United States: Washington Court Of Appeals Holds Wholesale Fuel Distributor That Made Regular Deliveries In Its Own Vehicles Had B&O Tax Nexus

The Washington Court of Appeals has held that an out-of-state wholesale fuel distributor that routinely made deliveries in Washington using its own vehicles had substantial nexus for purposes of the business and occupation (B&O) tax.1 The taxpayer's regular deliveries established its physical presence in Washington. Also, the taxpayer conducted substantial business activities in Washington because, as a wholesale fuel distributor, it sold both the fuel and the delivery service to customers in the state. Thus, the taxpayer's physical presence and its delivery activities were significantly associated with its ability to establish and maintain a market in Washington for its sales.


The taxpayer was an Oregon corporation that sold fuel as both a retailer and a wholesaler. All of the taxpayer's retail fuel stations were in Oregon, but approximately 40 of its wholesale customers were located in Washington. Following a wholesale customer's request, the taxpayer quoted fuel prices by telephone, fax or email. The taxpayer delivered fuel to its wholesale customers using vehicles that the taxpayer owned and operated. The fuel prices were increased to reflect the delivery costs and were greater for deliveries made over longer distances. Prior to transferring fuel, the taxpayer's employee would measure the contents of a customer's storage tank to ensure that it could hold the fuel.2

The Washington Department of Revenue audited the taxpayer for the period between January 1, 2004 and June 30, 2007. During this period, the taxpayer grossed over $48 million from 1,675 recorded sales to wholesale customers in Washington. Between July 1, 2005 and the end of the audit period, the taxpayer-owned vehicles were driven over 141,000 miles in the state. The Department determined that the taxpayer owed B&O tax for its activities in Washington. After paying the assessment, the taxpayer filed a refund claim and argued that it did not have substantial nexus. The trial court granted the Department's motion for summary judgment and dismissed the taxpayer's refund claim. The taxpayer sought direct review by the Washington Supreme Court, but the case was transferred to the Court of Appeals.

Substantial Nexus Required

Washington imposes its B&O tax on entities that have a substantial nexus with the state for the act or privilege of engaging in business activities.3 Two clauses of the U.S. Constitution limit a state's power to tax interstate commerce: (i) the Due Process Clause; and (ii) the "dormant" Commerce Clause.4 Under the Due Process Clause, an out-of-state taxpayer must have sufficient minimum contacts with the taxing state.5 The dormant Commerce Clause prohibits a state from discriminating against or unduly burdening interstate commerce.6 In Complete Auto Transit v. Brady,7 the U.S. Supreme Court provided a four-part test to determine whether the dormant Commerce Clause is violated. In order for a state to tax an out-of-state entity, the tax must be (1) applied to an activity with a substantial nexus with the taxing state, (2) fairly apportioned, (3) nondiscriminatory with respect to interstate commerce, and (4) fairly related to the services provided by the state.8 The taxpayer only disputed whether it had substantial nexus with Washington.

Substantial nexus exists when an out-of-state company's activities in the state are both substantial and significantly associated with its ability to establish and maintain a market in the state for its sales.9 A taxpayer's physical presence in a state can establish substantial nexus.10 Also, periodic visits can create a physical presence in a state.11 Thus, a taxpayer may have a physical presence even though it does not have an address in the state.

Regular Deliveries in State Establish Nexus for B&O Tax

The Washington Court of Appeals held that the taxpayer had substantial nexus with Washington because its physical presence and delivery activities were significantly associated with its ability to establish and maintain a market in Washington for its sales. The taxpayer's regular deliveries to Washington customers established its physical presence and were substantial because sales to Washington customers occurred, on average, more than once per day during the audit period. Also, the taxpayer delivered over $48 million of fuel to Washington customers through vehicles driven on Washington roads.

Furthermore, the taxpayer conducted substantial activities in the state because it sold both the fuel and the delivery service.

The Court rejected the taxpayer's argument that an interpretive rule issued by the Department indicated that delivery alone cannot establish substantial nexus.12 In determining that the rule lacked relevance to the nexus determination, the Court explained that interpretive rules are not binding on courts and are not entitled to deference unless they reasonably interpret an ambiguous statute that the legislature has charged the agency with administering. Finally, the interpretive rule does not attempt to show whether substantial nexus exists for a particular set of facts.

The taxpayer unsuccessfully argued that substantial nexus can only exist if there is an activity "designed to generate sales." The Court did not accept the taxpayer's attempt to distinguish its activities from the nexus-creating activities in Tyler Pipe,13 Standard Pressed Steel 14 and Lamtec.15 As explained by the Court, nexus-creating activity does not require the generation of sales. The cases took a broader view of establishing and maintaining a market than the taxpayer's narrow emphasis on generating sales would allow.

The Court also rejected the taxpayer's argument that delivery alone cannot establish substantial nexus under the reasoning supporting the bright-line test in Quill.16 Under this test, an out-of-state vendor does not have substantial nexus if its only contacts with the taxing state are by mail or common carrier. The taxpayer argued that it would fall within this "safe harbor" if it had made its deliveries by common carrier and the constitutionality of the tax should not be based on the method of delivery. However, the Court determined that this argument contradicted Quill. The "safe harbor" rule did not apply because the taxpayer actually delivered the fuel in its own vehicles rather than by common carrier. Similarly, the taxpayer's argument was not supported by the holding in Sage V Foods, LLC v. Department of Revenue.17 In this case, the Washington Board of Tax Appeals held that the taxpayer did not have nexus for purposes of the B&O tax because the out-ofstate taxpayer used a common carrier and leased rail cars to deliver its product to Washington customers. This decision did not apply to the instant case because the taxpayer did not deliver its fuel by common carrier.


As discussed above, there has been considerable litigation and controversy concerning the nexus standard that applies to the B&O tax.18 In this case, the taxpayer was found to have substantial nexus with Washington even though the taxpayer claimed that it did not perform any affirmative activities to solicit sales in the state. This decision appears to be consistent with the Washington Supreme Court's holding in Lamtec that an out-of-state manufacturer that sent sales representatives to meet with its customers within Washington had substantial nexus. In Lamtec, the Court reached this conclusion even though the sales representatives did not solicit sales for the taxpayer, but merely answered questions and provided information about the taxpayer's products. Out-of-state taxpayers must carefully consider their contacts with Washington, especially since Washington has enacted a "trailing nexus" statute.19 Under this provision, an entity that stops the business activity that created nexus in Washington continues to have nexus for the remainder of that calendar year, plus one additional calendar year.


1. Space Age Fuels, Inc. v. State of Washington, Washington Court of Appeals, Div. II, No. 44195-1-II, Dec. 31, 2013.

2. Note that the taxpayer's activities in Washington were limited to delivering the fuel and none of its employees visited the state to solicit sales or assess a customer's needs. Also, the taxpayer did not own or lease any real property in Washington and had no employees or assets that were based in the state.

3. WASH. REV. CODE § 82.04.220. This statute was amended in 2010 to expressly add the substantial nexus requirement. Ch. 23 (S.B. 6143), Laws 2010, First Special Session. However, prior to the statutory amendment, substantial nexus was required under the U.S. Constitution in order to impose the B&O tax. See Ford Motor Co. v. City of Seattle, 156 P.3d 185 (Wash. 2007). Historically, a person was required to have physical presence in the state for purposes of the B&O tax.

4. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

5. International Shoe Co. v. Washington, 326 U.S. 310 (1945).

6. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

7. 430 U.S. 274 (1977).

8. Id.

9. Tyler Pipe Industries, Inc. v. Department of Revenue, 483 U.S. 232 (1987); Lamtec Corp. v. Department of Revenue, 246 P.3d 788 (Wash. 2011), cert. denied, 132 S. Ct. 95 (2011).

10. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977); Lamtec Corp. v. Department of Revenue, 246 P.3d 788 (Wash. 2011).

11. Lamtec Corp. v. Department of Revenue, 246 P.3d 788 (Wash. 2011).

12. WASH. ADMIN. CODE § 458-20-193(11)(a) provides an example where Company A, which is located in California, sells machine parts at retail and wholesale. Company B is located in Washington and purchases machine parts for its own use from Company A. Company A uses its own vehicles to deliver the machine parts to its customers in Washington. The sale is subject to the retail sales and B&O tax if the seller has nexus, or use tax if nexus is not present.

13. In Tyler Pipe Industries, Inc. v. Department of Revenue, 483 U.S. 232 (1987), the U.S. Supreme Court held that independent contractors located in Seattle established substantial nexus with Washington for purposes of the B&O tax.

14. In Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975), the U.S. Supreme Court determined that there was B&O tax nexus because the out-of-state taxpayer had a Washington employee who made possible the contractual relationship between the taxpayer and its customers.

15. In Lamtec Corp. v. Department of Revenue, 246 P.3d 788 (Wash. 2011), the Washington Supreme Court held that an out-of-state company that sent agents to Washington two or three times per year had B&O tax nexus because the agents' visits were significantly associated with the company's ability to establish and maintain a market for its products in the state.

16. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

17 Washington Board of Tax Appeals, No. 11-704, Aug. 31, 2012. For a discussion of this case, see GT SALT Alert: Washington Board of Tax Appeals Holds Delivery of Goods by Leased Rail Cars Did Not Establish B&O Tax Nexus.

18. Note that Washington amended its B&O nexus standards in 2010. Effective June 1, 2010, Washington adopted a factor presence nexus standard for purposes of the B&O tax. WASH. REV. CODE §§ 82.04.460; 82.04.462. An out-of-state business is subject to B&O tax on apportionable activities, such as professional or personal services and royalty income if the business exceeds one of the following thresholds: (i) $50,000 of property; (ii) $50,000 of payroll; (iii) $250,000 of sales; or (iv) 25 percent of total property, payroll or sales are in the state. The new nexus standard only applies to out-of-state entities that make sales to Washington customers classified as service, royalty income or other categories listed under apportionable activities. The physical presence nexus standard continues to be required for retailing, wholesaling, and any other classification of business that is not subject to the single-factor apportionment formula. WASH. REV. CODE §§ 82.04.066; 82.04.067.

19. WASH. REV. CODE § 82.04.220; Special Notice, Washington Department of Revenue, Sep. 10, 2010.

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