The Washington Department of Revenue recently announced that it intends to substantially revise Rule 193, its administrative rule regarding B&O and sales taxation on sales of tangible personal property. Major proposed changes include:

  • Adoption of a destination sourcing standard. Currently, sales are sourced under a receipt standard that allows for sourcing at the point of origin if certain inspection and acceptance standards are met. The proposed changes may require retailers whose in-bound sales are currently treated as non-Washington sales to start collecting sales tax.  By adopting a strict destination sourcing standard, the Department would make virtually all sales of goods shipped into Washington subject to tax.
  • Repeal of dissociation. The current version of Rule 193 recognizes that the U.S. Commerce Clause requires not only nexus with the taxpayer, but also nexus with the activity the state seeks to tax. This allows taxpayers to “dissociate” sales for which there are no Washington business activities; in other words, sellers can currently exclude from tax sales that are not significantly associated in any way with the sellers’ Washington activities. The Department’s proposed changes would eliminate dissociation.
  • Taxation of drop ship sales. Rule 193 currently provides that certain wholesale sales drop shipped to a third party in Washington are not received by the seller’s purchaser in Washington, and therefore are not subject to wholesaling B&O tax. The revised rule is expected to expressly impose wholesaling B&O tax on such sales.

The proposed revisions also address other issues, such as trailing nexus. A draft of the proposed rule revision has been circulated for discussion, and a formal rulemaking notice will likely be issued in July, at which time a hearing will be scheduled (and likely an updated draft rule will be released).