In-State Activities Performed by a Third-Party Representative Created Sales Tax Nexus in Washington

By: Camille Adams, SALT Senior Tax Associate

At a glance

• The main takeaway: Despite the laser focus on sales tax economic nexus over the last several years, companies still need to consider their physical presence, which can be created through the activities of third-party representatives.
• Assess the impact: Businesses must be aware that third-party representatives can create physical presence nexus if the activities performed in a state are significantly associated with the business’ products and/or services.
• Take the next step: Aprio’s State and Local Tax (SALT) team can assist your business with nexus considerations, so you remain in compliance with state tax obligations.

Schedule a free consultation today to learn more!

The full story

Over the last several years, much of the focus regarding sales tax nexus has been on the economic nexus rules enacted by the states, which came in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc.[1] That case ruled that physical presence was not required to establish sales tax nexus; however, it did not remove physical presence as a nexus-creating activity. Therefore, businesses can still create sales tax nexus through physical presence, which is the subject of a recent Washington Tax Determination.[2]

A closer look at the case nexus-creating activity

In this ruling, the Taxpayer was a wholesaler of goods to Washington retailers (i.e., sales for resale) and it made retail sales online to Washington customers. The Taxpayer did not have any physical office locations or employees in Washington. However, it sent representatives to Washington each year to visit with its retail store customers. In addition, the Taxpayer’s website advertised that its online customers may take items requiring repair to a local retailer. Those local retailers handled repairs, including sending warranty repairs from customers directly to the Taxpayer.

The Washington Department of Revenue (Department) investigated the Taxpayer for the period of 2012 to 2018 because the Taxpayer was not remitting sales tax nor paying the state’s Business & Occupation (B&O) tax. The Department concluded that the Taxpayer met the wholesaling and retailing economic nexus thresholds and established physical presence. The Taxpayer conceded that it met the state’s economic nexus threshold, but it disputed the Department’s physical nexus conclusion.[3]

Unpacking the ruling

Under sales tax physical nexus principles established by the United State Supreme Court, while the presence of a taxpayer’s own property and/or employees in a state generally create nexus, when the presence in a state is an independent contractor performing activities on behalf of a taxpayer, those activities must be “significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.”[4] 

Washington’s regulation described certain activities that help establish or maintain a market in Washington, including:

• Meeting with customers to gather or provide product information, assess customer needs, or generate goodwill and
•  Providing services associated with the product sold (e.g., warranty repairs, installation, or product training), if the availability of those services are mentioned by the taxpayer in its marketing materials, communications, or other information accessible to customers.[5]

The ruling concluded that the Taxpayer’s business activities in Washington, specifically the representative visits and repair/warranty services provided through the retailers, were significant enough to establish a nexus in the state. This meant that the Taxpayer was required to comply with Washington’s tax laws, including the collection and remittance of sales tax and payment of B&O tax.

The bottom line

Businesses need to be aware that it is not just your own property or employees that can create physical presence nexus. Having third-party representatives perform activities in a state on your behalf that are significantly associated with your ability to establish or maintain a market in the state for sales of your products and/or services, is likely to create sales tax nexus, thereby giving rise to a requirement to register, collect/pay taxes, and file returns. 

Aprio’s SALT team has experience assisting businesses with nexus considerations so that your business complies with its state tax obligations and does not incur unexpected state tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.   

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[1] 138 S. Ct. 2080 (2018).
[2] Washington Tax Determination No. 21-0211, 43 WTD 58 (September 9, 2024).
[3] For some of the earlier periods under audit, the state’s nexus rules consisted solely of physical presence.
[4] Tyler Pipe v. Wash. Dep’t of Rev., 483 U.S. 232, 250 (1987).  Washington’s regulation sets forth this principle at WAC 458-20-193(102)(a)(iii).
[5] WAC 458-20-193(102)(d)(vii).