The Washington Court of Appeals recently issued a decision with far-reaching implications for businesses that sell products into Washington state. In Avnet v. State of Washington Department of Revenue, the court held that a business with a presence in Washington that’s unrelated to its sales operations would be taxable on any sales that are delivered in Washington. In coming to its decision, the court invalidated long-standing concepts called transactional nexus and dissociation.
Affected Sales Types
This case involved two types of sales by an out-of-state taxpayer with some Washington activities not related to processing or shipping orders (the court held that both such sales are subject to Washington B&O tax):
- National Sale. This was when a customer located outside of Washington places an order with a non-Washington sales office and instructs the seller to ship the order from outside of Washington to a Washington address.
- Drop Shipment Sale. This is when a non-Washington customer places an order with a non-Washington sales office. The resulting shipment is then drop shipped from a location outside of Washington to the purchaser’s customer inside of Washington. In this scenario, the buyer isn’t located inside Washington, but the buyer’s customer is.
Transactional Nexus and Dissociation
United States Supreme Court precedent has stated that a gross receipts tax, such as Washington’s B&O tax, couldn’t be assessed on interstate sales that are dissociated with a company’s local business. This concept, sometimes called transactional nexus, was accepted for many years.
Transactional nexus was included in a Washington Department of Revenue regulation that the taxpayer in this case relied upon. Recently, however, the department argued that dissociation is no longer applicable. Now, the Court of Appeals has agreed. Under this case it would be nearly impossible for a business to avoid B&O tax on sales into Washington if it has any activities in Washington that are held to be significantly associated with the business’s ability to establish or maintain a market in the state for the sales.
This case also ruled on another issue. It held that a sale takes place and is taxable in Washington if final delivery takes place in Washington. This applies even if the sale is executed through a drop shipment to a third party. As with the dissociation issue above, the taxpayer in the court case relied upon a Department of Revenue regulation. That regulation stated that the place of sale would be the location of the seller’s customer.
We're Here To Help
For more information about this court case or for help determining what the implications are for the sale of products into Washington state, please contact:
Adam Cline, Senior Manager
Marke Greene, Partner