Press Room: Tax Release

June 12, 2018

Washington Offers Marketplace Fairness Penalty Reduction Program

For a limited time, until June 30, 2018, Washington’s Marketplace Fairness Penalty Reduction Program will allow applicants who meet program requirements to receive certain benefits, including penalty abatement and a limited look back period. The new program is intended to encourage marketplace facilitators, remote sellers and referrers to come forward and voluntarily register with the state (if required) and then pay prior tax obligations or meet notice requirements under Washington’s Business and Occupation (B&O) tax and sales and use tax regimes.

Background

Effective July 1, 2017, the economic nexus standard for the Washington B&O tax is extended from businesses producing service and royalty income to businesses making wholesale and retail sales to Washington customers. An out of state business that meets the economic nexus threshold in either the current or prior calendar year is deemed to have substantial nexus with Washington. The receipts threshold establishing economic nexus is gross receipts of $267,000 for 2017 and $268,000 for 2018 that are sourced or attributed to Washington or 25% of gross annual receipts into Washington. Thus, a remote seller meeting the dollar threshold establishes economic nexus with the state. Accordingly, a remote seller that exceeds the threshold is required to register with the Washington Department of Revenue (Department) and report B&O tax under the retailing tax classification even without physical presence in Washington.

Additionally, effective January 1, 2018, Washington expanded its sales and use tax regime. Certain marketplace facilitators, remote sellers, and referrers (as defined in the legislation) may have a duty to collect and remit or comply with notice and reporting requirements if, during the current or immediately preceding calendar year, the gross receipts from retail sales sourced to Washington totals at least $10,000.

Referrers with physical presence or economic nexus in Washington from referral services plus income from Washington retail sales would also be required to make this mandated election to collect or report.

Typical penalties, which may be reduced for eligible businesses through the program, include:

  • 5% assessment penalty for substantially underpaid tax;
  • 5% penalty added against unpaid tax for taxpayer who has taxable activity but has not registered with the Department; and
  • 29% (maximum) late payment of a return penalty.

Note that use tax notice and reporting penalties are not waived under the program, but may be addressed in a separate process with the Department for businesses without a physical presence in Washington.

The Details

The Marketplace Fairness Penalty Reduction Program allows abatement of the penalties described above of up to 39%. Similar to the standard Voluntary Disclosure Program available throughout the year, it limits the tax liability look back period to the prior four calendar years plus the current year. This is in lieu of the seven calendar years plus the current year that applies to unregistered taxpayers.

Taxpayers may choose to come forward anonymously to verify eligibility for the program and then if eligible, they will need to disclose business identity within 15 days. The program offers possible reduction in penalties even if a business has already been in contact with the Department and/or has registered with back taxes and penalties owing. Full statutory interest will continue to be imposed on all amounts due. Additionally, the limited look back and 29% late payment penalty waiver does not apply if a business collected sales or use tax but did not remit the tax.

The Takeaway

The Marketplace Fairness Penalty Reduction Program is available to businesses that register before June 30, 2018. Unlike the Voluntary Disclosure Program, the penalty reduction program is available to businesses even after certain contact by the Department. Note though that the program is of limited benefit since it does not go back further than the look back period.

While this program is offered for a limited time, it is important to note that there are also other potential avenues for taxpayer relief. In addition to the Voluntary Disclosure Program mentioned above, a taxpayer may engage in prospective compliance through negotiations with the Department. A voluntary disclosure opportunity is also available through the Multistate Tax Commission’s National Nexus Program. Because the recent requirements affect almost all online sellers it is crucial for those with an online footprint in Washington to plan ahead and mitigate liabilities.