Washington State House of Representatives Office of Program Research | BILL ANALYSIS |
Finance Committee |
HB 1678
This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent. |
Brief Description: Improving tax fairness for businesses engaged in electronic commerce by eliminating inconsistent tax treatment of digital business inputs, ensuring that prewritten computer software developers remain eligible for the manufacturing machinery and equipment sales and use tax exemption, and providing greater clarity for out-of-state sellers concerning their tax obligations.
Sponsors: Representatives Carlyle and Nealey; by request of Department of Revenue.
Brief Summary of Bill |
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Hearing Date: 2/6/15
Staff: Dominique Meyers (786-7150).
Background:
Sales and Use Tax.
Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product or service. If retail sales taxes were not collected when the user acquired the property, digital products, or services, then use taxes apply to the value of property, digital product, or service when used in this state. The state, most cities and all counties levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary from 0.5 percent to 3.1 percent, depending on the location.
Business and Occupation Tax.
Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. Businesses must pay B&O tax even though they may not have any profits or may be operating at a loss. A business may have more than one B&O tax rate, depending on the types of activities conducted. Major tax rates are 0.471 percent for retailing; 0.484 percent for manufacturing, wholesaling, and extracting; and 1.5 percent for services, and activities not classified elsewhere. Several lower rates also apply to specific business activities.
Digital Automated Service.
In 2009 the Legislature made numerous amendments to the retail sales and use taxes statutes to define the terms digital good, digital automated service, and digital code. In 2010 the Legislature provided sales and use tax exemptions for purchases of standard digital information used solely for business purposes. Standard digital information is defined as a digital good consisting primarily of data, facts, or information that is not generated for a specific client or customer. Since then, the business use of digital automated services, such as online research applications, has increased without a comparable exemption for retail sales and use tax.
Prewritten Computer Software.
The production of prewritten computer software contained on a disc or other tangible storage media provided to the buyer is a manufacturing activity. Prewritten computer software developers have historically qualified for the retail sales and use tax exemptions for manufacturing machinery and equipment (M&E). Today, the software industry delivers most prewritten software to buyers electronically rather than by tangible storage media. This change has called into question whether software developers continue to be eligible for the M&E exemptions.
Out of State Sellers.
As currently interpreted by the United States Supreme Court, the commerce clause of the United States Constitution prohibits states from imposing sales or use tax collection obligations on out-of-state businesses unless the business has a substantial nexus with the taxing state. Under the Court's decision in Quill Corp. v. North Dakota, a substantial nexus for sales and use tax collection purposes requires that the taxpayer have a physical presence in the taxing state. Physical presence can be established through a taxpayer's own activities in the taxing state, or indirectly, through independent contractors, agents, or other representatives that act on behalf of the taxpayer in the taxing state. Business that have established nexus with Washington and collect and remit retail sales tax are also required to pay B&O taxes for income derived from sales in the state.
Summary of Bill:
Digital Automated Service.
The sales and use tax exemption for business purchases of digital goods is expanded to include business purchases of digital automated services.
Prewritten Computer Software.
The definition of manufacturing is expanded to include prewritten software delivered electronically so businesses engaged in this activity will continue to qualify for the M&E sales and use tax exemption.
Out of State Sellers.
Nexus standards are modified to include remote sellers who: (1) enter into agreements with Washington residents who, for a commission or other consideration, refer potential customers to the remote seller such as by a link on a website, and; (2) generate more than $10,000 in gross receipts during the prior calendar year under such agreements from sales into this state.
This change in nexus standards will require these remote sellers to collect and remit Washington sales tax for sales made into the state. Remote sellers that collect and remit retail sales tax will also be required to pay B&O tax on their Washington sales. Any provision of the expanded nexus standard that conflicts with any future change in federal law will expire.
Appropriation: None.
Fiscal Note: Available.
Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.