• Washington: Out-of-State Trailer Manufacturer Subject to Business & Occupation Tax
  • October 22, 2015 | Authors: David H. Godenswager; David M. Kall
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The Washington Department of Revenue (WADOR) has issued a Determination concluding that an out-of-state manufacturer is subject to the state’s Business & Occupation (B&O) tax because of its relationship with an independent, commissioned sales representative.


    The Taxpayer is an out-of-state trailer manufacturer that sells its products to dealers. They, in turn, sell the trailers at retail to the end-users. The Taxpayer does not have a traditional physical presence, such as inventory, equipment, office or warehouse space, or the like, in-state.

    In 1998, the Taxpayer hired an independent sales representative (Representative), based outside of Washington, to handle its sales. To this end, the Representative promotes the products via contact with potential and existing customers telephonically or in writing. The Representative works on a commission basis, earning a percentage of the sales he generates.

    In 2007, the Representative formed a delivery company and purchased a vehicle from the Taxpayer’s principal shareholder. The Taxpayer’s logo remained on the truck after the sale. The delivery company contacted the Taxpayer’s customers to solicit business for itself, independent of its relationship with the Taxpayer as a sales representative. Also during 2007, the delivery company began delivering trailers in Washington on behalf of the Taxpayer. The Taxpayer’s customers could choose to utilize the delivery company or a third party firm for their trailer deliveries. Prior to the formation of the delivery company, the Taxpayer’s customers used third party firms.

    In 2013, an employee of the WADOR noticed a delivery truck with the Taxpayer’s logo hauling trailers in Washington. This triggered the investigation into whether the Taxpayer had a sufficient physical relationship with the state to subject it to the contested B & O taxes. Concluding that the Taxpayer had created such nexus, the WADOR assessed tax, along with interest and penalties, for the four and one-half year period between January 1, 2009, and June 30, 2013. The Taxpayer appealed.
    1. The basis of the Taxpayer’s appeal was the following:The Representative did not visit Washington on the Taxpayer’s behalf;
    2. The majority of the Taxpayer’s customers were established before the Representative joined Taxpayer;
    3. The delivery company was an agent of the Taxpayer’s customers, not the Taxpayer; and
    4. The Representative, via the delivery company, took possession of the trailers outside of Washington before delivering them inside Washington.
    The B&O tax and nexus

    Washington levies its B&O tax on “every person that has a substantial nexus with this state a tax for the act or privilege of engaging in business activities.” The Determination explains that the B&O tax applies to inbound sales of personal property under certain circumstances, such as when the goods are received in-state, and the seller has nexus. In order for the B&O tax to apply to a particular sale, there must be both the receipt of the goods in Washington by the purchaser and the seller must have nexus.

    A company has nexus when its activities are significantly associated with its ability to establish and maintain a market in Washington for its sales. Either physical presence in Washington or periodic visits can establish nexus. Accordingly, nexus can be established through employees’ or independent contractors’ continuous presence in the state or their periodic visits.


    The WADOR concluded that the evidence, including statements from numerous Taxpayer’s customers, revealed that the “Taxpayer sends the Representative into this state to visit its customers and at least maintain its customer relations and answer questions.” Such activities are designed to ensure that the Taxpayer keeps its Washington customers, even if it is not necessarily there to directly solicit sales.

    As for the delivery company that the Representative formed, the fact that the Taxpayer’s logo is on the truck is “another way in which [the] Taxpayer’s Washington market is being maintained or established through the Representative’s activities in Washington.” In addition, there was no evidence that the delivery company, or another third party delivery firm, accepted the trailers on the Washington retailers’ behalf outside of Washington, had the authority to do so, or even inspected the trailers out-of-state.

    Finally, the arrangement in which the Representative played a dual role as both a sales representative and a delivery agent cast doubt on whether the Representative actually could accept or reject the goods out-of-state.

    For all these reasons, the WADOR concluded that the Taxpayer delivered its trailers into Washington, where its customers received the products. The WADOR thus denied the Taxpayer’s appeal and upheld the imposition of the B&O tax and related fines and penalties.