted more than 200 transactions to South Dakota.
The ruling will have the biggest effect on internet giants such as Wayfair, which sells home goods across the country and will now be subject to individual sales tax laws in every state.
But more globally, the case is an indicator of the swiftly changing and increasing sales tax laws in each state.
The new Oregon Commercial Activity Law is a product of increasing state nexus, and will require more and more Washington businesses to pay Oregon state taxes. (See below)
Another example, beginning in tax year 2018, Oregon enacted a substantial new economic nexus rule that may cause many Washington-based companies to pay Oregon income tax, even if they do not perform any service inside Oregon. This law is especially applicable to professional services firms like accounting firms, engineering firms and other consulting companies.
According to a statement previously released by Horenstein Law Group on the matter: “Previously, payment for services provided at the professional’s Washington office or over the phone or internet were merely subject to Washington business and occupation (B&O) tax.
As of January 1, 2018, however, if the client is located in Oregon, the income will be subject to Oregon income tax, requiring the professional to file an Oregon income tax return — even if the professional neither maintains an Oregon bank account nor is registered to do business in Oregon. This new rule applies even if the services have nothing to do with Oregon.”
The Oregon Department of Revenue states what types of services broadly fall into this category: “(P)rofessional services … that require specialized knowledge and in some cases require a professional certification, license, or degree. These services include the performance of technical services that require the application of specialized knowledge. Professional services include, without limitation, management services, bank and financial services, financial custodial services, investment and brokerage services, fiduciary services, tax preparation, payroll and accounting services, lending services, credit card services (including credit card processing services), data processing services, legal services, consulting services, video production services, graphic and other design services, engineering services, and architectural services.”
“If I have 10 clients, half of my net income would be reported to Oregon, other half wouldn’t,” said Salsbery. “I don’t know how businesses were supposed to find out about it. Somehow it hasn’t penetrated to business owners who have plenty of other things to worry about.”
Tax Changes to Watch in 2020
Oregon Commercial Activity Tax
As of Jan. 1, 2020, Oregon established an annual Commercial Activity Tax (CAT) on activities carried out in Oregon, or non-Oregon entities with significant Oregon activity. This tax could affect a wide range of entities ranging from large corporations to individuals with rentals. CAT applies to all business entity types, such as C and S corporations, partnerships, sole proprietorships and other entities. There are certain items excluded from the definition of commercial activity and will not be subject to CAT. In addition, Oregon’s CAT allows for a 35% subtraction for certain business expenses. The CAT is applied to Oregon taxable commercial activity in excess of $1 million. The tax is computed as $250 plus .57% of Oregon commercial activity of more than $1 million. Only taxpayers with more than $1 million of taxable Oregon commercial activity will have a payment obligation. Registration is open. Taxpayers must register within 30 days of reaching $750,000 in Oregon revenues. Tax is due on 2020 Revenue and will be required to have estimated tax payments paid in 2020 on April 30, July 31, Oct. 31 and Jan. 31. The first tax form will be filed by April 15, 2021. There are potential penalties for not registering, paying estimates, or filing on time.
Washington Paid Family Medical Leave
Washington has enacted a new payroll tax which was effective as of Jan. 1, 2019. The tax is 0.4% (.004) of gross wages earned in Washington. In general, a portion of the tax is withheld from employees’ pay and a portion is paid by the employer. This money goes to fund paid leave for employees who have medical or family emergencies. There are additional record keeping and disclosure requirements for this new program.
Washington B&O Tax Increase
Effective Jan. 1, 2020, a Workforce Education Investment Surcharge will be imposed on select businesses in the service and other activities B&O tax classification. The new surcharge is equal to .3%, .5%, or 1.0% of gross receipts. This is in addition to the pre-existing 1.5% rate.
Read more here: https://dor.wa.gov/find-taxes-rates/business-occupation-tax/workforceeducation-surcharge/workforce-education-investment-surcharge
Washington Department of Revenue Annual Excise Return Due Date Change
The 2019 annual excise filing is now due April 15, 2020. In prior years, the due date was Jan. 31.
Washington Real Estate Excise Tax (REET) Graduated Rate
Washington imposes the real estate excise tax on the transfer of Washington real property. Prior to 2020 the flat rate was 1.28%. Effective Jan. 1, 2020 the State of Washington established a graduated REET. The state portion of the tax will be imposed as follows:
1.1% of selling price below $500,000
1.28% of selling price between $500,000 and $1,500,000
2.75% of selling price between $1,500,000 and $3,000,000;
3.0% of selling price over $3,000,000
The local rates will be in addition to the rates above.
Read more here: https://dor.wa.gov/find-taxes-rates/other-taxes/real-estate-excise-tax
City of Portland Residential Rental Registration (RRR) Fee
The City of Portland has implemented a new rule that requires all owners of residential rental property within the city to register the address of each rental. The new Schedule R must be filed each year. Starting for tax year 2019 there will be a $60 per unit registration fee. This fee will be due with the 2019 filing on April 15, 2020.
Read more here: https://www.portlandoregon.gov/revenue/78312
Thank you to Peterson and Assoc. and Opsahl Dawson for providing the information on these changes to watch in 2020.