Washington Sales and Use Tax & Audit Guide
This guide is for businesses that need straightforward answers on the following Washington Sales and Use Tax subjects:
- Do I need to be collecting Washington sales tax?
- Should I be collecting or paying Washington use tax?
- What do I do if I should have been collecting but haven’t?
- I received an audit notice, what should I do?
- Guidance on fighting a sales tax assessment in Washington.
Who Needs to Collect Washington Sales and Use Tax?
Like most states, to be subject to Washington sales tax collection and its rules, your business must:
1) Have nexus with Washington, and
2) Sell or use something that is subject to Washington sales tax.
How Is Nexus Established in Washington?
- Having an employee in Washington
- Having property or inventory in the state
- Installing or assembling goods in Washington
- Occupying and maintaining an office, distribution center, warehouse, or physical location where business is conducted.
- Having independent sales reps, employees, or agents conducting business in the state, including selling, delivering, or taking orders for taxable items in Washington.
- Assembling, installing, servicing, or repairing products in Washington.
- Owning, renting, or leasing real property or tangible personal property in Washington, including a computer server or software to solicit orders for taxable items.
- Delivering goods to Washington customers using your company-owned or leased truck.
- Maintaining inventory in Washington using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).
Additionally, business that do not have a physical presence in Washington, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.
Economic Nexus (Wayfair Law) and Internet Sales in Washington
Effective January 1, 2020, Washington requires that an out of state business (a.k.a. remote sellers) register with the Washington Department of Revenue to collect and remit sales and use tax if the business has a total sales revenue in the state of more than $100,000 in the preceding twelve calendar months.
Total sales revenue, as defined by Washington, includes the following:
- Gross revenue from all taxable and nontaxable sales of tangible personal property and services in Washington.
- Any separately stated handling, transportation, installation, and other similar fees collected by the seller in connection with the sale.
- All sales for resale and sales to exempt entities.
- As of January 1, 2020, total Washington revenue must include the aggregate sum of all sales made on all mediums, including all marketplaces and the remote seller's own website.
Once the $100,000 sales threshold is exceeded, the seller must obtain a permit and begin collecting Washington sales and use tax.
EXAMPLE: If during the period of January 1, 2020, through December 30, 2020, a remote seller's total Washington revenue exceeds $100,000, the remote seller needs to obtain a permit and begin collecting the appropriate tax.
Washington Sales Made Through Marketplace Providers
If your business sells on Amazon or a similar marketplace provider, you may not have to collect sales and use tax on those sales. Specifically, if the marketplace provider certifies they are collecting and reporting sales tax, you are off the hook. However, such sales may count towards your total sales threshold, potentially requiring your business to collect tax on sales made directly through your website or other marketplaces.
Which Sales Are Subject to Washington Sales Tax?
If you have nexus in Washington, the next step is to determine whether the products or services you sell are subject to Washington sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Washington sales tax.
While the general rules seem straightforward, the application of Washington’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.
Common exemptions from Washington sales and use tax:
Generally, services are not subject to Washington sales tax. However, the types of services listed here are subject to Washington sales tax:
- Construction services including constructing or improving new or existing structures, cleaning, fumigating, painting, and clearing land.
- Landscaping services
- Fishing charters, sporting event tickets and other recreational services
- Personal services like personal training, tanning, tattooing, and dating or escort services.
More information on the taxability of these types of services can be found here.
Washington broadly treats SaaS and digital products as taxable sales Likewise, software that is downloaded and digital products are taxable in Washington.
Shipping & Handling
Washington takes the position that delivery and shipping charges connected with taxable items or services are taxable. If, however, the item being sold is exempt, the delivery charge is also exempt.
While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up. These guides were developed by the Washington Department of Revenue to provide some industry specific guidance.
- Washington State Sales Tax Guide for Farming and Agricultural Industry
- Washington State Sales Tax Guide for Pet Adoption and Animal Rescue
- Washington State Sales Tax Guide for Car Dealers and Auto Dealerships
- Washington State Sales Tax Guide for Bail Bond Agencies
- Washington State Sales Tax Guide for Hair Salons, Nail Salons, Massage Parlors, etc.
- Washington State Sales Tax Guide for Child Care and Daycare Services
- Washington State Sales Tax Guide for Commercial Fishing / Fishermen
- Washington State Sales Tax Guide for Construction and Contractors
- Washington State Sales Tax Guide for Convenience Stores (C-Stores) and Gas Stations
- Washington State Sales Tax Guide for Dentists
- Washington State Sales Tax Guide for Direct Seller and Independent Consultants
- Washington State Sales Tax Guide for Fishing Charters
- Washington State Sales Tax Guide for Restaurants, Bars, and Food Services
- Washington State Sales Tax Guide for Games and Gambling
- Washington State Sales Tax Guide for Horse / Equestrian Industries
- Washington State Sales Tax Guide for Insurance Industry
- Washington State Sales Tax Guide for Interior Designers and Consultants
- Washington State Sales Tax Guide for Landscaping
- Washington State Sales Tax Guide for Hotels and Lodging Industry
- Washington State Sales Tax Guide for Manufacturing
- Washington State Sales Tax Guide for Mortgage Brokers
- Washington State Sales Tax Guide for Nonprofit Organizations
- Washington State Sales Tax Guide for Out-of-State Businesses / Remote Sellers
- Washington State Sales Tax Guide for Photographers
- Washington State Sales Tax Guide for Portable Self Storage
- Washington State Sales Tax Guide for Staffing Companies / Headhunters
- Washington State Sales Tax Guide for Trucking and Truckers
- Washington State Sales Tax Guide for Boat or Vessel Dealers and Brokers
- Washington State Sales Tax Guide for Veterinarians
- Washington State Sales Tax Guide for Wineries and Wine Industry
Determining Local Sales and Use Tax Rates in Washington
Washington’s base or statewide sales tax rate is 6.50%. However, local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can charge a local surtax potentially increasing the total sales tax that must be collected and remitted by the seller. Local surtaxes are remitted to the state as part of the Washington sales and use tax return. The total state and local rate in Washington can be over 10%.
Determining exactly how much tax to collect on a transaction gets really convoluted, but the basic rules are:
- If a sale is taxable in Washington, then the base tax rate of 6.5% must be charged as well as the local sales and use tax for the jurisdictions where you are engaged in business.
- Generally, the rate applies based on the location of the customer receiving the goods. local sales tax is based on the location of the seller’s place of business. Local use tax is based on the location where the customer receives the goods or services. If you ship or deliver goods to your customers, you may have to collect local sales tax, local use tax or both.
In Washington, each taxing authority has its own boundaries, and different
taxing entities can have overlapping (and sometimes conflicting) boundaries.
Unfortunately, there is no logical way to determine which taxing jurisdiction
a given sale is in.
- We recommend using the Washington Department of Revenue’s Sales Tax Rate Locator, which allows you to search for sales tax rates by address.
List of Local Sales and Use Tax Rates in Washington
The combined Washington state + local sales and use tax rates for the largest 30 cities as of January 2021 are listed below. A comprehensive list can be found here.
I Should Have Collected Washington Sales Tax, But I Didn’t
Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.
If you determine your business has nexus but you have not collected Washington sales tax, the primary options are to:
- Register and pay back taxes, penalties, and interest, or
- Complete a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).
Here is what you need to know about each option to make the best decision for your business:
Option 1: Register to Pay Back Taxes, Penalties, and Interest
Sometimes the best solution for a business is simply to register with Washington and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.
When to consider registration and payment:
- If you established nexus less than 3 or 4 years ago.
- The sales tax penalty is LESS than the professional fees charged for the VDA.
- Your business does NOT have a sales tax collected issue.
Beware: registering does not generally eliminate past liabilities
Option 2: Voluntary Disclosure Agreement (VDA)
Washington’s lookback period: 4 years.
In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 4 years. As a result, the benefit of doing a VDA often turns on:
- Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
- The sales tax penalty savings is MORE than the professional fees charged for the VDA.
- You have a sales tax collected but not remitted issue.
I Received a Washington Sales and Use Tax Audit Notice, What Should I Do?
Washington regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive a sales and use tax audit notice should consider the following:
- Unless you have experience handling Washington sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
- How will you know when to provide documents or when to push back?
- Do you have a thorough understanding of your sales and use tax areas of exposure?
- Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?
If you are unsure of the answer to these questions and you do not have experience handling Washington sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.
Please visit our resource pages for more detailed information and to help you evaluate critical decisions during your Washington sales and use tax audit.
- The Audit Overview & Selection Process
- The General Audit Process
- Statute of Limitations Extensions & Issues
- Managing the Sales Tax Auditor
Washington Sales Tax Audit Process
The audit process usually follows the process laid out in this flowchart. See the detailed guidance for each stage of the process in the sections below.
What to Expect After You Receive a Washington Sales and Use Tax Audit Notice (Washington Routine Audit Letter)
Many audits begin with a call out of the blue from a Washington Department of Revenue’s sales tax auditor. Shortly after the call, your business will receive an audit notice which confirms that you were lucky enough to be chosen for a Washington sales and use tax audit. To prepare for the audit, it is likely a good idea to start by getting a state and local tax professional involved.
What to Expect From A Washington Sales Tax Auditor
- Auditor will conduct pre audit research.
- Auditor will often schedule and perform an entrance conference.
- Records will be requested (many of which the auditor is not entitled to and does not need).
What to Expect During The Audit
Once the necessary records are received, the auditor will:
- Conduct the audit by comparing your Washington sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your Washington sales tax return(s).
NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.
- Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
Conduct a use tax audit – the auditor will request a detail of certain
documents / accounts to make sure use tax was properly paid on applicable
purchases. Common areas audited include:
- Advertising Expense
- Auto & Truck Expense
- Repair and Maintenance
- Rent (including related party rent)
- Office Expense
- Miscellaneous Expense
Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to Washington. This often leads to shocking results for the unsuspecting taxpayer during an audit.
After the Audit – Understand and Defend Your Businesses Rights
Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the Washington sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied Washington’ sales tax laws.
We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their Washington sales tax liability.
The process of challenging a Washington sales tax audit assessment is discussed in detail in the following sections.
Washington Sales Tax Audit Protest Process Flow Chart
NOTE: If the deadlines are missed, you have a short period of time to pay the tax and seek a refund. If that deadline is also missed, it can be very difficult to get case reopened.
Contesting Audit Findings with the Auditor
After an audit, the auditor will issue a Washington sales and use tax audit report. This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:
30 days to contest findings with the auditor.
- Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
- Legal interpretations of sales tax law are often not resolvable at this stage.
- If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the Washington Department of Revenue.
Appeal / Protest with the Washington Department of Revenue
Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed (also called a Rule 100 Review) by the auditee. This is done after the Washington Department of Revenue issues the Assessment.
- A protest / appeal must be done within 30 days of the Assessment issuance.
- If you miss the 30 days, in some cases you have may have additional time to pay the tax and file a refund claim.
- If both periods are missed, the assessment becomes final and it is very difficult to reopen the audit.
If you have received an Assessment and have not at least talked to someone experienced in Washington State and Local tax, now is the time before these deadlines are missed.
Rule 100 Decision
If you cannot resolve the Washington sales and use tax dispute through the protest / appeal process, the Washington Department of Revenue will issue a Rule 100 Decision Letter. The Position Letter gives you the opportunity to re-protest the assessment within the agency or file in Washington’s tax / administrative court, which is called the Washington Board of Tax Appeals. There are important deadlines in this phase of the process as well, such as 30 days to file in administrative court.
Settling a Washington Sales Tax Liability
Along the way, or even after one the critical notices are issued, there is the possibility to settle your Washington sales tax case by negotiating with the Washington Department of Revenue. Washington will consider settlements if the issue is nonrecurring, the law is unsettled, a strict application of the law has harsh consequences, there is uncertainty of the outcome of the decision, or the taxpayer is unable to pay. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced Washington state and local tax lawyer or other professional.
Contest a Washington Jeopardy Assessment
Washington may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives Washington Department of Revenue accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has a shortened time to contest the assessment and must place a security deposit to fight the issue.
Washington Administrative Court
If you cannot resolve the case within the agency or missed your deadlines, you still have one last shot to fight your Washington sales tax assessment by going to the Washington Board of Tax Appeals (BTA). Although we generally don’t recommend it, you always have the option to skip the agency protest process and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.
If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral administrative law judge. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.
Other Washington Sales Tax Resources
Q:What triggers a tax audit?
A:You inadvertently waived a red flag or your company landed in the small percentage selected for a random sales tax audit. These red flags include: Cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to the IRS, a high volume of exempt sales, filing a refund claim, or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws.
Q:How do I prepare for a sales tax audit?
A:1. RESPOND to the notice; 2. Get organized; 3. Identify/hire your audit manager; 4. Notify your auditor of who they will be corresponding with; 5. Compare your sales tax returns against the federal tax return; 6. Test at least 1 month of exempt sales; 7. Reconcile your sales tax payable account versus your sales tax payments; 8. Review your fixed assets purchased — did you pay sales tax on them?; 9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases.
Q:How long do sales tax audits last?
A:Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.
Q:Can I do this myself or should I hire a sales tax lawyer or a sales tax consultant?
A:We all enjoy the occasional DIY project, especially when it saves us money. Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit, it is beneficial to have someone with knowledge of the financial implications on your side. That is where sales tax professionals, such as those at Sales Tax Helper LLC, can save you a lot of heartache and money by avoiding a few missteps.
Q:What accounting software and services do you work with?
A:TaxJar, Vertex O Series, Avalara, Vertex Cloud, Quickbooks, Proconnect Tax Online, Canopy, ONESOURCE, Sovo Intelligent Compliance Cloud, Intuit Lacerte, CCH SureTax, SS&C Advent Axys, Vertex Payroll Tax Q Series, Bloomberg Tax Advantage, VATBox, CSC Corptax Compliant, Oracle Tax Reporting Cloud, TaxCloud, Fast Enterprises, GenTax, Fast Enterprises FastUI, SAP Tax Compliance, Taxify, and ESKORT Compliance Solution.