Changes to Sales Tax Resale Certificates (SB 6173)

The Senate budget assumed a change in how sales tax resale certificates worked. As the bill implementing this idea came over from the Senate it made substantial changes to how resale certificates work for retailers and wholesalers (which was fine) but also made a change I found punitive to how resale certificates worked for contractors and builders. The final bill is described below and is a much better process. I believe it will result in significantly less sales tax avoidance without significant negative impacts on our beleaguered building industry.

We estimate that the bill will fix at least $100,000,000 (one hundred million dollars) of illegal tax avoidance.

I worked with my Republican counterparts Rep. Ed Orcutt and Rep. Cary Condotta, the Associated General Contractors, the Master Builders, the Building Industry Association of Washington, the Association of Washington Business, the Independent Businesses Association, the National Federation of Independent Businesses and a host of others in reviewing the results. These associations, while not wildly excited by the bill, do not oppose the final product as it passed the House. The vote was 86-9, with a substantial bi-partisan majority.

Under current law, products that are purchased to be resold (products purchased from a wholesaler) are exempt from sales tax. The purchaser of the product simply provides a completed “Resale Certificate” to the seller which states that the product being purchased will be resold. Resale Certificates are easily downloaded from the Department of Revenue’s (DOR), it is nearly impossible for sellers to determine whether a completed resale certificate is legitimate.

Misuse of a resale certificate is easy.  All that is required is a Unified Business Identifier (UBI) number and a resale certificate.  UBI numbers are easily forged and resale certificates can be completed with fraudulent names.  Consequently:

  • There are over 1 million UBI numbers in circulation
  • However, only 450,000 are active taxpayers (businesses)
  • Of these 150,000 report retail or wholesale sales
  • Consequently, there are over 850,000 UBI numbers in circulation that enable people to misuse resale certificates.

Senate Bill 6173 was amended in the House to protect legitimate businesses and eliminate fraudulent sales tax exemptions.  This proposal passed with overwhelming bi-partisan support and will ensure that the state will collect all of the sales tax that is owed.  The following provisions are contained in Senate Bill 6173:

  • Effective January 1, 2010, requires retailers, wholesalers, manufacturers and qualified building contractors to have a seller’s permit instead of a resale certificate to purchase goods and services at wholesale without paying sales tax.
  • Contractors would apply on an annual basis for a seller’s permit. All other businesses would apply on a 2 or 4 year basis. The Department of Revenue (DOR) must rule on applications for seller’s permits within 60 days of receipt. Every existing taxpayer without significant payment issues will automatically get a permit.

Provides criteria for DOR to revoke a seller’s permit for any of the following reasons (subject to rulemaking):

  • Misuse of the seller’s permit;
  • The department issued the permit in error;
  • The department determines the taxpayer is no longer entitled to make wholesale purchases;
  • The department determines that revocation of the seller’s permit would be in the best interest of collecting taxes due under this title.

The bill as it passed the house is dramatically different than the Senate version. It no longer penalizes contractors, but does create a mechanism that will ensure that much more of the tax owed will be paid. This will weed out non-licensed businesses, significantly reducing unfair competition. For more detail you may want to review the official documentation available here: http://apps.leg.wa.gov/billinfo/summary.aspx?bill=6173&year=2009.

About the Author

Ross
I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.