Washington State Imposes New Reporting Requirements for Out-Of-State Sellers Not Collecting Sales Tax

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As part of Washington State’s efforts to collect more sales tax on out-of-state companies’ sales to Washington customers, the Legislature recently enacted H.B. 2163. The bill, signed by the Governor on July 7, imposes notice and reporting requirements on out-of-state sellers not already collecting Washington’s sales tax.

Starting January 1, 2018, out-of-state sellers that do not have a physical presence in Washington must either start collecting sales tax or comply with the notice and reporting requirements listed below. These requirements apply if the out-of-state seller has more than $10,000 of retail sales to Washington customers in the current or prior calendar year. As shown below, failing to comply with the requirements can subject the out-of-state seller to substantial penalties that are far greater than the amount of uncollected sales tax. The obvious intent of the Legislature is to pressure out-of-state sellers to collect Washington sales tax, rather than face these onerous requirements and penalties.

Notice and Report Requirements for Remote Sellers

  1. General Use Tax Notice - The seller must post a notice on its website, catalog, or other similar medium, informing Washington customers that they may be liable for use tax on their purchases and that they must file a use tax return.

    Penalty - $20,000 for each year the notice is not posted.

  2. Transactional Use Tax Notice - The seller must provide a notice to each customer at the time of each transaction containing a statement that sales tax is not being collected on the sale and that the customer may be required to remit sales or use tax directly to the Department of Revenue and instructions on how to remit the tax.

    Penalty - $20,000 for each year that any customers were not notified at the time of the transaction, regardless of the number of notices the seller provided or failed to provide.

  3. Yearly Customer Purchase Report - The seller must provide a report to each customer listing the products the customer purchased during the last year and the price of each product.

    Penalty - Varies depending on the amount of retail sales the seller made into Washington.

    WA Retail Sales Penalty Amount
    < $50,000 $5,000
    $50,000 - $149,999 $10,000
    $150,000 - $299,999   $50,000
    >$300,000 $100,000 + $20,000 for every add’l $50,000 in sales
  4. Yearly Washington Customer Report - The seller must file a report with the Department of Revenue signed by an officer of the seller, listing the customer’s name, billing address, shipping address, and total dollar amount of the products purchased by the customer and delivered to Washington during the last year. Penalty - $25 per customer not included in the report, but not less than $20,000 per year.

These penalties add up quickly for even the slightest mistake. For example, a remote seller with $1,000,000 of Washington sales during a year would owe at least $420,000 in penalties (42% of the gross sales amount) if it did not strictly comply with the notice and reporting requirements.

Notice Penalty $20,000
Customer Purchase Report Penalty $380,000
Washington Customer Report $20,000 (if less than 800 customers omitted)
Total Penalty $420,000
 

This penalty would apply if the seller generally complied with the statute, but failed to comply with the notice and reporting requirements for only one customer during the year. When compared with a sales tax obligation of approximately $85,000 to $100,000 for the same $1,000,000 in sales, the penalty provisions are clearly intended to pressure out-of-state sellers into voluntarily collecting and remitting sales tax.

We expect the provisions of this bill to be challenged in court. However, the outcome of any lawsuit is far from clear. The Tenth Circuit Court of Appeals recently upheld a notice and reporting requirement imposed on out-of-state sellers by Colorado. While the Colorado law differs in a number of important respects, such as a much higher threshold ($100,000 vs. $10,000) and much lower penalties, the court’s validation of the general concept creates significant risk that Washington’s notice and reporting requirements will be upheld as well.

The bill also has provisions that apply to “marketplace facilitators,” who facilitate transactions through a physical or online marketplace, and “referrers,” who list or advertise items for sale or transfer a purchaser to a seller. There are a number of additional requirements for marketplace facilitators and referrers that are beyond the scope of this alert. Companies that operate or make sales through marketplaces or referral systems should contact one of the key contributors for more information regarding their obligations under the bill.

If you have any questions regarding the notice and reporting requirements in the bill, please contact one of the key contributors.

Key Contributors

Chauncey A. MacLean
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