What is a physical nexus in Washington?

A physical nexus is established when an out-of-state business has activities like representatives visiting retailers or offering repair services in Washington.

How does the Wayfair ruling relate to physical nexus?

While the Wayfair ruling focuses on economic nexus, Washington's decision shows that physical nexus rules, like third-party activities, still apply.

Does an online retailer without a store in Washington still need to collect sales tax?

Yes, if the retailer’s activities, such as in-person representative visits or third-party services, meet nexus requirements.

Can economic and physical nexus overlap?

Yes, businesses selling online may meet economic nexus thresholds while third-party activities establish physical nexus, requiring compliance with both.

What are the consequences of not complying with Washington’s nexus rules?

Non-compliance can result in audits, back taxes, penalties, and interest for uncollected or unremitted sales tax.

Washington Nexus Rules: Third-Party Activities Establish Physical Presence

Q: What activities established physical nexus in this case?

Sending representatives to visit retailers and offering repair and warranty services through those retailers established the physical nexus.

Since the Wayfair ruling was published in 2018, economic nexus and related rules have been the focus of state governments, courts, and taxable persons. However, taxable persons still need to remember physical presence and nexus rules.

Therefore, the Washington Department of Revenue Determination Letter, which determines whether a company from another US state sending a representative each year to visit its retailers selling products and offering warranty repair services through those retailers constitutes a physical nexus in Washington, is a vital reminder of those rules.

Facts of the Matter and Department Decision

The taxable person is a wholesale company that sells goods to Washington retailers that resells them. In addition to selling goods to retailers, the wholesaler also sells goods online directly to consumers in the State.

The wholesaler did not own or rent a physical office or store in Washington, nor did it have any employees. However, it did send representatives to Washington each year to visit all retailers that buy and resell wholesale goods. Furthermore, the wholesaler advertised that customers who bought goods online could repair them at the local retailer. Therefore, the local retailers resell the goods purchased from the wholesaler and handheld repairs and warranties.

Since the wholesaler did not collect and remit sales tax between 2012 and 2018, the Washington Department of Revenue (WDR) conducted a tax audit. The WDR concluded that the wholesaler met all requirements for establishing an economic and physical nexus. The wholesaler accepted the economic nexus decision but disputed the physical nexus's establishment.

However, after carefully considering all the facts, the WDR concluded that under the State laws and regulations, sending a representative to visit retailers and providing repairs and warranty services through retailers are sufficient to establish a physical nexus. Thus, the wholesaler had to comply with State laws and regulations to charge, collect, and remit sales tax in Washington.

Conclusion

Although many businesses focus on online sales and digital services and products, physical presence and nexus rules must not be neglected, even in the digital era. The decision establishes that having a third-party representative perform activities on behalf of one company is enough to establish the physical nexus in Washington, which further implies the application of sales tax legislation.

Moreover, the case shows how economic and physical nexus can be closely related when selling goods online remotely but offering repair and warranty services through third-party representatives.

Source: Department Of Revenue