July 1 marks Washington’s switch to new sales tax collection systems among retailers that deliver their products both in-state and throughout the nation.
The change will happen on state and national levels, affecting about 15 percent of Washington’s businesses and about 6 percent of its sales overall.
Washington is one of 22 states that have passed legislation for the national Streamlined Sales and Use Tax Agreement. It primarily affects Internet and catalog sales of retailers with a physical presence, or economic nexus, in more than one sales tax area. Currently, many of those retailers don’t have mechanisms for collecting sales tax, said Mark Johnson, vice president of government affairs for the Washington Retail Association.
Nationally, just more than 1,000 retailers have agreed to collect sales tax at rates that apply to customers’ locations in participating states. Registration in the national system is voluntary, but avoiding it means losing amnesty, according to the state DOR. Sellers that fail to register could have to pay back years of uncollected sales tax.
The same also will apply in Washington under its new destination-based sales tax system. Washington retailers are not required to register under the state system, but are required to participate, said DOR spokesman Mike Gowrylow. “There is nothing that requires a Washington retailer to collect sales tax in any state unless they agree to do so or have nexus in an area.”
That means retailers delivering products in-state must collect sales tax at the rate of an in-state customer’s location, rather than at the rate of the retailer’s location.
For example, if a Vancouver furniture store has an online customer who orders a sofa in Seattle, the Vancouver store must charge the customer Seattle’s sales tax rate.
In the past, the store could have charged the Vancouver sales tax rate or none at all.
If that Seattle customer came to Vancouver and purchased the sofa in person, the Vancouver sales tax rate will apply.
If the Vancouver store sells furniture online to a customer in another participating state, such as Utah, that state’s sales tax rate will apply. But if the online customer were in a non-participating state, such as California, no sales tax will be charged.
The change has been in the works at least five years and is expected to put brick-and-mortar businesses on a more level playing field with remote retailers.
“Local businesses are losing sales to Internet companies that don’t charge sales tax. They become showrooms for (Internet) companies by default,” said Rick Manugian, streamlined sales tax coordinator for the DOR. “This is a way of protecting businesses from losing sales and it protects the state from losing sales tax.”
Internet sales are growing 25 percent a year, which impacts brick-and-mortar stores, Johnson said.
“It’s not just the loss of sales that our members are worried about,” he said. “It’s the time they lose on educating people about their products when people go and buy products online.”
Washington loses $780 million a year in sales tax when its residents make out-of-state purchases, Johnson said, and local businesses have to make up the difference in taxes elsewhere.
To help retailers with the transition, the DOR has held workshops throughout the state since the fall of 2007 and has developed more than a dozen computer-based tools to help businesses determine tax rates.
Washington businesses earning $500,000 a year or less can get a state tax credit worth up to $1,000 for expenses related to the transition.
The DOR is open to cooperating with retailers during the transition.
“For smaller businesses, there will be some administrative burden in the change,” said Russ Brubaker, senior assistant director of tax policy for the DOR. “Our goal is to help people figure out how to do this with the least amount of burden for them.”
More information about Washington’s destination-based tax program is available at dor.wa.gov.
Charity Thompson can be reached at cthompson@vbjusa.com.
