Washington Court Of Appeals Holds Business Could Not Dissociate Activities From Sales to Avoid B&O Tax Nexus

The Washington Court of Appeals has held that a business had substantial nexus for purposes of the state's Business & Occupation (B&O) Tax for the sale of goods delivered to Washington addresses even though the activities of its office in the state were not directly connected to the sales.1 The business met the nexus requirements because its Washington office was significant in establishing and maintaining a market for its goods in the state. As a result, the business was not able to avoid taxation by dissociating its activities in the state from its sale of goods destined to Washington addresses.

Background

Avnet, a corporation based outside Washington, was a large distributor of electronic items that shipped all of its products from distribution centers outside Washington. An Avnet office in Washington had more than 40 employees that served customers in the state and conducted other activities related to market and product development.2 The Washington Department of Revenue (Department) determined that Avnet had miscalculated its B&O Tax for 2003 through 2005 by improperly excluding two categories of sales described as "national sales" and "third party drop-shipped sales." The national sales category involved transactions where an Avnet customer placed an order from outside Washington with an Avnet sales office outside the state, but directed Avnet to ship products to the customer in Washington. The drop-shipped sales category also involved an Avnet customer located outside Washington placing an order with an Avnet sales office outside the state, but Avnet's customer directed Avnet to ship products to a third party located in Washington.3

After an unsuccessful administrative appeal at the Department, Avnet paid the disputed amount under protest and filed an action in a local trial court. The trial court granted Avnet's motion for summary judgment regarding the drop-shipped sales and granted the Department's motion for summary judgment regarding the national sales. Both parties filed appeals.

Drop-Shipped Sales Subject to Tax

The Court of Appeals reversed the trial court and held that the drop-shipped sales were subject to the B&O Tax. As explained by the Court, Washington imposes B&O Tax on every person that has "substantial nexus" with the state "for the act or privilege of engaging in business activities."4 For wholesale sales, the tax is imposed on "every person engaging within this state in the business of making sales at wholesale" and is based on the "gross proceeds of sales."5 "Sale" is defined as "any transfer of the ownership of, title to, or possession of property for a valuable consideration."6 Washington courts have broadly interpreted this statute to tax interstate commerce almost as far as the dormant Commerce Clause permits.7 For the drop-shipped sales, Avnet did not deliver...