The Washington Legislature released the state budget for the 2015-2017 biennium, which enhanced the state’s nexus standard, eliminated certain tax exemptions, extended some tax preferences, and made other tax changes:

Enhanced Nexus Standard

• Click-Through Nexus Presumption. The legislature imposed a rebuttable presumption that an in-state website owner may create sales tax nexus for a remote seller. Under the new Washington statute, there is a rebuttable presumption that a remote seller has nexus if it pays commissions or other consideration for the direct or indirect referral of customers through websites or other arrangements with in-state providers and the remote seller generates more than $10,000 in gross receipts during the prior calendar year under such arrangements. The law follows the New York Court of Appeals decision in Overstock.com, Inc. v. New York State Department of Taxation and Finance, 20 N.Y. 3d 586 (2013), cert. denied, 134 S. Ct. 682 (2013), and is modeled after the New York statute. ESSB 6138. The nexus presumption may be overcome with proof that (a) establishing, in a manner acceptable to the department, that (i) each in-state person with whom the remote seller has an agreement is prohibited from engaging in any solicitation activities in this state that refer potential customers to the remote seller, and (ii) such in-state person or persons have complied with that prohibition; or (b) any other means as may be approved by the department. ESSB 6138.
• Economic Nexus Presumption Extended to B&O Wholesaling Tax. Washington imposed its economic nexus standard in 2010 for activities subject to the B&O Service and Other Activities Tax and other limited tax classifications. Under the standard, nexus is presumed if the seller has significant factors in Washington, currently $267,000 in sales, $53,000 in property, $53,000 in payroll, or 25% of any one factor. The new statute extends the economic nexus standard to the B&O Wholesaling Tax. The B&O Retailing Tax continues to be immune from the economic nexus standard. ESSB 6138.

Eliminated Tax Exemptions

• Repeal of Research and Development Exemption for Large Software Companies and Enhancement of Research and Development Exemption for Manufacturers. The machinery and equipment sales tax exemption described in RCW 82.08.02565 applies to manufacturing machinery and equipment as well as research and development equipment used by a manufacturer. The legislation excludes certain large software companies from claiming the exemption for their research and development equipment.  For purposes of the carve-out, taxpayers may not claim the exemption if they were in existence prior to July 1, 1981, employ more than 40,000 people in Washington, and they are primarily engaged in development, sales, and licensing of computer software. In addition, the legislation clarifies that a manufacturer for purposes of RCW 82.08.02565 includes software developers that deliver software electronically. ESSB 6138.
• Elimination of the B&O Royalties Tax Classification. Under prior law, royalty income was subject to the B&O Royalties Tax classification at a rate of 0.484%. Under the legislation, royalty income is now subject to the catch-all B&O Service and Other Activities Tax classification at a rate of 1.5%. ESSB 6138.

Extenders

• Food Processing Manufacturing Tax Exemption. The following tax preferences set to expire on July 1, 2015, were extended to July 1, 2025: (1) B&O manufacturing tax exemption for fruit and vegetable processors and manufacturers; (2) B&O manufacturing exemption dairy product projection; (3) B&O tax exemption for seafood manufacturing; and (4) certain sales of these products if transported directly out of state by the purchaser. ESSB 6057.
• Tax Preferences for Aluminum Smelters. There are several preferences for aluminum smelters, including a preferential B&O tax rate, property tax credits, sales and use tax credits against the state portion of tax for personal property, construction materials, and labor and services performed on buildings and property at an aluminum smelter, and brokered natural gas exemptions or credits, that were set to expire on July 1, 2017, which are extended to January 1, 2027. ESSB 6057.

Other Tax Changes

• Increased Penalties for Excise Taxes. RCW 82.32.090(1) imposed a 5% penalty for late payment. The penalty increases by an additional 10% if tax is not received on or before the last day of the month following the due date and by another 10% if not received on or before the last day of the second month following the due date for a total of 25%. The legislature added an additional 4% to the penalty amounts. As such, the penalties for late payment will increase from 5%/15%/25% to 9%/19%/29%. ESSB 6138.
• Increased Penalties for Unclaimed Property. Washington added a 10% penalty for the failure to report or pay over unclaimed property, a 10% assessment penalty, and a 5% late payment penalty. As such, the cumulative penalties for unclaimed property non-filers will now be 25%. ESSB 6057.
• Data Center Sales Tax Exemption. Washington’s data center sales tax exemption, RCW 82.08.986, previously expired on April 1, 2020, and commencement of construction of the data center had to occur before July 1, 2015. Under the statute, a data center must have at least 20,000 square feet located in a rural county and create 35 family wage employment positions or three such positions per 20,000 square feet of space. The exemption applies to servers, power infrastructure, and software, as well as charges for labor and services rendered in respect to installing eligilbe server equipment and power infrastructure. With the new legislation, the data center exemption is extended to July 1, 2025, with the following changes: (1) no more than eight data centers will be approved between July 1, 2015 to July 1, 2019, and no more than 12 by July 1, 2025, on a first-come, first-served basis; (2) working servers must be housed in buildings rather than modular or similar containers for data centers where commencement of construction occurs after June 30, 2015; and (3) refreshes to working servers may be made over 12 years. The existing data center sales and use tax exemption on replacement server equipment where commencement of construction took place after April 1, 2012, but before July 1, 2015, is extended from April 1, 2020 to April 1, 2024. Qualifying businesses or tenants must apply to the Department of Revenue for the exemption. ESSB 6057.