United States

Washington State: Taxpayer’s National Sales Were Not Disassociated from Washington Activities

Dec 05, 2016
From KPMG TaxWatch

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The Washington State Supreme Court recently held that an electronics distributor was liable for B&O tax on receipts from sales of products that were delivered to Washington customers from an out-of-state warehouse or that were drop-shipped to Washington addresses (i.e., delivered to a third-party in Washington State at the request of the taxpayer’s customer). The taxpayer at issue had a sales office in Washington State where it employed over 40 people that conducted numerous activities to support Washington-based customers. The Washington office was not involved in the sales at issue, however, and the taxpayer did not report these sales on its original B&O returns. The Department of Revenue took the position on audit that these so-called “national sales” should have been included in the taxpayer B&O base. The matter eventually made its way to the state’s highest court.

Before the court, the taxpayer argued that the Commerce Clause—and the U.S. Supreme Court’s 1951 decision in Norton Co. v. Department of Revenue—barred the state from taxing receipts attributed to sales that were not associated with the Washington State office.  In other words, the taxpayer sought to dissociate the inbound sales from the B&O tax base because the activities of the Washington office and employees were played no role in the “national sales.” In Norton, the Court held that Illinois could impose B&O tax on sales that were associated with the taxpayer’s Illinois branch or warehouse; however, sales accepted and shipped to Illinois customers from the taxpayer’s Massachusetts office were not taxable. These sales, the Court held, were dissociated from the local business because the taxpayer established that its in-state activities did not help establish and maintain a market for the goods shipped from out-of-state. The Washington court noted that the U.S. Supreme Court and other courts have addressed the issue of dissociation several times in the over 60 years since Norton was decided. After reviewing the cases, the court held that while Norton remains good law, what has evolved is how a company must demonstrate dissociation. The taxpayer, the court concluded, had not proven that its local activities at the Washington State office were not significantly associated with its ability to establish and maintain a market for sales in the state.

The court next rejected the taxpayer’s argument that a department regulation, Rule 193, barred the assessment of tax. In short, the taxpayer asserted that the drop-shipped sales were not received by the “purchaser” in Washington because the taxpayer’s direct customer was out-of-state and therefore such sales were not subject to B&O tax. The court concluded the drop-shipped sales were received by the purchaser in Washington because the entity ultimately taking possession of the goods was the Washington purchaser, regardless of the fact that there was a facilitator elsewhere. Please contact Michele Baisler at (206) 913-4117 with questions on Avnet v. Washington Department of Revenue.


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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.