United States: Washington Court Of Appeals Holds Business Could Not Dissociate Activities From Sales to Avoid B&O Tax Nexus

The Washington Court of Appeals has held that a business had substantial nexus for purposes of the state's Business & Occupation (B&O) Tax for the sale of goods delivered to Washington addresses even though the activities of its office in the state were not directly connected to the sales.1 The business met the nexus requirements because its Washington office was significant in establishing and maintaining a market for its goods in the state. As a result, the business was not able to avoid taxation by dissociating its activities in the state from its sale of goods destined to Washington addresses.

Background

Avnet, a corporation based outside Washington, was a large distributor of electronic items that shipped all of its products from distribution centers outside Washington. An Avnet office in Washington had more than 40 employees that served customers in the state and conducted other activities related to market and product development.2 The Washington Department of Revenue (Department) determined that Avnet had miscalculated its B&O Tax for 2003 through 2005 by improperly excluding two categories of sales described as "national sales" and "third party drop-shipped sales." The national sales category involved transactions where an Avnet customer placed an order from outside Washington with an Avnet sales office outside the state, but directed Avnet to ship products to the customer in Washington. The drop-shipped sales category also involved an Avnet customer located outside Washington placing an order with an Avnet sales office outside the state, but Avnet's customer directed Avnet to ship products to a third party located in Washington.3

After an unsuccessful administrative appeal at the Department, Avnet paid the disputed amount under protest and filed an action in a local trial court. The trial court granted Avnet's motion for summary judgment regarding the drop-shipped sales and granted the Department's motion for summary judgment regarding the national sales. Both parties filed appeals.

Drop-Shipped Sales Subject to Tax

The Court of Appeals reversed the trial court and held that the drop-shipped sales were subject to the B&O Tax. As explained by the Court, Washington imposes B&O Tax on every person that has "substantial nexus" with the state "for the act or privilege of engaging in business activities."4 For wholesale sales, the tax is imposed on "every person engaging within this state in the business of making sales at wholesale" and is based on the "gross proceeds of sales."5 "Sale" is defined as "any transfer of the ownership of, title to, or possession of property for a valuable consideration."6 Washington courts have broadly interpreted this statute to tax interstate commerce almost as far as the dormant Commerce Clause permits.7 For the drop-shipped sales, Avnet did not deliver the products to its own buyer outside Washington, but delivered the products to its buyer's customer in the state. Because the only transfer of property to any buyer occurred within Washington, this statutory language brought the drop-shipped sales within the reach of the B&O Tax. According to the Court, an administrative rule further supported the conclusion that the drop-shipped sales were subject to the B&O Tax. Under the rule, a sale occurs in Washington "when the goods are delivered to the buyer in this state, irrespective of whether title to the goods passes to the buyer at a point within or without this state."8 The Court reiterated that the only delivery to any buyer that occurred was within Washington. Under the both the statutory definition of "sale" and the rule's criteria for determining when a sale takes place in Washington, the drop-shipped sales took place in Washington.

Avnet unsuccessfully argued that the wholesale B&O Tax did not apply to the dropshipped sales because Avnet's customer, the wholesale buyer, did not take physical possession of the goods in Washington. In support of its argument, Avnet cited an administrative rule providing that B&O Tax is not imposed on "sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus."9 Based on a specific example provided in the rule,10 Avnet argued that its buyers did not receive the goods within the meaning of the rule. The Court distinguished the example and explained that the crucial factor was that the only buyer who took delivery from Avnet was located in Washington. The Court also characterized Avnet's approach as an impermissible elevation of form over substance,11 where corporate convenience in negotiating or contracting outside Washington did not hide the fact that the location of the sale was where the buyer took delivery and possession of Avnet's products. Finally, the Court discounted this argument because the rule cited by Avnet was an "interpretive rule" that explains the Department's views and does not constrain the courts. Accordingly, the Court explained that the "language of the rule can provide Avnet no more haven than the B&O statute does."

Shipments to Washington Customers Subject to Tax

The Court of Appeals affirmed the trial court and held that Avnet's national sales were subject to the B&O Tax. Avnet unsuccessfully argued that its national sales were exempt under a rule that allegedly excluded sales not significantly associated with Avnet's activities in Washington. The same administrative rule that Avnet used to support its drop-shipped sales argument provides that "a seller [who] carries on significant activity in this state and conducts no other business in the state except the business of making sales . . . has the distinct burden of establishing that the instate activities are not significantly associated in any way with the sales into this state."12 Because its Washington office did not engage in the activities listed in the rule that would establish that the B&O Tax applied to its sales, Avnet argued that the office's activities in Washington were not significantly associated with the sales. In rejecting this argument, the Court reiterated that an interpretive rule cannot provide more protection than afforded by the B&O Tax statute.

Transactional Nexus

Avnet argued that the dormant Commerce Clause exempted the disputed sales from the B&O Tax.13 This argument was based on the substantial nexus requirement and focused on "transactional nexus." According to Avnet, the dormant Commerce Clause allowed it to "dissociate" its sales delivered to Washington addresses by showing that its Washington personnel played no significant role in the transactions. Avnet argued that "states may impose a tax on interstate sales only if there is a substantial nexus between the seller's activities and the state and those activities are significantly associated with the sales at issue." The Court held that the case that Avnet cited for this proposition, Allied-Signal, Inc. v. Director, Division of Taxation,14 did not support this argument. Allied-Signal requires that the taxing state must have a sufficient connection both to the taxpayer and the activity taxed, but it does not impose a requirement that the taxpayer's activities creating the necessary connection to the taxing state have some direct connection to the specific sales taxed.

In support of its argument, Avnet cited two cases from 1951, Norton Co. v. Department of Revenue15 and B.F. Goodrich Co. v. State.16 The Department conceded that these cases were similar to the instant case and have not been expressly overruled. The Department has taken the positon that more recent cases demonstrate that Avnet's activities in Washington created sufficient nexus for taxing all of the sales bound for the state.17 After noting that Norton's foundations have been eroded by subsequent cases, the Court agreed with the Department that more recent cases have expanded the range of activities relevant to the substantial nexus analysis. For example, in Tyler Pipe Industries,18 the U.S. Supreme Court held that there was sufficient nexus to impose tax on the sales into Washington even though the business did not have an office, own property or have employees residing in the state. Pursuant to Tyler Pipe Industries, the crucial factor is whether the activities in the state are "significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."19 The Washington Court of Appeals explained that these cases "show a progressive broadening of the types of activities that may establish substantial nexus for purposes of state taxation of interstate commerce." These cases illustrate that "a state need not demonstrate a direct connection between a taxpayer's nexus-creating activities and particular sales into the state in order to tax those sales."

Maintaining Market in Washington

As discussed above, U.S. Supreme Court decisions do not require a direct connection between Avnet's activities in Washington and the specific sales, but Avnet's activities in the state must be significant in establishing and maintaining a market for its goods in the state. The Court concluded that Avnet's Washington office met this requirement because its employees engaged in a variety of market research and product development activities aimed at building and maintaining the company's market in Washington, as well as other locations.

Commentary

This case essentially precludes businesses from making a "dissociation" argument that they do not have substantial nexus with Washington for B&O Tax purposes because their activities in the state are not directly related to their sale of items that are delivered to customers in the state. Under the U.S. Supreme Court decisions, the state must show that a company's in-state activities are significant in establishing and maintaining a market in the state. However, this standard provides much less protection than was offered under the "dissociation" theory. This decision turned on the Washington administrative rule cited by Avnet which does allow companies to establish that their activities in the state are not significantly associated with the sales into Washington, though it should be noted that reliance on an example in the rule that was not parallel to the instant facts made it more difficult for the Court of Appeals to accept Avnet's argument. Further, the Court of Appeals' discounting of Avnet's attempt to rely on an interpretive administrative rule to support its argument is relevant. Apparently, if the "interpretive" classification for a particular Department rule is apt, such rule appears to be entitled to less deference than other Department rules and provides little support for the party relying on such rule. As this case may be interpreted as an expansion of the activities that satisfy the substantial nexus requirement for purposes of the B&O Tax, such interpretation (if an appeal is unsuccessful) is likely to result in more out-of-state companies being subject to the tax.

Footnotes

1 Avnet, Inc. v. Department of Revenue, Washington Court of Appeals, No. 45108-5-II, April 28, 2015.

2 There was no indication that this office participated in soliciting or filling orders, investigating customer credit, or providing technical support to the end users in the specific sales at issue. 3 Generally, this third party was the Avnet customer's own customer.

4 WASH. REV. CODE § 82.04.220; Lamtec Corp. v. Department of Revenue, 246 P.3d 788 (Wash. 2011).

5 WASH. REV. CODE § 82.04.270.

6 WASH. REV. CODE § 82.04.040(1).

7 Coast Pacific Trading, Inc. v. Department of Revenue, 719 P.2d 541 (Wash. 1986).

8 WASH. ADMIN. CODE § 458-20-103.

9 WASH. ADMIN. CODE § 458-20-193(7).

10 WASH. ADMIN. CODE § 458-20-193(11)(h).

11 See Chicago Bridge & Iron Company v. Department of Revenue, 659 P.2d 463 (Wash. App. 1983).

12 WASH. ADMIN. CODE § 458-20-193(7)(c).

13 To satisfy the dormant Commerce Clause, a state tax imposed on an out-of-state corporation must: (i) be applied to an activity with a substantial nexus with the taxing state; (ii) be fairly apportioned; (iii) be nondiscriminatory with respect to interstate commerce; and (iv) be fairly related to the services provided by the state. Complete Auto Transit v. Brady, 430 U.S. 274 (1977).

14 504 U.S. 768 (1992).

15 340 U.S. 534 (1951).

16 231 P.2d 325 (Wash. 1951).

17 Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987); Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560 (1975); General Motors Corp. v. Washington, 377 U.S. 436 (1964).

18 483 U.S. 232.

19 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.