Washington’s Marketplace Sales Tax Law Heading for Battle

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By Paul Shukovsky

Industry players are gearing up to challenge Washington’s second-in-the-nation law that imposes sales tax collection duties on electronic marketplace providers.

Washington Governor Jay Inslee (D) signed into law July 7 E.H.B. 2163. The statute requires that beginning Jan. 1, 2018, remote sellers, marketplace facilitators such as Amazon.com Inc., and referrers with gross receipts sourced to Washington of at least $10,000 must collect and remit sales or use tax. If sellers don’t collect and remit the tax, they must comply with notice and reporting requirements, which include informing consumers of their obligation to pay use tax. The definition of seller “includes marketplace facilitators, whether making sales in their own right or on behalf of marketplace sellers, and referrers.”

“We definitely anticipate a legal challenge,” Steve DelBianco, executive director of the e-commerce trade association NetChoice, told Bloomberg BNA July 10. “NetChoice and the American Catalog Mailers Association are now developing legal arguments and raising funding for a lawsuit.”

At the heart of the issue is Quill Corp. v. North Dakota, the U.S. Supreme Court’s 1992 decision that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. States have employed multiple methods to manage the 25-year-old restraint in an ever-expanding digital economy. But the model to tax marketplace providers like Amazon is a twist on the typical regime that targets vendors for sales tax collection.

Rather than require remote sellers to collect tax on their marketplace transactions, an increasing number of states have proposed shifting the tax collection burden to Amazon, eBay Inc., Etsy Inc., and other companies providing the online platforms. Minnesota’s first-in-the-nation law was enacted earlier this year, and many expect it will also spark litigation.

Challenge to Come

DelBianco said Washington’s $10,000 threshold is particularly problematic, calling it “a significant burden on America’s small businesses. Washington’s new law reaches the tiniest of businesses anywhere in the country if they happen to have customers in Washington state.”

Washington’s imposition of tax and reporting requirements on marketplace facilitators “would be unique, since these facilitators are not the seller of record,” DelBianco added. He accused the new law of targeting facilitators and marketplaces in what amounts to discrimination against electronic commerce, which is prohibited under the Internet Tax Freedom Act.

“We’ll also challenge the privacy violations that this would bring on Washington residents, as the state would now be collecting data on their personal and sometimes sensitive Internet purchases,” he said.

Line-Item Veto

Inslee also wielded a line-item veto July 7 to excise from S.S.B. 5977 a provision that would have incrementally lowered over four years the business and occupation tax rate on gross receipts of general manufacturers from 0.5 percent to 0.3 percent—the same preferential rate currently paid by The Boeing Co. and the state’s aerospace sector. The vetoed provision would have produced about $64 million over four years.

In his July 7 veto message, Inslee wrote: “At a time when we are asking homeowners to pay more in property taxes to support our children’s education, Sections 201 to 205 instead give a tax break to business; and, 21 percent of the revenue from this tax break goes to out-of-state oil companies.”

The Republican-authored extension of Boeing’s preferential B&O rate to the rest of the manufacturing sector passed late June 30 as part of a budget bargain. Lawmakers were under intense pressure to pass a budget June 30 before midnight or face a government shutdown.

Twenty-three Democrat lawmakers wrote to Inslee July 3 seeking the veto. “We first learned of its inclusion in the budget deal on Thursday, June 29, barely 24 hours before we cast our votes on the bill,” the letter said. “This change was never considered by the House Finance Committee during the regular or special sessions, and came as a complete surprise to all of us,” wrote the lawmakers, some of whom voted for the bill.

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of E.H.B. 2163 is at http://src.bna.com/qDn.

Text of S.S.B. 5977 is at http://src.bna.com/qDp.

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