Washington State Partially Modifies Unreasonable “Trailing Nexus” Rule

The Washington Department of Revenue (“DOR”), based on a very thin reed of statutory support, has long taken the position that once an out-of-state business has engaged in activity in Washington sufficient to create nexus with the State, even if it thereafter ceases all activity in the State, the out-of-state company continues to have nexus with Washington for a period of at least four years after ceasing activity there (the remainder of the calendar year plus four more years), for purposes of both Washington’s sales tax and its Business & Occupation (“B&O”) tax. See WAC 458-20-193(7), (8). This “trailing nexus” rule is fundamentally inconsistent with the Commerce Clause’s requirement that an out-of-state company must have a physical presence in a state in order for the state to impose tax collection and reporting obligations on it, as the Supreme Court affirmed in Quill Corp. v. North Dakota, 504 U.S 298 (1992).

This summer, the Washington State legislature revised the Washington B&O tax statute to include a provision which makes it clear that a company which stops doing business in Washington state will now be deemed to have “trailing nexus” for B&O purposes for only the remainder of the calendar year in which it stops doing business and for one additional year. See RCW 82.04.220. Although even a one-year trailing nexus rule is highly suspect as a matter of constitutional law, it is certainly an improvement over the DOR’s four-plus year rule, which the DOR has announced it intends to continue to apply to the Washington sales tax. See DOR Special Notice (September 10, 2010).

Online and multi-channel direct marketers should be aware of this unreasonable, extended nexus provision as creating additional risks and burdens with regard to any business activity or connection involving Washington.