Washington Board Of Tax Appeals Holds Delivery Of Goods By Leased Rail Cars Did Not Establish B&O Tax Nexus

The Washington Board of Tax Appeals (BTA) has held that a seller of raw materials used in food manufacturing that delivered its goods in leased rail cars did not have nexus for purposes of the business and occupation (B&O) tax and litter tax.1 The rail cars were physically present in Washington on a regular basis to deliver the goods, but the seller's use of the leased rail cars was not significantly associated with its ability to establish and maintain a market in the state.

Background

The seller was a California limited liability company that manufactured rice products that were primarily sold to food manufacturers. Although the seller had approximately 20 customers in Washington, the seller had no manufacturing facility, warehouse or offices in the state. Over 90 percent of the seller's Washington sales involved one customer, Columbia Basis Blends (Columbia), who purchased bulk rice flour. Under the bid specifications provided by its main customer, Columbia was required to purchase the rice flour from the seller. During January 2003 through June 2010, Columbia received approximately 450 deliveries of rice flour by rail cars that were leased to the seller under long-term lease agreements. The seller's president made only one trip to Washington during this period to see Columbia for less than one hour. The visit was combined with a personal vacation and did not involve the direct solicitation of orders.

In May 2010, the Washington Department of Revenue discovered that the seller was making sales to customers in the state without being registered. Following a nexus investigation, the Department determined that the seller had sufficient nexus with the state to be required to register and comply with Washington's excise tax laws. The Department assessed B&O tax, litter tax, penalties and interest against the seller. After the Department's Appeals Division upheld the assessments, the seller appealed to the BTA.

Substantial Nexus Required

Washington imposes its B&O tax on entities that have a substantial nexus with the state for the act or privilege of engaging in business activities.2 In general, a foreign corporation has sufficient nexus to support the imposition of the B&O tax if it: (i) has more than the slightest physical presence in Washington; and (ii) the purpose of its physical presence is in furtherance of the activities sought to be taxed.3

A tax on an out-of-state entity must satisfy the Commerce Clause of the U.S. Constitution. In...