The Washington Department of Revenue (Department) determined that an out-of-state mail order retailer (Taxpayer) had substantial nexus with the state based on the activities of an in-state affiliate (Affiliate), and therefore, upheld an assessment of business and occupation tax (B&O Tax) and sales tax. Determination No. 10-0057 (released Dec. 20, 2011). The Taxpayer sold tangible personal property via catalog and shipped the goods to Washington customers from out-of-state via a common carrier. Although the Taxpayer did not have a place of business in Washington, the Taxpayer’s Affiliate operated two retail stores in Washington that engaged in activities on the Taxpayer’s behalf.
The Department found that the Affiliate engaged in three activities on the Taxpayer’s behalf that established or maintained a market for the Taxpayer: (1) the Affiliate sold gift cards at its two Washington stores that customers could redeem on the Taxpayer’s website; (2) the Affiliate handed out the Taxpayer’s catalogs free to its customers at its two Washington stores; and (3) the Affiliate assisted the Taxpayer’s customers seeking to return catalog purchases by calling or emailing customer service to request a free shipping label to be sent to the customer. Therefore, the Department attributed the in-state physical presence of the Affiliates to the Taxpayer, causing the Taxpayer to be subject to the B&O Tax and the sales tax.
Recently, the Washington Legislature amended state law to provide that an economic presence created sufficient contact or nexus with the state to require Taxpayers to be subject to the B&O Tax. The economic nexus rule, enacted in 2010, requires those taxpayers organized or commercially domiciled outside of Washington to register for and remit the B&O Tax if they have: (1) more than $50,000 of property in the state; (2) more than $50,000 of payroll in the state; (3) more than $250,000 of receipts from the state; or (4) at least 25% of their total property, total payroll, or total receipts in the state. Wash. Rev. Code Ann. § 82.04.067(1)(c). While Washington modified the nexus standard for the B&O Tax, the physical presence standard remains unmodified for sales tax purposes. Finally, the new nexus law may be inconsistent with the U.S. Supreme Court’s analysis of B&O Tax nexus in Tyler Pipe Indus., Inc. v. Washington Dep’t of Revenue, 438 U.S. 232 (1987).