A Note about Washington State Sales tax…

Sonrisa Publications is required to collect sales tax on all sales that occur in Washington State or are delivered to a location within the state. The State requires that this tax be computed on the total sale price of the goods plus any shipping and handling charges.

Since July 1, 2008, Washington State has used a destination-based sales tax system. This means that the tax rate in effect is based on where the goods actually changed hands. In a face-to-face sale, i.e., in a store or swap meet, the tax rate is based on the location where the sale took place. In a sale where the goods will be shipped to the customer, the tax rate in effect is at the point of delivery.

Just in case you missed that brief mention above – sales at swap meets are subject to sales tax! If you didn’t pay it, then the seller did (or should have). Normally the purchaser is expected to pay the tax, but the State charges the seller whether or not the tax was collected from the customer.

Now, for the Rest of the Story…

Don’t read further if you dislike opinions about how government gets in the way of most of us law-abiding, and willing-to-pay-fair-taxes citizens. For the other side of this, see the State’s own explanation of Destination-Based Sales Tax, or the Streamlined Sales and Use Tax Agreement.

Destination-Based Sales Tax is an Accounting Nightmare

This tax system requires the seller to verify the proper tax jurisdiction and tax rate in effect for each sale. Jurisdictions and rates are subject to change on a quarterly basis. These usually don’t change much, but still you have to look them up to be sure.

There are over 350 tax jurisdictions shown in the State’s 2011 Quarter 4 Sales Tax list, with tax rates varying between 7.0% and 9.5%. However, this list is useless since it does not break down areas finely enough to determine the actual jurisdiction. There are many more jurisdictions out there. I could not find the exact number on the State’s web site, but to give an idea of how many have been allowed for, it takes a 4-digit code to identify them all.

An example of the difficulty of determining the proper jurisdiction exists in Auburn, where I used to live. A house on the north side of East Main Street is in one jurisdiction, while the house directly across the street is in another. Both homes are within the city limits, but the tax rate is different for each.

To accommodate this need, the State’s website has an application that will look up the correct jurisdiction. This involves manually typing in the customer’s street address and nine digit zip code. A large company can afford to purchase a computer program, hire a programmer to create their own, or pay a service to do the look up for them. Small businesses like mine look up the tax info one order at a time.

Destination-Based Sales Tax is a Costly Time-Waster

Here’s what I have to do for each sale to a customer in Washington State:

1. Determine the taxing jurisdiction by manually typing the customer’s address and nine-digit zip code into the State’s web site. If the 9 digit zip is unknown, I have to look up the location on a map (like I know which side of the street every house in the state is located!). I assume all responsibility for determining the correct jurisdiction.

2. Print out a one to two page report generated by the State and retain as proof of how I obtained the information.

3. At the end of the year, tally up a report of tax collected by each taxing jurisdiction, no matter how small the amount. This is split three ways: state, county and local, each with their own varying portion of the tax.

In practice, my methods of invoicing differ from the ideal. A web store that can handle this kind of variation in tax rates and jurisdictions would cost hundreds of dollars per month, and I simply can’t afford one. My sales to customers in Washington State don’t even add up to hundreds of dollars per year, much less per month, so I have to compromise.

Since the State punishes sellers who over-collect sales tax and ignores those who under-collect (but pay the state the proper amount), I charge my local rate of 7.8%, which is just about the lowest rate in the state. So far no one in an area with a lower tax rate has placed any orders, so I guess I’m safe. To continue my invoicing process:

4. Armed now with the correct tax jurisdiction code, tax rate and sales tax amount, I re-open the invoice and correct the sales tax amount. I do not dun the customer for the difference because it would be too much trouble for 15-20 cents.

5. At the end of each month, I write off these amounts as “bad debt,” since I will never collect the amount from the customer.

6. At the end of the year, I write a check to the state that includes both the amounts I actually collected and the amounts I wrote off.

Now here’s the clincher. Last year it took about 4 hours at year end to put my tax form together. The amount of sales tax I had to remit to the State? $6.98. If I paid myself Washington State’s new minimum wage of $9.04/hour, it would mean it cost me a minimum of $5.18 for every dollar I remitted in sales tax.

Destination-Based Sales Tax Steals From Local Government

The business owner is not the only loser in this system. The local governments that provide police, fire protection and ambulance service, as well as road maintenance and a wealth of other community necessities DO NOT RECEIVE A SINGLE CENT of my collected sales taxes, small as they may be. This is true because my sales have always been outside of my local area, and usually to the big urban areas. It doesn’t cost these cities a thing to support my business activities, but they reap all the gain.

There is a nationwide move towards this sort of sytem in every state that hopes to pave the way towards applying state sales taxes to all sales regardless of origin or destination. It is often called “Streamlined sales tax.” Please consider this side of the story. It is not told when states encourage voters to approve it.

Best regards,

Dave Cooley

Sonrisa Publications