Washington Destination-Based Sales Tax and Online Stores
May 11th, 2008If you’re a Washington state business and you ship/deliver goods within Washington state, you need to collect sales tax based on the destination starting in July 2008. This is very different from the current way we do it, which is based on whether the business is based in Washington. It’s quite confusing, and I don’t have it all sorted out, but will be updating this article as I learn more.
Here are the official links from the WA Dept of Revenue:
The Washington State Department of Revenue “Destination-bases sales tax” page.
Another Washington State DOR “Destination-based sales tax” page.
A nice video on Destination-based sales tax.
And the DOR email contact form if you have questions.
But look at this…an ONLINE RETAILERS SURVEY…if you have an online store..please take this (I took it and submitted my own opinion)
And some unofficial online discussions:
Online Merchant Network Thread
Lots of folks are worried about how to implement this way of calculating taxes in their online stores. Currently most of the online stores I’m familiar with do not support this kind of tax calculation. I founds lots of speculation, nothing that came directly from the WA DOR.
So I decided to contact the Washington State Department of Revenue and ask for myself.
Here’s what I sent:
I do website design, and have several clients who operate online stores. Currently, all the online store applications I’m familiar with calculate tax based on settings inside the online store application that determine the customer’s state.
For online stores in WA, this is typically set to 9%. In order to comply with the June requirement (and just to clarify, this is not voluntary, right?) all online stores in WA that ship to WA, now need to determine which location code the customer is in, to properly charge the right amount for sales tax.
I’ve seen nothing on your website regarding online store database integration - meaning, that DOR would maintain a database that, in real time, my online store would connect to to determine, again, in real time, what the appropriate tax rate to charge a particular customer.
This would be similar to how online stores calculate shipping costs, on the fly, by connecting to USPS, or FedEx or UPS. I would assume that DOR would be the same way - because it’s not possible to have an online store with someone sitting around manually looking up these codes.
I received this on April 04, 2008 from “DOR Streamlined Sales Tax”:
Ms. Olkoski,
The Department is considering providing a web service that would allow online sellers to connect to in order to determine the appropriate tax rate for their buyer’s address. However, we have run into concerns with that approach.In the meantime, we ask that sellers do what they can to collect the Washington sales tax.
If they have no control over the settings and they can only use the one rate, then we ask that they adjust, after the fact, for purchasers that request a refund of overpaid sales tax.
Of course, they would also adjust their reporting to reflect actual collections and refunds or credits.
Please write again if you have any questions.
TAXPAYER SERVICES
So the Washington State Department of Revenue gave me a nice speedy response to my question, and I recommend that if you have questions, you email them as well.
UPDATE: 5/16/08
I received a voicemail from the Washington State Department of Revenue - and you simply have to be really impressed with their customer service - telling me that the response they emailed to me should be considered a work in progress. They said that they would be sending me a more complete response in a few weeks, and I’ll post it here as soon as I get it. They are actively working on a more formal solution for us online business owners, and we need to just sit tight and see what they come up with.
Jill--------------
J. Olkoski
Aldebaran Web Design, Seattle
Jill Olkoski has a BS in Engineering, a BS in Computer Science and a MA in Clinical Psychology. She delights in using her advanced technical, psychological and interpersonal skills to help small business owners develop cost-effective and successful websites.
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May 15th, 2008 at 7:44 pm
Last week I also had a conversation with a DOR staffer who basically told me that they do not have a solution for online shopping carts and have no idea as to how they (or anyone else) would implement this - hence their online survey. I have talked several times to one of their “certified” providers, Avalarra, who also has no solution to working with a Yahoo or online store in real time. The staff repeated several times we are just looking for people to make a good faith effort.
May 15th, 2008 at 7:47 pm
Hi June,
Thanks very much for your comment - it’s great to see that the DOR staff is at least consistently sending out the same “do the best you can” message. Also, very interesting to know that their “certified” provider can’t do it either. Again, thanks for sharing!
May 22nd, 2008 at 12:06 pm
Greetings,
I have some thoughts to share but wish first to inform you that I am neither an attorney nor a psychic. My comments were hastily prepared, but I think are pretty close; I look forward to your opinions. The first part of this was from a message I sent to a group (cfif.org) to get an outside take on the constitutional issues. I am not affiliated with nor do I endorse this (or many other groups). The latter part of this is from an e-mail I sent and have edited slightly. This is a long read, but I think it worthwhile
On 1 July, 2008 the State of Washington launches the “destination based sales tax”. As a small business owner, I am responsible to ‘comply’ with this change in how the State wants to deal with the collection and reporting of sales tax.
Currently, if we sell and deliver a product to someone in Washington State, we charge the tax rate for the location where our business is. As of 1 July, we will be required to charge tax based on the destination (within the state). This means that every business that takes the occasional phone order will have to determine tax based on either; 1) a location by name list of approximately 360 different areas/combined tax rates, or 2) through the use of an address verification tool, determining tax rate by the destination zip+4 (over 33,000 differrent codes).
This change in our State tax law was requested by Governor Christine Gregoire who previously was our State Attorney General . The Washington State Legislature drafted the legislation and sent it to the Washington State Department of Licensing (they perform accounting and analysis functions as well) for review. Washington State Department of Licensing sent it back to the legislature noting that it would cost the State of Washington more to implement than it would recoup in any additional revenues and more importantly, that businesses would have a very hard time complying with the law.
My belief is that Governor Gregoire in alliance with the other member states of the Streamlined Sales Tax Project (SST), is setting the stage to challenge the U.S. Supreme Court decisions “Quill Corp v North Dakota” and “Hess v. Department of Revenue” by countering the statement that “State taxation falling on interstate commerce . . . can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.” becomes null when a contingency of states band together and reciprically collect each others’ sales taxes. In this model, the member states get past the test(s) of Complete Auto Transit v Brady (1977) - through the argument that the tax is fairly apportioned (reciprocal tax collections), does not discriminate against interstate commerce (reciprocal tax collections) and the tax is fairly related to services the state provides the taxpayer.
Additionally by keeping it ‘in-state’ first, Governor Gregoire is coercing businesses in Washington to create a solution to calculate and account for an excessive number of different tax locations. Since this is intra-state, it falls outside the protections provided under the interstate commerce clause. If this additional recordkeeping burden can be demonstrated to be performed by businesses and determined that it is not causing harm to businesses , it follows that a group of states can argue that it wouldn’t be cumbersome to calculate different rates for ALL the member states. The Washington State Department of Revenue (WA-DOR) has contacted concerned businesses and stated that they expect only a ‘good faith’ attempt to follow the new law - meaning 1) the WA-DOR is not likely to penalize businesses that make some attempt to follow the law, 2) since any difference in calculation would be due to the small differences in city or certain local tax rates since the State sales tax is the same, WA-DOR is unlikely to invest the time and money to audit businesses for small amounts that do not directly benefit the state (unless my assertion above is valid) but rather cities and municipalities and 3) it buys the state time while developers of software revise their programs if possible to deal with all the additional tax locations without forcing businesses to bring an action against the state - they are focusing on blindly persuing a solution to the immediate problem without understanding the precedent they will ultimately create for the SSTI member states to use against them.
From my e-mail message -
I spoke with an attorney (specializes in small business tax issues) regarding this; the attorney’s take is that 1) WA-DOR is unlikely to deal with more than a 90-day window IF they even consider auditing. 2) (as I interpret) The cost of auditing is pretty high and a relatively low ROI - the average for combined tax is 0.082 (0.070-0.090) so, let’s say for example; you have a local tax rate of 0.085 and continued to charge your local rate and totally blew off this destination based crap…
Example:
IF you had all your ‘destination based sales’ sent to King County (0.090) and charged 0.085, the difference would be 0.005. For every $100,000.00 in sales you inadvertently erred in computing tax’, this would result in $500 in lost tax revenue (for King County) - the State still gets it’s 0.065; the question arises - “is it reasonable to assume that the State of Washington is likely to spend state tax dollars to audit (costing more than $100/hr) any business when it is improbable to recoup the cost?” - I think NOT.
Another suggestion (that I didn’t agree with) was to charge and document the cost for calculating the tax rate and pass that on to the consumer much like the fee for using a debit card or having a fee to use VISA/MC for an amount under $5 (i.e. passing on the cost for using a 3rd party provider like AVALARA, not that I have anything against Avalara). The idea being that the consumer would be irritated enough to contact their legislators and complain. In my estimation, it would lead to the loss of more business to out-of-state businesses and ultimately cause WA state businesses to lose more revenue -and- when did our elected folk ever listen to the folks who pay their salary?
After all my discussions, I have come away with a very simple idea (I won’t call it a plan yet)…
Let’s say you have a business in unincorporated Skamania County (0.070 is the lowest combined rate in WA) and you do a little bit of mail order or e-trade. If your average sale is $100 and you calculate the difference between 0.070 and 0.090 tax rates, you get $2 in tax difference (state average would be about $0.82). The DOR is asking businesses to act in good faith (which I don’t think the State is) and issue refunds to customers who are overcharged (I wonder if the State will start calling customers and demand the difference if UNDERCHARGED?).
So hypothetically speaking, I would add 2% to a s/h charge (it’s legal to charge a documented s/h charge still). One additional handling charge is much easier to deal with than 360. IF audited, I would have additional funds to offset the tax difference, it would be UNLIKELY to receive any real penalty from DOR, and if you did this, you would have the satisfaction of having the AUDITOR do the calculations at the State’s expense! What would happen next is the big question…
How many of you retired during that read?
Dan
May 28th, 2008 at 3:34 pm
I’m with a Tacoma software developer (we do retail point-of-sale systems). We’re in the process of releasing a web services version of our Tax Link program for Washington, in large part because of the uncertainty regarding exactly what the state might provide.
Jill, I don’t want to spam your blog comments with commercial stuff, so I won’t include any further details unless you say it’s OK to.
May 31st, 2008 at 11:58 am
For those trying to implement a solution into their shopping carts…there IS a flat file available from DOR that shows tax details by ZIP+4. DOR will update this file on their site every quarter.
Link: http://dor.wa.gov/content/FindTaxesAndRates/SalesAndUseTaxRates/stdownloads.aspx
Steve
http://www.inandoutgifts.com
June 3rd, 2008 at 2:33 pm
Edge Technologies has a stand alone program and one that will work with shopping carts to calculate the destination sales tax.
June 4th, 2008 at 2:43 pm
Sorry, forgot the website:
http://www.profit-plus.com
June 5th, 2008 at 1:56 pm
Jill,
I too am a web designer with e-commerce clients. Thanks for your post–it’s valuable information for those of us who are trying to help find solutions for our clients.
I’m intrigued with Daniel White’s suggestion of a handling fee to cover the local tax portion of the sales tax. This might be a workable solution–hopefully a temporary one! It’s amazing that the legislature passed this law without providing _any way_ for merchants to implement it. Is this an example of technological illiteracy?
This thread might be of interest as well:
http://www.onlinemerchantnetwork.com/inform/board/message?board.id=OnlinePayments&message.id=2220
I have sent an inquiry to the company mentioned in the last post of that thread, Profit Plus.com. Their Tax Link solution may be worth looking into.
Thanks again, I’ll be following this post for updates. If I come up with more info of my own I’ll try to let y’all know as well.
June 12th, 2008 at 4:03 pm
I am a small business owner - we write software targeting other small businesses. Just as a note regarding solutions providers - Avalara and the other CSPs (by the SST governing board - not WA State) are simply huge faceless corporations that got their application into SST at the right time in order to become a CSP. This does absolutely nothing for other small businesses who can’t afford their uber-expensive, enterprise-level solutions. My partner and I have developed a set of inexpensive solutions for SST - and because we are a small business, we’re also able to adapt and respond quickly to the needs of others. I urge anyone to take a look at our products available now & if you have another need - just let us know & we can do whatever we can to accomodate that - it’s our business. Online shopping carts are a difficult problem, because there are hundreds of them. Our own “buy now” feature on our website uses paypal - and we’ve successfully integrated our sales tax calculator product with that in order to charge the correct sales tax to WA customers at the time of purchase & download. There’s no reason we shouldn’t be able to do the same for others. If you have other shopping carts you would like us to look at, please post a comment on our forum.
Thanks for checking it out - Josh.
June 27th, 2008 at 12:57 pm
I am interested in Josh’s solution (June 12th) but there is no website or email link in this post. Can you send one or include it in the post?
June 27th, 2008 at 1:51 pm
Hi Joseph,
If you hover your mouse over Josh’s name, it will give you the URL he put in. It’s http://www.gotsst.com/
If you find it useful, please let us know - I haven’t verified it at all.
July 4th, 2008 at 7:39 pm
Thanks Jill for pointing out our URL (on my name) - by the time I was available to respond - you already had - so thank you.
In case people are still wondering (for WA state), the DOR just sent an email out this past week announcing a solution for shopping carts! It’s a URL-based lookup query (as opposed to a webservice) that returns a XML dataset for results. It’s actually pretty awesome & seems to be very very fast in returning results. The link to it is: http://dor.wa.gov/Content/FindTaxesAndRates/RetailSalesTax/DestinationBased/ClientInterface.aspx
This has definitely put a damper on the WA-only business for our webservice (not that big of a deal, because our other products are the strong ones), but it’s an easy solution for businesses with shopping carts to adapt to and I definitely urge businesses to take a look at it - it’s probably the best tool the DOR has available for SST. Just beware this is only for WA state (which should be just fine for most of us).
Josh @ Snowcap
July 7th, 2008 at 11:42 am
Thanks for the update Josh. This is definitely progress, but still requires a major hack to all of our shopping carts.
I wouldn’t call it “easy” because most small online store owners have no idea how to implement this into their online stores.
If you have recommendations as to how to implement with PHP based stores, I’d love to hear it.
July 17th, 2008 at 10:45 am
If you’re a PHP programmer, it’s fairly simple. I only just learned about the DoR service from your blog comments, but I’m just today putting essentially the same idea online here internally.
Assuming you’re a complete novice (well, a complete novice shouldn’t be doing this,really):
There’s a library of PHP extensions called PEAR. The basic PEAR library ships with PHP. There’s an extension in PEAR called HTTPRequest. You’ve heard of AJAX? HTTPRequest is the way the modern servers and clients communicate with each other without loading a separate page.
Basically, your PHP program builds a HTTPRequest, ships it to the URL as shown on the DoR site, and receives back an XML string. You process that XML data to get your tax rate. PHP has XML functions to handle it, or you can just ignore the XML and ask for plain text and do some pattern matching on that instead.
Anyway, it’s relatively simple and painless from the standpoint of programming it if you’re already experienced with PHP programming. It’s not plug and play but it’s not tough either.
July 17th, 2008 at 1:08 pm
Hi Scott,
Thanks very much for the detailed explanation. I’ve been doing some PHP coding for the past few years, but haven’t heard of this, and so I’ll have to do more research in order to determine the ease of implementation in the WA online stores I use for my clients. But I’ll also use your response to make a request to my online store builder (eCommerceTemplates) to see if they would consider adding this in the future. Again, thanks very much for the information.
July 17th, 2008 at 1:20 pm
Another thought on Scott’s comments…that while from the eyes of an experienced PHP programmer, the task of creating a custom hack for someone’s online store might seem simple, view this from the store owner’s perspective.
You have an online store and have zero programming skills. You’re supposed to go out and hire a free lance programmer - and then trust this person to create a hack in your store - your source of livelihood - in which you’re taking sensitive information like other people’s credit cards. Someone who can make a hack to perform the tax info gathering can certainly make a hack to divert the credit card numbers.
So while to a reputable programmer, this seems simple, to a store owner, this is a formidable issue, and not without some financial risk involved. It’s hard enough for folks out there to find a reputable web designer, much less a reputable PHP programmer and give them complete access to their online revenue stream - it’s really asking online store owners to take a huge risk it seems to me. All to collect accurate tax which might be the difference in cents for an order.
July 17th, 2008 at 1:50 pm
I have mixed feelings about the whole thing. I’d just as soon it wasn’t neccesary, but the pennies today thing is really the predecessor to the dollars tomorrow when those other 21 states start collecting WA state sales tax on orders sent to Washington.
That also means that any solution for Washington today needs to be extensible to the entire country tomorrow or next year when we are required to reciprocate to the rest of the SSUTA.
I hope that the DoR is planning to make their online request server compatible with members states when that day comes. I surely wouldn’t want to be explaining to every small online business in the state that they have to change their software again.
July 17th, 2008 at 2:00 pm
Amen…completely agree!
July 18th, 2008 at 7:35 am
All of our online products utilize our one webservice - giving our customers automatic access to all states (once we get them all online) - and giving businesses a central point of determining the tax code/rate. We’re slowly getting more states online - there’s no real rush for it (so far) until the whole inter-state thing comes up. I doubt the DOR will update theirs to include multiple states - right now it seems to be very basic - not even any address correction involved, so if you spell “Street” instead of “ST” - it won’t be accurate - whereas ours goes through normal address standardization methods before processing. This is another reason we feel we have a good set of products for small businesses, but for right now if businesses are strapped for cash and don’t fall into the credit offered by the DOR, the free service they offer is a great step - provided you can implement it in your billing software!
July 18th, 2008 at 12:23 pm
The DoR XML spec suggests that they ought to be returning a standardized address, even though they don’t. The fact that they can create a reasonably accurate tax rate value from a street address and a five-digit zip suggests that they ARE doing standardization behind the scenes. I double-checked them using 98012, which has three different rates depending on the zip+4. It pulled out the correct rates for addresses in different tax zones based just on the street and five-digit zip. The only way to do that is if it figured out the zip+4 from the street/zip combo.
My take on this is that they intended to perform standardization as well, but somebody realized that the license on their address processing software didn’t allow it (the CASS software we use internally has such a license - it can serve unlimited users as long as the info doesn’t leave the firm), or someone just decided it would be bad for the government to effectively be competing with the private sector in the area of address correction.
This is the kettle of fish that small businesses are in. To do it right, you really need to invest in an address standardization system, subscribe to regular updates, and keep a database of the tax rates and locations, also updated regularly.
You’re also depending on the DoR site to be working correctly 24/7. At the moment, that doesn’t seem to be the case. After some discussion here, I decided to code in a call to the DoR service as a backup in case the internal server is down or can’t resolve the address. Starting around 2:00, the DoR service stopped responding correctly. This morning, it was fine again.
I guess it’s a good thing that they’re supplying some sort of solution for businesses but I’d a bit leery about having to rely on it. Of course, until SSUTA actually goes online, you could really just ignore the whole issue, charge everyone 9%, and deal individually with anybody who wants a refund of the pennies they might have lost due to being overcharged on their sales tax.
July 21st, 2008 at 6:38 pm
The D.O.R. should just charge a flat internet sales tax rate for the state. It will work out for everyone in the end.
July 21st, 2008 at 9:08 pm
James,
I couldn’t agree more.
Jill
July 21st, 2008 at 9:51 pm
From what I understand, the only other SST state anywhere close to the complexity of Washington is Kansas. Some of the others are a flat-rate for the entire state (no local taxes), and the ones with local taxes are easier to compute - like based on zipcode or county, etc…
I personally like the flat-rate model.
July 22nd, 2008 at 4:53 pm
Well I think that the flat rate model will serve both sides of this monster fairly, business and consumer. Have you looked at how many counties there are in WA State? I did yesterday trying to figure out how I was going to accomplish this task. You would be a long time in getting them done in the first place, and they could change each quarter.
The flat rate is the best system. Some may argue that they pay a lower sales tax where they live and it’s not fair. To them I ask, “When you go out of your town or county, do you expect to pay a lower tax?” I don’t think so; you pay what the next town or county charges.
One rate for the Internet State Tax, the average works out to 8 %. A little higher for some, and a little lower for others. In the end the State of WA gets there monies, and does away with my headache.