United States

Washington: Appeals Division Says Constitutionality of Washington's Economic Nexus Rule is for the Courts to Decide

May 11, 2015
From KPMG TaxWatch

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In a recent ruling, the Appeals Division of the Washington Department of Revenue (Department) determined that a taxpayer providing webhosting services to Washington customers had nexus for business and occupation (B&O) tax purposes. The taxpayer had no physical presence in Washington, but made sales to Washington customers that exceeded $250,000 in each of calendar years 2010 through 2012. Recall, effective June 1, 2010, taxpayers engaged in apportionable activities that have over $250,000 of Washington receipts are deemed to have substantial nexus with the state. After receiving a B&O tax assessment, the taxpayer appealed.

The taxpayer first argued that because it lacked a physical presence in Washington, the imposition of B&O tax violated the Commerce Clause of the United States Constitution. The taxpayer further argued that although many state courts have concluded that a physical presence is not required for the imposition of a net income tax, the B&O tax—as an activity-based gross receipts tax—is distinguishable, and the physical presence standards still apply. The Appeals Division rejected the taxpayer’s arguments. Because the taxpayer’s sales attributed to Washington State webhosting customers exceeded the statutory $250,000 threshold, the taxpayer had established a substantial nexus with Washington State under the statute. The Appeals Division noted that even if Washington’s statutory definition of “substantial nexus” were facially unconstitutional, it did not have the authority to rule on the issue.

The taxpayer also argued that imposition of B&O tax violated the Due Process Clause of the United States Constitution. Specifically, the taxpayer argued it lacked the requisite contacts with Washington State and that receipts attributed to Washington were not rationally related to values connected within the state.  The Appeals Division disagreed. In its view, the taxpayer clearly and purposefully availed itself of the benefits associated with the Washington economic market, and had adequate contacts with Washington to satisfy the minimum contacts test. Furthermore, the taxpayer had not established that the receipts attributed to Washington were not rationally related to values connected within the state. Please contact Michele Baisler at 206-913-4117 with questions on Washington Tax Determination 14-0342, 34 WTD 250, Apr. 30, 2015.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.