Some time ago, I came across one exciting and intriguing tax scenario regarding the supply of digital products to customers residing in Washington State. Most European countries don’t impose direct tax liabilities for non-resident suppliers of digital goods or services outside their country of residence that are also VAT registered in the destination country when needed. So, we are not discussing non-resident digital suppliers with a physical presence in the destination country.
Most times, the foreign sellers of digital products don’t have more than one tax residence or permanent establishment. Even the number of VAT registrations dropped significantly since adopting the OSS schemes.
As we know, the tax liabilities of the foreign providers of Electronically Supplied Services within EU B2C operations are defined mainly within the circle of indirect taxes. Non-resident digital merchants making their supplies to customers based in Washington State could be behind indirect and direct tax liability.
Sales Tax Compliance
Non-Resident Digital Sellers with physical or economic nexus in Washington State must levy retail sales tax on their sales to customers based in the state. Various triggers could imply the existence of a physical nexus in the state. As regards the economic nexus, the triggering momentum is more straightforward.
The out-of-state digital seller(marketplace or e-merchant) has an economic nexus when they reach the gross receipts threshold of USD 100,000 for sales sourced or attributable to Washington State.
When the respective supplier reaches the threshold, it must register for sales tax in the State and should start adding the attributable sales tax rate to the supply in question.
Business and Occupation Tax
The tax liability of non-resident digital sellers becomes very particular when in the picture enters the liability for the Business and Occupation tax. As mentioned at the beginning of the article, when it comes to the direct tax liability of digital suppliers in most EU countries, they are, in most cases, limited to the country of residence and/or permanent establishment. In Washington State, this is different. Let’s be more specific.
When the digital supplier reaches an economic or physical nexus, besides having the liability for the retail sales tax, it automatically becomes liable for the so-called Business and Occupation tax(B&O tax).
Unlike many other US States, Washington State doesn’t have an income tax. However, to some extent, we can classify the B&O tax as income tax for easier comprehension.
After reaching the threshold, Digital Suppliers should be aware of this liability. They should file and remit B&O tax returns as per allocated frequency.
There are different types of B&O tax, as per the classification of the activity. For the underlying taxpayers, it is crucial to be aware of the classification rules for their B&O tax liability. The calculation of the owed B&O tax for the reporting period is based on the seller’s gross income within the state.
If the seller chooses the classification type of his sales wrongfully, he will most probably incorrectly calculate the B&O tax owed to the state. When this happens, the return will be erroneous, and the taxpayer will likely pay interest and penalties for the incorrect tax return.
Taxpayers should remember that to calculate the Business and Occupation tax correctly, they must consider all gross income made in the state in the reporting period. Noteworthy is that the supplier will not be able to make any deductions for calculating the owed tax.
Digital Sellers that provide their digital products or services to customers using the marketplace facilitator’s intermediary services should remember that the marketplace isn’t responsible for handling B&O tax.
The responsibility for submission and remittance of the tax return concerning the B&O tax remains the sole duty of the digital seller.
Practical Notes
Let’s make a practical example of when the foreign digital supplier becomes liable for Retail sales tax and is subject for Retailing classification for the B&O tax purposes.
So, the Slovenian-based digital vendor of SaaS allows its customers in Washington to access and purchase various digital products and services. The Slovenian company has reached the economic nexus threshold in the State.
When the company reaches the threshold, it becomes liable for both Retail sales tax and at least for the Retail classification of the B&O tax. Depending on the customers, it could also be liable for the Wholesale classification of the B&O.
The B&O tax rates will be defined according to the allocated classification type.
The SI company must file retail sales tax returns and B&O tax returns. The tax returns can be submitted online using the services made available by the Washington State Revenue or by mail.
The non-resident digital sellers should know their potential liability for the Business and Occupation tax in Washington state. When the supplier meets the nexus conditions besides the mandatory requirement to register for the retail sales tax, it should bear in mind that there is also a direct tax liability under the B&O tax.
As the tax rules for digital sellers in Washington state are tricky, it would be advisable to seek professional tax advice to eliminate the possibility of not being aware of some tax liabilities. The existence of this type of tax for digital sellers coming from non-US states can be astounding. Taking that also into account, the sound assistance of tax professionals seems even more reasonable.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)