Washington Court of Appeals: No Transactional Nexus Requirement or Dissociation for Washington B&O Tax

Perkins Coie
Contact

On April 29, 2015, the Washington Court of Appeals issued an important tax decision in Avnet, Inc. v. Washington Department of Revenue, Dkt. No. 45108-5-II.  In its most significant holding, the court of appeals effectively eliminated the transactional nexus requirement for Washington B&O tax.  In a second and perhaps less controversial holding, the court concluded that a drop-shipper with Washington nexus is subject to Washington B&O tax on sales delivered directly to its customers’ customer in Washington.

Transactional Nexus/Dissociation

In Norton Co. v.  Department of Revenue of Illinois, 340 U.S. 534, 537 (1951), the U.S. Supreme Court held that the Commerce Clause barred the imposition of gross receipts tax on interstate sales delivered to Illinois customers but “dissociated from the [taxpayer’s] local business.”  The Washington Supreme Court recognized that the same dissociation principle applied to Washington’s B&O tax. B.F. Goodrich Co. v. State, 38 Wn.2d 663, 231 P.2d 325 (1951).  Over the intervening years, the Department recognized the dissociation or transactional nexus requirement in its administrative rule, WAC 458-20-193, and numerous published determinations, e.g., Wash. Dep’t of Revenue Det. No. 94-209R, 15 W.T.D. 100 (1995) and Det. No. 87-69, 2 W.T.D. 347 (1987) (concluding, “The taxpayer must pay B&O tax on its wholesale sales, except only those sales which the taxpayer can affirmatively show were disassociated from the activity which created the nexus.”).

In Avnet, the parties agreed that the taxpayer’s facts were “substantially similar” to the facts in Norton and B.F. Goodrich.  Although Norton has not been overruled, the court of appeals concluded that “Norton’s foundations have been eroded by subsequent precedent” and “subsequent precedents have expanded the range of activities relevant to the substantial nexus analysis.”  Slip op. at 15, 16.  As a result of this “progressive broadening,” “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.”  Id. at 17.

Although the court of appeals rejected the need for a “direct connection” between nexus-creating activity and a sale in Washington, the court of appeals acknowledged that there must still be “some connection.”  Id.  Having left a slight theoretical opening for dissociation, the court hammers it shut by noting that taxpayers have “a heavy burden in showing the absence of such a connection” and suggesting that delivery by common carrier is nexus-creating activity that can provide that connection for B&O tax purposes.  Id. at 17 n.10 (noting that Quill’s nexus holding was limited to sales/use taxes “robbing it of precedential force in this appeal.”), 18.

Unless reversed on appeal, the Avnet decision effectively ends more than 60 years of dissociation in Washington state.  It will be a very rare taxpayer that can establish that its in-state activities, including those of common carriers, have no connection with its in-state sales.  Given the court’s departure from U.S. Supreme Court and Washington Supreme Court authority, we expect the taxpayer to seek discretionary review with the Washington Supreme Court.

Place of Sale for Drop Shipments

The second issue in Avnet was the application of wholesale B&O tax to sales of goods that were shipped by the taxpayer directly to the taxpayer’s customers’ customers in Washington (i.e., drop shipments).  The taxpayer had relied on an example in the Department’s administrative rule, WAC 458-20-193(11)(h), that advised that an out-of-state retailer with no nexus was not subject to B&O tax when it purchased goods from an in-state wholesaler that drop shipped goods to the retailer’s customer in Washington.  The example concludes that the out-of-state retailer is not subject to B&O tax “[s]ince [retailer] has no nexus in Washington.”  WAC 458-20-193(11)(h). After basing its no-tax conclusion on the absence of nexus, the Department’s example adds that “[retailer] has not taken possession or dominion or control over the [goods] in Washington.”  This sentence suggests an alternative place-of-sale basis for the Department’s no tax conclusion.

The court of appeals held that, notwithstanding WAC 458-20-193, Avnet’s sales were subject to B&O tax because Avnet delivered the goods in Washington and “the only transfer of possession of property to any buyer occurred within the State of Washington.”  Slip op. at 6.  The court first distinguished Avnet from the drop shipment example in WAC 458-20-193 by noting that the example addressed the treatment of the retailer not the wholesale drop-shipper and, accordingly, “is not as apt as [taxpayer] contends.”  Id. at 8.  More significantly, the court concludes that whatever the Department’s rule, an interpretative rule such as WAC 458-20-193 “do[es] not constrain courts” and “cannot subtract from the force of the statute.”  Id. at 9, 10.  According to the court, “the B&O statute aims to tax interstate commerce almost as far as the dormant commerce clause permits:  absent a specific statutory exemption, every party with the requisite nexus to Washington must pay it on every transaction occurring here.”  Id. at 11.

Although the court’s decision on the place of sale issue in this case may be correct, the decision marks a continued erosion in taxpayers’ right to rely on written guidance issued by the Department of Revenue.  It is difficult to square the court of appeals’ casual dismissal of interpretive rules in Avnet (and other recent decisions) with  Washington courts’ historic view that taxpayers have a right to rely on the written advice of the Department.  E.g., Hansen Baking Co. v. City of Seattle, 48 Wn.2d 737, 743-44, 296 P.2d 670 (1956) (“If it were permissible for a taxing agency to challenge, years later, such rules promulgated by its own enforcement agency, taxpayers would never be able to close their books with assurance.”); Group Health Coop. of Puget Sound, Inc. v. Wash. State Tax Comm'n, 72 Wn.2d 422, 433 P.2d 201 (1967); Stroh Brewery Co. v. Dep’t of Revenue, 104 Wn. App. 235, 243, 15 P.3d 692 (2001) (“Where the Department changes its interpretation of a tax, it cannot retroactively assess the tax.")

[view source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie
Contact
more
less

Perkins Coie on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide