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.


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.


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.


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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions