Washington: Arguing Lack of Nexus for B&O Tax Can Prove to be a Tough Haul
Taxpayers can sometimes find themselves in audit situations that have become out of control, as one trailer manufacturer found out in a recent Washington Tax Determination.
By Tina Chunn, SALT senior manager
Many times, taxpayers find themselves with an audit situation that has become out of control without their knowledge. In a recently released Washington Tax Determination, the Appeals Division found the taxpayer subject to Washington Business & Occupation (B&O) tax as a result of many different extenuating circumstances which provided the state the support it needed to assert nexus.  Despite the taxpayer’s best efforts and use of third-party representatives, the State of Washington was unwilling to reverse on appeal its original determination that the taxpayer had indeed created sufficient nexus within Washington based on activities of an unrelated nonresident representative.
In this case, the taxpayer was a manufacturer of trailers who sold these trailers at wholesale to dealers for their eventual retail sale. The taxpayer did not have any property, employees or representatives in the state of Washington, and all business was conducted from outside the state as well.
In 1998, the taxpayer hired an independent sales representative (”representative”) to field calls, promote products and contact potential clients by phone or mail. The representative was not a resident of the state of Washington and was paid through commissions from the sales generated from his calls and correspondence. The representative also owned a separate delivery business and used a truck purchased from the taxpayer’s owner to make these deliveries.
From the beginning, the taxpayer had difficulty showing the distinction between the representative’s delivery business and activities the representative performed on behalf of the taxpayer. The audit was actually commenced as a result of a Department of Revenue employee observing the representative making a delivery within the state of Washington using a truck that contained the logo from the taxpayer.
As the auditor began its investigation, he questioned the taxpayer’s employees and customers regarding the activities of the representative to determine what, if any, activities were performed in Washington on behalf of the taxpayer. The taxpayer’s employees and customers provided confirmation to the auditor that the representative made sales calls and performed duties outside solicitation services on behalf of the taxpayer. The auditor determined that the representative’s duties met the threshold for nexus based on these confirmations. 
The taxpayer solicited a third-party representative to respond to the audit who attempted to explain that there were misunderstandings during the questioning of the taxpayer’s employees and customers and that the facts were not accurately presented. The taxpayer further had all customers draft correspondence to clarify their statements to support that the representative’s activities did not meet this threshold. Unfortunately, these activities were not able to be fully supported with enough documentation to retract the prior statements.
Once the auditor determined that the taxpayer had established nexus, he further identified that the representative’s deliveries into the state constituted deliveries that were subject to the wholesale B&O tax.  Although it was determined during the audit that the truck logo was merely left on the truck after its sale to the representative, the customer sales documentation did not support the taxpayer’s argument that the delivery to the representative outside of Washington constituted receipt by the customer and was therefore not subject to Washington B&O tax. Conversely, the invoices provided showed that the customer had the obligation to inspect the goods in Washington rather than the representative asserting this right upon initial receipt outside Washington. Additionally, the customer had the ability to request repair of goods upon delivery in Washington. Therefore, there was not sufficient support to show that the delivery of goods occurred outside Washington as required by Washington’s sales and use tax guidance. 
As you can see, there were several instances in this audit where the initial inquiries provided incomplete or inaccurate evidence that was not able to be later refuted. This unfortunate scenario resulted in a significant amount of additional efforts to reverse these statements that ultimately proved to be unsuccessful.
The SALT team at HA&W is experienced with audit management and is available to assist you at any stage of the audit process. We can also provide guidance to aid you in minimizing your audit defense efforts while offering the most accurate responses to these inquiries as well as assisting in any analysis that may be necessary. We constantly strive to keep our clients advised of important issues and developments in SALT in order to help them address their specific tax situations. We will continue to monitor these and other significant SALT developments and include any updates in future issues of the HA&W SALT Newsletter.
Contact Tina Chunn, SALT senior manager, at email@example.com or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at firstname.lastname@example.org for more information.
 Det. No. 14-0417, 34 WTD 392 (2015)
 RCW 82.04.067(6) and WAC 458-21-193
 RCW 82.04.270
 RCW 82.04.040; WAC 458-20-103; Excise Tax Authority 3091.2009
This article was featured in the
November/December 2015 SALT Newsletter.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.