Washington Rules Sales under a Licensing Agreement are Subject to Wholesaling B&O Tax
September 27, 2017
Under the terms of a consignor/consignee agreement, the consignee was deemed to constructively possess the property it sold, making the consignor a wholesaler instead of a retailer.
By Tina Chunn, SALT senior manager
Sales transactions that involve parties other than the seller and purchaser often require more scrutiny to determine the proper sales tax treatment. One common example is a drop shipment transaction, which involves a retailer, a purchaser and a supplier. Specific rules govern which parties are required to collect sales tax as well as the tax base. Another common example is a consignment arrangement, where one party (the consignee) holds property of another party (the consignor). When a customer buys the property, the consignee completes the transaction and provides the revenue to the consignor, typically less a service fee or commission.
It is important to look at each state to understand how the sales tax process works with consignment transactions and who is responsible. How the parties structure these arrangements can also impact the tax treatment; if the transaction is not structured properly, the parties may find themselves dealing with unintended and unfavorable tax consequences. On July 31, 2017, the Washington Department of Revenue published a Tax Determination highlighting the significance of the transaction structure for purposes of determining tax treatment under the Washington business and occupational (“B&O”) tax. 
The taxpayer sells footwear and associated accessories at retail locations throughout the United States. In July 1999, the taxpayer executed a license agreement with a retailer to occupy designated space within the retailer’s stores, where the retailer also continued to sell its own merchandise. The taxpayer was granted a specified area within the store for selling the taxpayer’s merchandise, as well as a storage area in the stock room for processing deliveries and storing inventory. In the selling area, the taxpayer had exclusive rights to display and sell their footwear in their own name and employ staff identified as employees of the taxpayer. The merchandise remained the sole property of the taxpayer and was located in the retailer’s store with the sole risk and hazard remaining with the taxpayer; the retailer was subject to no liability on the property.
However, once a customer decided to purchase the footwear, the customer took the merchandise to the retailer’s cashier for purchase. The retailer’s cashier charged the customer for the purchase and collected payment from the customer through its point-of-sale (POS) system. The retailer’s cashier provided the customer with a receipt containing the retailer’s trade name and no identification of the taxpayer. As a payment for all benefits received under the agreement, the retailer charged an annual license charge of 13.5 percent of the taxpayer’s net sales of its merchandise sold in the retailer’s stores. This amount was deducted from the gross proceeds of the sales when the revenues were transferred by the retailer to the taxpayer.
The taxpayer remitted B&O tax on these sales under the retailing classification, but the state sought to reclassify the taxpayer as a wholesaler, thereby taxing the revenues at the higher wholesale rate.
For the purposes of the B&O tax, Washington provides that a consignee is deemed the seller of property which it actually or constructively possesses, has the power to sell in its own name and actually sells. A consignee is further defined as having actual or constructive possession of the property owned by someone else. Constructive possession is established by having the power to pass title to someone else. A consignor is deemed to sell the property to the consignee. 
The tax review officer determined that the retailer was the seller of the property to the end user and that the taxpayer, therefore, was a wholesaler. This ruling was based on several factors, including (i) the retailer had constructive possession of the property since it could pass title to consumers, (ii) the retailer sold the merchandise in its own name through the use of receipts containing only the retailer’s trade name, with no reference to the taxpayer and (iii) the sale was documented through the retailer’s POS system.
The ruling does consider that a consignor could be liable for retailing B&O tax instead of wholesale B&O tax if the consignee was merely acting as a broker or agent for the consignor. However, to meet this requirement, the contract or agreement between the two parties must clearly establish the relationship of principal and agent and the records indicate that the transactions were entered into in the name of the principal.  Unfortunately, in this case, the agreement between the retailer and taxpayer specifically states that the relationship is not an agency relationship.
It is evident that the taxpayer did not intend to be treated as a wholesaler for the Washington B&O tax purposes. How a company structures its transactions can have a direct impact on the state tax treatment, whether favorable or unfavorable.
The SALT Services Team at Aprio understands how states tax various transactions and is experienced at helping businesses structure their operations and transactions with other parties in order to obtain the desired tax treatment. We constantly monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
Contact Tina Chunn at email@example.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at firstname.lastname@example.org for more information.
This article was featured in the September 2017 SALT Newsletter. You can view the full newsletter here.
 Det. No. 16-0399, 36 WTD 412 (2017).
 RCW 82.04.480; WAC 458-20-159.
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 the matter.
About the Author
Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.