United States

Washington: ALJ Addresses Sourcing of Sales by Out-of-State Wholesaler

Nov 02, 2015
From KPMG TaxWatch

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The Washington State Department of Revenue recently addressed whether an out-of-state taxpayer’s receipts from sales of truck chassis were subject to wholesale B&O tax. The taxpayer and its affiliate sold commercial vehicle chassis to dealers nationwide. During the audit period, the taxpayer reported its income and the income of its affiliate under the service and other B&O classification and reported no income taxable in Washington. On audit, the Department reclassified the taxpayer’s sales under the wholesaling classification and sourced all the chassis sales to the state of Washington. Most of the sales at issue were sales of garbage truck chassis made by the taxpayer’s affiliate. However, the taxpayer made one sale of a terminal tractor chassis to a dealer in North Carolina that was first shipped to a location in Washington State. Despite the taxpayer’s error in reporting the affiliate’s sales on its own return, the ALJ nevertheless analyzed the taxability of the sales.

Under Washington law, B&O tax is imposed on every person that has substantial nexus with Washington. The measure and tax rate are determined by the nature of the taxpayer’s business activity. The taxpayer did not dispute that the sales, if taxable, would be subject to B&O tax under the wholesaling classification. Washington’s regulations specify that inbound sales of tangible personal property are taxable if the seller has nexus in Washington and the sale is sourced to Washington. Under the applicable sourcing rules, the sales at issue would be sourced to the location where receipt by the purchaser occurs, including the location indicated by instructions for delivery that are known to the seller. Receipt by the purchaser includes the purchaser taking physical possession or the purchaser having dominion or control (termed “constructive possession” by the ALJ) over the property. The affiliate sold certain chassis to Washington dealers. These chassis were first shipped to a carrier in Indiana for further transport to body shops chosen by the purchaser that were outside the state. At the body shop, the chassis was transformed into a completed garbage truck by installation of an outer body (constructed to the requirements of the purchaser), a garbage bin and electronics. The invoice for each chassis showed the “ship-to address” as that of the body shop. The ALJ determined that the taxpayer could rely on the “ship-to” address contained on the invoices as “instructions for delivery.” The ALJ further concluded that once the chassis were received by the body shop, the purchasers (i.e., the dealers) had “dominion and control” or constructive possession of the chassis because body shops modified the chassis at the dealers’ direction, and the body shop became solely responsible for later delivering the chassis to the dealers. As such, the ALJ concluded that none of the sales of garbage truck chassis were sourced to Washington.

Next, the ALJ addressed whether the taxpayer was liable for B&O tax on the sale of the tractor chassis sold to a dealer in North Carolina that had a “ship-to” address in Washington State. Because the sale would be sourced to Washington, the ALJ had to determine whether the taxpayer had sufficient nexus in Washington such that it was required to report B&O tax on the sale. For the tax years at issue, a person making sales of tangible personal property was deemed to have Washington nexus if the person had a physical presence in the state. Nexus could be established by activities performed in the state by an agent or other representative of the seller if the activities were significantly associated with the seller’s ability to establish or maintain a market in the state. In this case, the taxpayer’s affiliate contracted with in-state third parties to provide warranty repair services. These warranty agreements, in the ALJ’s view, created nexus for the affiliate. Although the agreements did not specifically include the taxpayer, the ALJ concluded that the taxpayer also had Washington nexus as a result of the warranty repair contracts. Notably, the repair services contracted for by the affiliate were also available to taxpayer’s customers and the companies shared a website that did not distinguish between the products sold by the affiliate and those sold by the taxpayer. For more information on Washington Det. 2015 STT 208-25 (Oct. 20, 2015), please contact Michele Baisler at (206) 913-4117.


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