United States: Recent Nexus Developments: Washington Enacts Legislation Imposing Sales Tax Obligations On "Marketplace Facilitators," And Ohio Enacts "Cookie Nexus" Law

At a Glance...

Washington Governor Jay Inslee signed EHB 2163 July 7, imposing sales and use tax obligations on "remote sellers," "referrers," and "marketplace facilitators" beginning January 1, 2018. Businesses subject to the new law may elect to either collect sales or use tax on taxable retail sales, or comply with notice and reporting requirements, similar to the reporting regime that went into effect in Colorado July 1. The bill contains a multi-layered penalty regime. In Ohio, Governor John Kasich signed into law H.B. 49, the state's biennial budget bill, which includes a provision imposing sales and use tax collection requirements on certain Internet sellers based on "cookie nexus."

Washington Marketplace Legislation

The State of Washington has enacted sweeping economic nexus legislation that requires almost any online retailer making sales to Washington customers to either (1) collect sales tax on its Washington sales; or (2) comply with reporting and notice requirements for its sales to Washington customers. The legislation creates a web of economic nexus rules that apply to both remote sellers and "marketplace facilitators," through which sellers' products are sold to Washington customers. 

The notice and reporting requirements for vendors and marketplace facilitators should be of particular concern to businesses making mail-order and online sales to Washington customers. Significantly, businesses that meet the statute's very low economic nexus thresholds, but that choose not to collect tax on their sales to Washington customers, will be required to comply with the notice and reporting requirements, which carry substantial penalties for non-compliance.

Marketplace Provisions. The new statute creates a new class of companies subject to tax collection or reporting requirements—"marketplace facilitators." A marketplace facilitator is defined as anyone that contracts with a seller to facilitate sale of the seller's products through a marketplace operated by the marketplace facilitator, if certain other requirements are met.1  Under the new law, a marketplace facilitator will be on the hook for collecting sales tax on all Washington sales made through its marketplace if it is either physically present in Washington, or makes $10,000 in gross receipts from sales to customers in Washington (whether through its sales or others' sales using the marketplace) in the current or preceding calendar year.2 If the marketplace facilitator does not collect and remit sales tax on its sales to Washington customers, it is required to comply with the notice and reporting requirements.

In addition to imposing an economic nexus standard for marketplace facilitators, the Washington law goes even farther by asserting that a vendor has economic nexus if it sells goods through a marketplace facilitator that has economic nexus—even if the vendor would not otherwise be required to collect sales tax on its sales to Washington customers. The law imputes the nexus of the marketplace facilitator to each marketplace seller by treating the marketplace facilitator as an agent of each marketplace seller.3

Economic Nexus for Remote Sellers. In addition to the marketplace nexus provisions, the Washington law imposes economic nexus for remote sellers with gross receipts of at least $10,000 from sales to Washington customers. A remote seller is any seller,4 other than a marketplace facilitator, who does not have a physical presence in Washington, but makes retail sales to consumers purchasing property sourced to Washington.5 Remote sellers with nexus would be required to either collect and remit retail sales or use tax on taxable sales to Washington customers, or comply with the notice and reporting requirements.6

Notice and Reporting Requirements. The new law gives vendors and marketplace facilitators the option of following notice and reporting requirements on sales to Washington customers—similar to those implemented in Colorado and upheld in Direct Marketing Association v. Brohl—in lieu of collecting sales or use tax. The penalties for non-compliance with these notice and reporting requirements are significant. For example, a remote seller or marketplace facilitator subject to, and failing to comply with, the requirements, that has gross receipts sourced to Washington of $300,000 or greater in a given year may be subject to penalties of: (1) $20,000, for failing to provide the required notice to consumers at the time of a sale; (2) $100,000 plus $20,000 for every $50,000 in gross receipts in excess of $300,000, for failing to send annual reports to consumers; and (3) the greater of $20,000, or $25 per consumer, for failing to provide the annual report to the Department of Revenue.7

Washington's law directly contravenes Quill v. North Dakota8 by providing that a remote seller or marketplace facilitator has nexus with Washington solely as a result of making sales sourced to the state. Physical presence is not the determinative factor to ascertain whether nexus exists under the law. Washington joins Minnesota as the only states seeking to impose sales tax obligations on marketplace facilitators. Remote sellers or trade associations will likely challenge the new Washington law in court. As the pending lawsuit challenging South Dakota's law attempting to overturn Quill demonstrates, remote sellers are ready and willing to challenge unconstitutional efforts by the states to impose sales tax obligations on non-physically- present sellers. 

Ohio "Cookie Nexus"

On June 30, Ohio Governor Kasich signed into law Ohio's budget bill, H.B. 49, which includes a provision requiring that Internet sellers with more than $500,000 of annual Ohio gross receipts must collect sales tax from Ohio customers. The requirement is triggered if a seller's website installs cookies on a user's computer, or if the seller employs a system of servers in Ohio. Specifically, the bill provides that substantial nexus with the state is presumed to exist when a seller "uses in-state software to sell or lease taxable tangible personal property or services to consumers," or "provides or enters into an agreement with another person to provide a content distribution network in this state to accelerate or enhance the delivery of the seller's web site to consumers."9 The bill includes the following definitions:

"In-state software" means computer software, as that term is defined in section 5739.01 of the Revised Code, that is stored on property in this state or is distributed within this state for the purpose of facilitating a seller's sales.

"Content delivery network" means a system of distributed servers that deliver web sites and other web content to a user based on the geographic location of the user, the origin of the web site or web content, and a content delivery server.10

Unlike Washington's statute, Ohio's new law is arguably not a direct challenge to Quill, because the use of cookies or in-state servers may satisfy Quill's physical presence requirement. In that sense, the bill mirrors one of the arguments that the Department of Taxation recently made to support the Commercial Activity Tax's bright-line nexus standard in Crutchfield Corp. v. Testa.11 In Crutchfield, the Department argued that the use of cookies helped the taxpayer to "grow and maintain its Ohio market," and thus was sufficient to create nexus. Ultimately, the Ohio Supreme Court held that Ohio's bright-line nexus standard for Commercial Activity Tax purposes ($500,000 of Ohio receipts) was sufficient to create substantial nexus, and did not address the effect of the use of cookies.(See Reed Smith's prior coverage.)


1. EEHB 2163 § 204(3).

2. EHB 2163 § 202(1)(a)(i), (2)(b).

3. EHB 2163 § 203(1)(a).

4. A seller has the same meaning as provided in RCWA § 82.08.010 (generally, every person making sales at retail to a buyer, purchaser, or consumer), and includes marketplace facilitators, whether making sales on their own right or on behalf of marketplace sellers, and referrers. EHB 2163 § 204(12).

5. EHB 2163 § 204(7), (10).

6. EHB 2163 § 202(1)(a)(i), (2)(a).

7. EHB 2163 §§ 206(1)(a), (2)(a), (3).

8. 504 U.S. 298 (1992).

9. H.B. 49 § 5741.01(I)(2)(h) and (i).

10. H.B. 49 § 5741.01(I)(6)(d) and (e).

11. Slip Opinion No. 2016-Ohio-7760.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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