By Charles Capouet and Andrew Appleby
The Washington Supreme Court held that drop shipments and sales from out-of-state are subject to the Washington business and occupation (B&O) tax even when an in-state office was not involved in placing or completing the sales. A wholesaler of electronic components and computer technology worldwide sold products through its Arizona headquarters and its many regional sales offices, including one in Washington, but excluded its national and drop-shipped sales from its B&O tax liabilities. The taxpayer shipped goods into Washington from an out-of-state warehouse. The products were delivered to the customers at its Washington branch, but the goods were billed to the out-of-state office.
The taxpayer argued that the substantial nexus prong of the dormant Commerce Clause was not met because the Washington office was not involved with the sales. The court held that “merely showing that an in-state office was not involved in the placing or completion of a national or drop-shipped sale is insufficient to dissociate from the bundle of in-state activities that are essential to establishing and holding the market for its products.” The Washington employees provided the corporate office with market intelligence regarding Washington markets, met with the taxpayer’s sales teams and suppliers to strategize on how to create a greater demand for the products and services, and worked with customers to improve products and design new prototypes. The in-state activities created nexus and satisfied the dormant Commerce Clause for the taxpayer because they were “at least minimally associated with [the taxpayer’s] ability to establish and maintain a market in Washington for the sale of its products.”
The taxpayer also argued that a Washington regulation barred the imposition of the B&O tax on both categories of sales. The rule stated that “Washington does not assert B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus.” The court held that the imposition of the B&O tax to the taxpayer’s sales was proper because the rule defined “received” as including the purchaser’s agent receiving the goods. Thus, the taxpayer’s buyer would qualify as either the purchaser or as the purchaser’s agent. Avnet, Inc. v. Washington Department of Revenue, No. 92080-0 (Wash. Nov. 23, 2016) (en banc).