by Garry Fujita
In an effort to expand the tax base, the legislature may consider legislatively enacting an economic nexus standard for taxpayers that sell services and other similar intangibles. There is no bill formally introduced in the legislature at this time. The preliminary bill draft contemplates using three factors to determine if economic nexus exists:
>25% of a taxpayer’s total property or $50,000 of property is in the state, or
>25% of a taxpayer’s total payroll or $50,000 of payroll is in the state, or
>25% of a taxpayer’s total receipts or $500,000 of receipts is from this state.
The state understands that the U.S. Supreme Court has not expressly ruled on whether economic nexus can be applied in light of Quill, but the state believes that 30 states have used an economic nexus standard. The state feels that the U.S. Supreme Court has declined several petitions to review the issue, and that fact signals that the high court accepts the notion that economic nexus can exist outside the Quill fact pattern. The state understands that it may be taking a risk that the Court will strike down economic nexus or that Congress might legislate permissible nexus upon which a state’s taxing authority attached, so the bill contains language that the state believes will put the taxpayers back to the status quo in that event.
There are other important and unattractive aspects to this approach. First, if this was enacted, then the state would be constitutionally required to apply the same standards to instate companies engaged in interstate commerce. The statute would apply a single factor sales apportion formula (making rules like WAC 458-20-194 and 458-20-14601 dispensable), which means that it is really an allocation of income to only one state. This is good news for instate businesses that sell services in interstate commerce and have been reporting income on an apportioned basis. Under this new approach, for instate businesses, this would likely mean that their income will be allocated to the buyer’s out of state locations, resulting in tax on 0% of its out-of-state sales. For out-of-state businesses, this would likely mean that their income will be allocated to the buyer’s instate location, resulting in tax on !00% of its Washington sales. Second, this allocation theory (described as apportionment) raises concerns as to whether this is really an unapportioned gross receipts tax on services and royalties and whether it is constitutional. This method effectively transfers the tax burden from the instate businesses selling out of state to the out-of-state taxpayers selling into Washington.