In Washington for business? You may be liable for sales tax

Out-of-state businesses making sales in Washington State may have substantial nexus with the state and may therefore be required to collect and remit Washington sales and use tax and business and occupation (B&O) tax.

A company based in California learned this the hard way. The company, which makes wholesale sales of nutritional supplements to retailers and distributors and retail sales through infomercials, was found to have nexus in Washington and was assessed sales tax for the period 2002 – 2008. The company paid the assessment and then challenged it, claiming the tax was a violation of the U.S. Constitution’s commerce clause. The Court of Appeals of Washington recently made public its opinion on the matter.

Snapshot

For wholesale sales beginning in 2002, company employees participated in Washington-based trade shows, sales staff training, and promotional planning. According to the court opinion, “Senior company employees … spent considerable amounts of time in Washington during the tax period at issue.” In addition, the company engaged four Washington-based marketing firms to attend trade shows on its behalf, solicit sales from wholesale customers, receive product orders, and act as intermediaries with the company’s retailers on promotional programs.

The company created a separate channel for retail sales in 2004. According to the court opinion, the two branches of the company “operated completely independently of each other during the period from 2004 through 2009,” a fact that is crucial to the company’s claim that the tax assessment is a violation of the commerce clause. Retail sales were marketed through infomercials, which were promoted by third party companies that also handled orders, processed payments, did assembly and shipment, and handled customer service. Employees did not travel to Washington to specifically support retail sales.

A bright line: physical presence

The pivotal United States Supreme Court ruling in Quill Corp. v. North Dakota (1992) upholds the physical presence standard established in earlier rulings. Quill maintains that a state does not have the power to tax sales made by an out-of-state vendor lacking substantial nexus — physical presence — in that state.

Interestingly, the opinion concedes some artificiality to the rule that “a state may compel a vendor to collect a sales or use tax” based on “the presence in the taxing State of a small sales force, plant, or office.” However, it continues, “This artificiality… is more than offset by the benefits of a clear rule.” The flip side of the clear rule is also true: that a state does have the right to tax sales made by an out-of-state vendor with a substantial physical presence in the state.

That clear rule doesn’t benefit the California business in question. The court determined that although the physical presence may be associated with the company’s wholesale channel, it nonetheless creates nexus for all channels of the company.

Additional information, including an explanation of the court’s finding of substantial nexus for the purposes of the B&O tax, is available in the Washington Court of Appeals opinion, Irwin Naturals v. Department of Revenue (No. 73966-2-I).

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photo credit: Welcome to Washington via photopin (license)