Washington Sales & Use Tax Guide: Rates, Nexus Rules & Compliance

Sales and Use Tax Basics in Washington

Sales Tax

Sales tax rules in Washington state that this tax applies to retail sales of tangible personal property (tangible goods) and services such as installation, repair, cleaning, altering, improving, construction, and decorating. In addition to this, sales tax applies to transactions relating to digital products.

Washington rules and regulations impose state and local sales taxes on taxable transactions. The state Department of Revenue must receive all collected sales taxes.

Use Tax

When a registered retail seller does not collect sales tax, the responsibility to pay retail tax is transferred to the consumer. The consumer must remit use tax for goods and services used in Washington. The use tax structure is the same as the sales tax structure and consists of state and local rates.

Washington Sales and Use Tax Rates

The Washington state-wide sales and use tax is 6.50%. Local sales and use tax rates vary from city to city or district to district, but when combined with the state sales and use tax rate, they amount to 9.38% on average. Nine city sales and use tax rates and 12 country tax rates exist.

Determining which local sales and use tax rate apply may be challenging. Therefore, retail sellers may use the Washington Sales Tax Rate Lookup app, specifically designed and developed to quickly and easily calculate applicable rates.

However, one piece of information is crucial for determining the applicable rate: the consumer's address and zip code. Therefore, retail sellers should obtain this information from the consumer when they receive a purchase order for taxable goods or services.

Tax-Exempt Transactions

In addition to knowing which tangible goods and services are taxable, retail sellers must also know which transactions fall out of the sales and use tax scope. The extensive list of tax-exempt transactions is grouped into seven groups: farm products, producer goods, interstate sales, public activities, health-related purchases, deferrals and credits, and others.

The last group, referred to as the other sales and use tax exemptions, includes personal and professional services, custom computer software, casual sales, newspapers, food, food ingredients, and arts and cultural organizations.

Nexus Rules in Washington

Generally, across the US, with the sales and use tax rules and regulations, there are a few types of nexus relevant for charging, collecting, and remitting liability of retail sellers. In Washington, there are three types of nexus: physical, economic, and marketplace.

Before introducing the economic nexus, the State of Washington had rules for click-through nexus, which was repealed in 2019.

Physical Nexus

Physical nexus means that a retail seller has a physical presence in Washington, and on that basis, it must register for sales and use tax purposes. Physical presence can be established by having employees, real or tangible personal property, or stock of goods in the state. 

Regarding the stock of goods, even if they are held by the marketplace facilitator or another third party, this is still enough to create a physical nexus.

Other activities relevant to establishing physical nexus are renting or leasing tangible personal property, having agents or third-party representatives, soliciting sales in the state, installing or assembling goods, constructing, installing, repairing, or maintaining real or tangible personal property.

Additionally, providing services such as accepting returns or providing product training, regardless of whether employees or representatives provide them, is sufficient to establish a physical presence in Washington.

Economic Nexus

The economic nexus was introduced in 2018 following the Wayfair ruling. Under the economic nexus rules, if retail sellers, primarily out-of-state or remote, have a sufficient economic presence in the state, they must charge, collect, and remit sales tax.

The initial threshold for establishing an economic nexus was USD 100,000 or more in retail sales delivered or sourced to Washington consumers or 200 annual transactions with Washington consumers in the current or preceding calendar year. However, in 2019, the transaction threshold was repealed, leaving only USD 100,000 in annual gross sales in the current or preceding calendar year as relevant for establishing an economic presence.

Marketplace Nexus

Marketplace facilitators that either make or facilitate sales to consumers in Washington must register for sales tax once their combined gross sales in the state exceed USD 100,000 or have marketplace sellers with a physical presence in Washington.

Taxable Goods and Services in Washington

As previously noted, retail sales of tangible goods and specified services are subject to sales and use tax. Tangible goods can be seen, weighed, measured, felt, or touched in any other manner perceptible to the senses, including electricity, water, gas, steam, and prewritten computer software. Only tangible goods listed as tax-exempt are not subject to sales and use tax.

Taxable retail services include construction, installation, cleaning, and repair services, landscaping and landscape maintenance, supplying tangible goods, machinery with an operator, and personal services such as personal training.

Bundled Transactions and the True Object Test

In the case of bundled transactions, meaning those that include taxable and non-taxable components, they are subject to sales and use tax if any of their components would be under general rules subject to sales and use tax. 

A true object test determines whether the main component of the transaction is a non-taxable service or tangible goods. If the true object test shows that the main component is a non-taxable service, the transaction is non-taxable, regardless of the supply of tangible goods.

Nevertheless, it is essential to note that not all service and tangible goods combinations can be governed by general rules. Therefore, the true object test should be applied to all bundled transactions to determine if sales and use tax apply.

E-Commerce Framework

E-commerce sellers, such as remote or out-of-state located in another US state or abroad that do not have a physical presence in Washington, must register for sales tax purposes with the Department of Revenue once their gross sales exceed USD 100,000. However, Washington cities and counties also have registration requirements. Therefore, e-commerce sellers may have some difficulties completing the registration process.

Nevertheless, once the registration process is completed, e-commerce sellers must collect and remit state-wide and local sales tax.

Marketplace Rules

From 2020, marketplace sellers may be required to register for sales tax if they have more than USD 100,000 in gross sales, meaning sales through marketplaces and direct-to-consumers through their own websites. Exempt sales are also considered when calculating the threshold.

Once the marketplace sellers exceed the threshold, they must collect and remit sales tax for the rest of the current and the following year. 

However, suppose the marketplace seller only sells tangible goods and services through a marketplace facilitator. In that case, they are not required to collect and remit sales tax as long as they can prove that the facilitator is fulfilling that requirement on their behalf.

Additionally, marketplace sellers should receive a monthly report on gross sales information for all Washington sales made on their behalf within 15 days of the end of the month.

Digital Goods and Services

Sales and use tax apply to digital products and goods regardless of how they are transmitted or accessed. In other words, if a digital product can be downloaded, streamed, and accessed based on a subscription, it is taxable. Digital goods include data, facts, information, sounds, images, and a combination of all these elements transferred electronically.

In addition to digital products and goods, automated digital services, including software, data, information, or additional functionalities or services such as chat rooms or multiplayer capabilities, also fall under the scope of sales and use tax rules and regulations.  

Prewritten software, known under the Washington legislation as remote access software (RAS) that can be accessed remotely by consumers paying the right to access and use the software, is subject to sales and use tax.

Additionally, Washington legislators included taxability rules for digital codes that allow consumers to obtain one or more digital products. For a code to be considered digital, it must provide access to digital products with the same tax treatment. The supply of digital codes is treated the same way as the underlying digital products. However, if the digital code provides the right to digital products that do not have the same tax treatment, it is not considered digital.

Digital Marketplace

Marketplace facilitator rules were introduced in 2020. These rules make online marketplaces liable for collecting and remitting sales tax on behalf of marketplace sellers who use the platforms to offer and sell tangible goods and services to consumers in Washington.

Digital Platform Operator

To qualify as a marketplace facilitator, the digital platform operator must have agreements with marketplace sellers to facilitate the sale of their goods for a fee and communicate the offer and acceptance directly or indirectly with the seller and the buyer.

In addition to these two requirements, the marketplace must directly or indirectly engage in one of the additional activities, such as payment processing, fulfillment or storage services, listing goods for sale, setting prices, branding sales, taking orders, providing customer services, and accepting or assisting with returns or exchanges.

Suppose the digital platform operator meets all the requirements and makes or facilitates sales to consumers in Washington in the amount exceeding the USD 100,000 threshold in combined gross sales. In that case, it must register for the sales and use tax purposes.

The marketplace facilitator must also register if even one marketplace seller has a physical nexus in Washington. The marketplace facilitator is responsible for reporting all sales that marketplace sellers make. As an additional obligation, marketplace facilitators must provide their sellers with information on all monthly sales that they facilitate on their behalf.

Filing and Payment Requirements in Washington

Once the taxable persons complete their registration process, the Department of Revenue sends certain information to them, including the filing frequency. Depending on the estimated yearly business income. 

Annual, quarterly, or monthly tax returns may be required depending on the estimated gross annual income. For different business activities, the different limits apply. Therefore, quarterly tax returns are needed for retail activities if the estimated gross annual income is between USD 0 and USD 60,000, and monthly tax returns must be submitted if the estimated income is over USD 60,000.

Different limits are defined for services. Thus, annual tax returns are mandatory when the estimated gross income is between USD 0 and USD 60,000, quarterly returns are required when the amount is between USD 60,000 and USD 100,000, and monthly tax returns are filed when the amount exceeds USD 100,000.

In addition to estimated gross income, filing frequency may be set based on the amount of tax due. If the tax is less than USD 1,050, an annual tax return is required. If the annual tax liability is between USD 1,050 and USD 4,800, the taxable person must file quarterly tax returns. If the annual tax liability exceeds USD 4,800, a monthly tax return is required. 

All tax returns must be filed electronically with the Department of Revenue. They are due on the 25th of the month following the reporting period for monthly returns, the end of the month following the tax quarter for quarterly returns, and April 15 for annual returns.

Penalties for Non-Compliance with Sales and Use Tax Requirements

If the taxable person makes a late payment, the Department of Revenue (DOR) imposes a 9% late penalty. However, if the late payment remains outstanding, DOR may impose a 19% penalty after the last day of the month following the due date pass and a 29% penalty if the payment is due more than two months. In either case, the minimum penalty of USD 5 is defined for late payments.

In addition to the penalty, an annual interest of 7% may be calculated on the due amount.