United States

Washington State: Activities of an Affiliate did not Create Nexus for Online Retailer

Jul 10, 2017
From KPMG TaxWatch

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Recently, an Administrative Law Judge (ALJ) for the Appeals Division of the Washington State Department of Revenue ruled that the activities of an affiliate were insufficient to establish nexus for an online retailer. During the relevant tax period, the online retailer had no physical presence in Washington. The wholesaling affiliate, which did have Washington nexus, had an independent representative in the state soliciting sales from third-party retailers and also had an employee in the state interacting with customers. The Department of Revenue’s Compliance Division investigated the retailer’s and wholesaler’s activities in Washington State during the audit period and determined that both entities sold the same brand name products and the products were packaged the same for both the wholesale and online sales. The packaging referenced the retailer’s website and that website displayed a “store locater” search tool that identified third-party retail outlet locations in Washington. The Compliance Division concluded that the wholesaling affiliate’s marketing activities contributed to establishing and maintaining a market for the retailer’s sales of products to Washington customers. As such, the retailer was assessed retailing B&O tax, retail sales tax, as well as penalties and interest. 

On appeal, the retailer argued that the wholesaling affiliate was a separate legal entity and was not acting as its representative. It further asserted that the activities of its wholesaling affiliate were not sufficiently significant in relation to establishing or maintaining a market for the retailer’s goods to merit a finding of nexus with Washington. The ALJ agreed. Citing to cases in other states addressing bricks and mortar booksellers and their online affiliates, the ALJ determined that the brand name similarity and connections between the parties in the instant case were significantly different than in those cases. Notably, the retail stores at issue were owned by independent third parties in Washington State, whereas the retail stores in the bookseller cases were commonly branded, commonly-owned retail stores. Furthermore, the ALJ noted that, unlike in the bookseller cases, there was no cross-return policy or any cross- promotional activities, such as a shared customer reward program, or sales of gift cards that could be used for purchases from both entities. The ALJ concluded that despite the brand name overlap, the activities of the wholesaling affiliate were not significantly associated with establishing or maintaining a market for the retailer’s products in Washington. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 15-0321. 


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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.