Irwin Naturals, V State Of Wa Dept Of Revenue , 195 Wash. App. 788 ( 2016 )

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Respondent. FILED: July 25, 2016
Spearman, J. — Irwin Naturals (Irwin) is a California company that sells
wholesale and retail nutritional supplements to Washington consumers. Irwin
disputes the Department of Revenue's (DOR) assessment of a Business and
Occupation (B &0) and Retail Sales Tax (sales tax) on its retail sales in the State
of Washington for the period from 2002 through 2009.1 Irwin paid the tax and
brought an action to refund the amount paid, claiming that the tax violated the
commerce clause of the United States Constitution because the retail sales were
dissociated from its in-state wholesale activities. The trial court disagreed and
granted summary judgment in DOR's favor. Irwin appeals. We affirm.
1 Irwin does not contest the taxes assessed on its wholesale sales.
No. 73966-2-1/2
FACTS
Irwin Naturals is a corporation with its principal place of business in Los
Angeles, California. Irwin is in the business of developing, marketing, and selling
retail and wholesale nutritional products. From 2002 through 2009, Irwin made
wholesale sales to retailers and distributors in Washington. During this time, Irwin
invested considerable resources into its store presence in Washington. Senior
company employees spent a considerable amount of time in the state. They
participated in new item presentation, category review, promotional planning,
educating sales staff and trade show exhibitions. Irwin also engaged four
marketing firms to aid in marketing its products in Washington. The firms
engaged in a wide variety of activities with Irwin's wholesale customers, such as
soliciting sales, receiving product orders, attending retailer shows on Irwin's
behalf and acting as an intermediary with Irwin's retailers on promotional
programs and other business matters. Irwin's products are available at
Washington health food stores, as well as numerous well-known grocery, drug,
and convenience store chains. According to one of its sales representatives,
"people know the Irwin name." Clerk's Papers (CP) at 118.
Irwin began making retail sales to Washington residents in 2004. It
characterizes its operations during the tax period as being divided into a "Retail
Sales Channel" and a "Wholesale Sales Channel. Brief of Appellant at 2.
According to Irwin, the retail and wholesale sales operated completely
independently of each other during the period from 2004 through 2009. Irwin
No. 73966-2-1/3
handled all of the wholesale advertising and promotion in-house, along with the
shipment of orders, the collection of payments, and the inquiries from its
wholesale customers. Irwin sold wholesale products under the brands "Irwin
Naturals," "Nature's Secret" and "Applied Nutrition" from 2002 through 2006. CP
at 193.
All of the products sold in Washington stores listed Irwin's phone number
and/or email address and website address. The website provided information
about Irwin Naturals' product line and how to obtain product samples. During that
period, consumers were not permitted to place online orders. It is undisputed that
Irwin received phone inquiries from individuals who had purchased Irwin products
from its wholesale customers. However, when it received these calls, Irwin
directed the callers back to the retailer.
Irwin's strategy for developing retail sales was to offer particular products
for sale through infomercials. Once the retail sales of those products peaked,
Irwin planned to offer the same products to its established retailers and
distributors, with the goal of maximizing revenue from both retail and wholesale
sales. From 2004 through 2009, Irwin's retail sales used third party companies
for its advertising and promotion, solicitation and taking of consumer orders,
assembly and shipment, collection of consumer payments, and customer service
inquiries.
In 2004, Irwin implemented its retail strategy with its Dual Action Cleanse
product, under the brand "Cellular Research" Formulas. It marketed the product
No. 73966-2-1/4
directly to Washington consumers through infomercials. CP at 47-48. Annual
retail sales of Dual Action Cleanse peaked just short of $2 million dollars in 2006.
As planned, Irwin made the product available to its retailers who advertised the
product through "As Seen on TV" campaigns at a much lower price. But the
market did not immediately shift from retail sales to wholesale sales. In 2007 and
2008, Irwin's retail sales far exceeded those of its retailers. Irwin's annual retail
revenues were approximately $1.3 million and $820,000 respectively and its
annual wholesales revenues were approximately $45,000 and $91,000,
respectively. By 2009, Irwin's annual revenue was still comparable to that of its
retailers, approximately $635,000 and $693,000, respectively.
From 2002 through 2009, Irwin earned approximately $10 million in gross
revenue from wholesale sales. From 2004 through 2009, Irwin earned
approximately $5 million in gross revenue on its retail sales. DOR audited Irwin's
records and issued assessments for unpaid business and occupation, retail
sales, and litter taxes for 2002 through 2008. Although Irwin disputed the amount
assessed on it retail sales, it paid the assessment under protest along with
penalties and interest. Irwin filed this action seeking a refund for the disputed
amount under RCW 82.32.180.
The parties filed cross-motions for summary judgment. The trial court
rejected Irwin's argument that the tax violated the commerce clause and granted
DOR's motion. It concluded that because Irwin's retail sales had a substantial
No. 73966-2-1/5
nexus to Washington, the revenues from those sales were properly subject to the
State's B&O and sales tax. Irwin appeals.
DISCUSSION
We review a decision granting summary judgment de novo, engaging in
the same inquiry as the trial court and viewing the facts and inferences in the
light most favorable to the non-moving party. Lamtec Corp. v. Dep't. of Revenue,
151 Wash. App. 451, 456, 215 P.3d 968 (2009). Summary judgment is proper when
there are no genuine issues of material fact and the moving party is entitled to
judgment as a matter of law. Id. The parties agree that there are no genuine
issues of material fact; Irwin contends that the trial court should have granted
summary judgment in its favor.
Irwin claims that its retail sales are separate and distinct from its
wholesale activities in Washington. As a result, it contends that the commerce
clause prohibits Washington from imposing either the B&O tax or an obligation to
collect a sales tax.2 In support of its argument concerning the B&O tax, Irwin
relies primarily on Norton Co. v. Dep't of Revenue, State of III., 340 U.S. 534, 71
S.Ct 377, 95 L.Ed 517 (1951). That case held that an interstate seller who
2 The issue in this case concerns what is frequently referred to as the "dormant" or
"negative" commerce clause. As explained in Quill Corp. v. North Dakota by and through
Heitkamp, 504 U.S. 298, 309,112 S.Ct. 1904, 119 L. Ed. 2d 91 (1992), "the Commerce Clause is
more than an affirmative grant of power; it has a negative sweep as well. The Clause ... 'by its
own force' prohibits certain state actions that interfere with interstate commerce" (quoting South
Carolina State Highway Dep't v. Barnwell Brothers. Inc.. 303 U.S. 177, 185, 58 S. Ct. 510, 82
L.Ed.734 (1938). All references to the commerce clause in this opinion pertain to this aspect of
commerce clause jurisprudence.
No. 73966-2-1/6
engages in activities within a state can still avoid taxation on some in-state sales
by showing that particular transactions are dissociated from the local business
and solely interstate in nature. Id. at 537. As to the use tax, Irwin concedes Nat'l
Geographic Soc. v. Cal. Bd. of Equalization, 430 U.S. 551, 97 S.Ct 1386, 51
L. Ed. 2d 631 (1977), "held that the taxpayer was not permitted to dissociate its
mail order sales for sales and use tax purposes." Brief of Appellant at 23. But it
contends that recent U.S. Supreme Court cases interpreting the commerce
clause, particularly Complete Auto Transit, Inc. v. Brady, 430 U.S. 374, 97 S. Ct.
1076, 51 LEd.2d 326 (1977) and Quill Corp. 504 U.S. 298, have "diminished, if
not tacitly overruled, the holding in National Geographic" and "ma[de] clear that
dissociation applies to all tax types." Br. of Appellant at 23; 28.
DOR takes the opposite view. It contends that dissociation is no longer a
viable means for an interstate seller to avoid a tax imposed by a state with which
it has a substantial nexus. As to the sales tax, DOR relies primarily on National
Geographic and notes Irwin's concession "that National Geographic, if still good
law, forecloses its argument." Brief of Respondent at 17. But DOR also
concedes, as it must, that National Geographic does not expressly apply to a
B&O tax. Nonetheless, DOR argues that Irwin's reliance on Norton to contest
that tax, is misplaced. According to DOR, Norton's precedential vitality has been
undermined by more recent U.S. Supreme Court cases, specifically, Gen. Motors
Corp. v. Washington, 377 U.S. 436, 84 S. Ct. 1564, 12 L. Ed. 2d 430 (1964)) and
Tyler Pipe Indus., Inc. v. Wash. Dep't of Revenue, 483 U.S. 232, 107 S. Ct. 2810,
No. 73966-2-1/7
97 L. Ed. 2d 199 (1987) (which overruled Gen. Motors on other grounds). It also
cites a recent decision by Division Two of this court which rejected an interstate
seller's reliance on dissociation to contest B&O tax liability. Avnet v. State, Dep't
of Revenue, 187 Wash. App. 427, 348 P.3d 1273 (2015), review granted. 184
Wash. 2d 1026, 364 P.3d 120 (2016).
We conclude that an out-of-state corporation is not subject to a state tax if
it can prove the sales or activity in question does not have a substantial nexus to
the taxing state. For purposes of a sales tax, a substantial nexus exists if the
corporation has a presence in the taxing state. For purposes of a B&O tax, a
substantial nexus exists if the corporation's in-state activity aids in establishing or
maintaining a market within the taxing state. We further conclude, for the reasons
explained below, that Irwin has not proved that it does not have a substantial
nexus with Washington and accordingly, it is liable for both taxes on its retail
sales in Washington.
We first address Irwin's liability for the sales tax. We begin with a
discussion of the two cases upon which the parties principally rely.
In Norton, 340 U.S. at 535, a Massachusetts corporation, sold machines
and supplies in Illinois through an in-state office and warehouse in Chicago. But
the record appeared to show that some sales occurred directly between a
customer and the home office in Massachusetts without any intervention by the
Chicago office. In these instances orders were sent by the customer directly to
the home office which, in turn, sent the purchased product directly to the
No. 73966-2-1/8
customer. Jd. at 539. Even though the Illinois tax statute specifically exempted
"business in interstate commerce" as required by the commerce clause of the
U.S. Constitution, the state collected a B&O tax on these direct sales as well as
those that went through Norton's Chicago facilities, id. at 535-36.
The Illinois Supreme Court affirmed the lower court's finding that the tax
was validly imposed even though, as the Norton court observed, it acknowledged
that "'there could be no tax on solicitation of orders only' in the State." jd. at 537
(quoting Norton Co. v. Dep't of Revenue, 405 III. 314, 320, 90 N.E.2d 737
(1950)). The Illinois court concluded that "the presence of [Norton's] local retail
outlet, in the circumstances of this case, was sufficient to attribute all income
derived from Illinois sales to that outlet and render it all taxable." Id. The Norton
court explicitly rejected this reasoning because a B&O tax is a direct tax that
"falls on the vendor." jd. The court concluded that the presence of a local office in
the state was, by itself, insufficient to support the imposition of a B&O tax on
transactions that did not involve the local office in any way. The court stated:
Where a corporation chooses to stay at home in all respects except
to send abroad advertising or drummers to solicit orders which are
sent directly to the home office for acceptance, filling, and delivery
back to the buyer, it is obvious that the State of the buyer has no
local grip on the seller. Unless some local incident occurs sufficient
to bring the transaction within its taxing power, the vendor is not
taxable.
IdL, (citing McLeod v. J.E. Dilworth Co., 322 U.S. 327, 64 S. Ct. 1023, 88 L.Ed.
1304(1944)).
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No. 73966-2-1/9
The court expressly limited its holding to a tax like a B&O tax, because it is
imposed directly on the vendor. It did not express an opinion on whether in the
case of a sales or use tax, the mere presence of a local office was sufficient to
bring the vendor within the state's taxing power. The court did note, however,
that the state's burden of establishing its right to impose a tax was "more easily"
met in that context, "because the impact of those taxes is on the local buyer or
user." Id. Thus, for B&O taxes, the court concluded that a corporation "can avoid
taxation on some Illinois sales only by showing that particular transactions are
dissociated from the local business and interstate in nature." jd. But it left for
another day the showing necessary to dissociate in the case of a sales or use
tax.
The opportunity to address that issue arose in Nat'l Geographic, 430 U.S.
551. There, the National Geographic Society, a District of Columbia (D.C.)
corporation, maintained two offices in California that solicited advertising copy for
the Society's monthly magazine. The California offices performed no activities
related to the Society's operation of a mail order business for the sale of maps,
atlases, globes, and books from its offices in D.C. Orders for these items were
solicited by inserts in magazines or other announcements mailed to subscribers
and Society members. Orders and payments were sent directly to the Society's
D.C. headquarters. Purchased items were mailed directly to the consumer from
the Society's D.C. or Maryland offices.
No. 73966-2-1/10
California law required retailers "'engaged in business in this state and
making sales of tangible personal property for storage, use, or other consumption
in this state' to collect from the purchaser a use tax in lieu of a sales tax imposed
upon local retailers." Nat'l Geographic, 430 U.S. at 553, (quoting California Rev.
&Tax Code § 6203 (West Sup. 1976)). The retailer is liable for the full amount of
the tax whether collected or not. jd. The California Supreme Court held that the
Society was liable for the tax and the U.S. Supreme Court accepted its appeal.
As framed by Justice Brennan, the question before the court was "whether
the Society's activities at the offices in California provided sufficient nexus
between the out-of-state seller appellant and the State as required by the Due
Process Clause of the Fourteenth Amendment and the Commerce Clause to
support the imposition upon the Society of a use-tax-collection liability. ..." Id. at
554.
The Society argued that to impose use-tax-collection liability "there must
exist a nexus or relationship not only between the seller and the taxing State, but
also between the activity of the seller sought to be taxed and the seller's activity
within the State." Id, at 560. It maintained that because its mail order sales were
separate and distinct from the activities of its two in-state offices which involved
only soliciting advertising copy, the requisite nexus or relationship was not
present. The Court disagreed. It concluded that while a transactional nexus may
be necessary to sustain a direct tax, like that at issue in Norton, "such
dissociation does not bar the imposition of the use-tax-collection duty." jd. It was
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No. 73966-2-1/11
sufficient that the Society had a "substantial presence" in the state, which
included two offices that solicited approximately $1 million dollars of business
annually, jd. at 556. The court held that,
the relevant constitutional test to establish the requisite nexus for
requiring an out-of-state seller to collect and pay the use tax is not
whether the duty to collect the use tax relates to the seller's activities
carried on within the State, but simply whether the facts demonstrate
some definite link, some minimum connection, between 'the State
and the person ... it seeks to tax.'
id, at 561, (quoting Miller Bros, v. Maryland, 347 U.S. 340, 344-345, 74 S. Ct.
535, 98 L. Ed. 744 (1954)).
In light of this holding, DOR relies heavily on National Geographic to
support its claim that Irwin is liable for the sales tax obligation at issue here. Irwin
contends however, that the decision is not controlling. It claims the decision may
be disregarded as "an anachronistic landmark" in the evolution of the Court's
commerce clause jurisprudence. Reply Br. of Appellant at 10.
Irwin argues that National Geographic's commerce clause analysis fails to
distinguish between the nexus necessary to satisfy the due process clause and
that necessary to satisfy the commerce clause. It argues that the analysis
conflates the issues and thus, fails to explicitly address commerce clause
concerns regarding the free flow of commerce between the states. Instead, its
conclusion that sufficient nexus was established by "some minimum connection,
between 'the State and the person ... it seeks to tax'" actually addressed only
due process concerns with notice and fundamental fairness. National
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No. 73966-2-1/12
Geographic, 430 U.S. at 561, (quoting Miller Bros., 347 U.S. at 344-45). For that
reason, according to Irwin, the case does not control here. Irwin cites Quill Corp.,
504 U.S. 298, in support of this argument.
Quill was a Delaware corporation with offices in several states, but it
owned no property in North Dakota nor did any of its employees work or reside
there. Quill solicited customers for its office equipment and supply business
catalogs, flyers, advertisements in national periodical and phone calls. It earned
about $1 million dollars annually from approximately 3000 customers in North
Dakota. Quill delivered all of its merchandise to its North Dakota customers by
mail or common carrier from out-of-state locations. When Quill failed to collect a
use tax from its customers, North Dakota sued, seeking an order directing Quill
to collect and pay the tax. Quill disputed the state's claim, arguing that under the
due process and commerce clauses of the U.S. Constitution, North Dakota did
not have the power to compel it to collect the tax. After the North Dakota
Supreme Court rejected Quill's arguments on both grounds, the U.S. Supreme
Court accepted its appeal.
The Quill court first observed that although due process and commerce
clause claims are closely related, each poses "distinct limits on the taxing powers
of the States. Accordingly, while a State may, consistent with the Due Process
Clause, have the authority to tax a particular taxpayer, imposition of the tax may
nonetheless violate the Commerce Clause." jd, at 305 (citing Tyler Pipe Indus.,
483 U.S. 232).
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No. 73966-2-1/13
Due process centrally concerns the fundamental fairness of
governmental activity. Thus, at the most general level, the due
process nexus analysis requires that we ask whether an
individual's connections with a State are substantial enough to
legitimate the State's exercise of power over him. We have,
therefore, often identified 'notice' or 'fair warning' as the
analytic touchstone of due process nexus analysis. In contrast,
the Commerce Clause and its nexus requirement are informed
not so much by concerns about fairness for the individual
defendant as by structural concerns about the effects of state
regulation on the national economy.
Id, at 312. These fundamental fairness concerns are met where there is "'some
definite link, some minimum connection, between a state and the person,
property or transaction it seeks to tax[.]'" Id, at 306 (quoting Miller Bros., 347 U.S.
at 344-45).
Caselaw prior to Quill had utilized a bright line test to determine whether
the due process minimum connection was established in the case of a use tax.
Regardless of other factors, if the foreign corporation engaged in some form of
activity within the taxing state, such as the presence of sales personnel or
maintenance of local retail stores, due process was satisfied. Id, (citing Scripto,
Inc. v. Carson, 362 U.S. 207, 80 S. Ct. 619, 4 L. Ed. 2d 660 (1960). If not, imposing
the duty to collect the tax was unconstitutional, id, (citing National Bellas Hess,
Inc. v. Dep't of Revenue of III., 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505
(1967)) (overruled by Quill only as to the due process clause analysis).
Quill noted, however, that in the 25 years since Bellas Hess, due process
jurisprudence had evolved substantially:
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No. 73966-2-1/14
[W]e have abandoned more formalistic tests that focused on a
defendant's 'presence' within a State in favor of a more flexible
inquiry into whether a defendant's contacts with the forum made
it reasonable, in the context of our federal system of
Government, to require it to defend the suit in that State.
id, at 307. Accordingly, the court overruled those cases applying a presence/non-
presence bright-line test, id, at 308. Instead, the court held that due process is
satisfied if"a foreign corporation purposefully avails itself of the benefits of an
economic market in the forum State." Id, at 307. Because it was beyond question
that Quill had done so in North Dakota, imposition of the duty to collect the use
tax did not offend the due process clause, id, at 308.
The Quill court then turned to the nexus necessary under the commerce
clause. It noted that the commerce clause jurisprudence had likewise trended
away from formalism and bright-line tests. The court cited Complete Auto, 430
U.S. 374, as a case which "emphasized the importance of looking past 'the
formal language of the tax statute [to] its practical effect." Id, at 310 (quoting
Complete Auto, 430 U.S. at 279). Instead, the court in that case set out a flexible
four-part test to govern the validity of state taxes under the commerce clause. A
tax will be sustained against a commerce clause challenge so long as it "is
applied to an activity with a substantial nexus with the taxing State, is fairly
apportioned, does not discriminate against interstate commerce, and is fairly
related to the services provided by the State." Complete Auto, 430 U.S. at 279.
At first blush, Quill appears to support Irwin's argument that National
Geographic is no longer good law. Quill makes clear that the nexus requirements
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No. 73966-2-1/15
of the due process clause and the commerce clause are not identical. The court
expressly disagreed with North Dakota's assertion that
the nexus requirements imposed by the Due Process and
Commerce Clauses are equivalent and that if, as we concluded
above, a mail-order house that lacks a physical presence in the
taxing State nonetheless satisfies the due process 'minimum
contacts' test, then that corporation also meets the Commerce
Clause 'substantial nexus' test.
Id, at 312. Quill establishes that the proper test is set forth in Complete Auto and
that for the first factor, which the parties agree is the only factor at issue in this
case, the issue is whether the tax is being applied to an activity with a substantial
nexus with the taxing state.
But in determining what constitutes a substantial nexus under the
commerce clause for purposes of a sales or use tax, Quill did not reject National
Geographic in its entirety. Instead, the court embraced "'the sharp distinction ...
between mail-order sellers with [a physical presence in the taxing] State and
those ... who do no more than communicate with customers in the State by mail
or common carrier as part of a general interstate business'" as a basis for
determining when a state could properly impose a use tax collection obligation.
Id, at 311 (quoting National Geographic, 430 U.S. at 559). In other words, the
determinative factor in National Geographic, that the Society had a substantial
presence in California, continued to be the determinative factor under Quill. The
Quill court explicitly acknowledged that for purposes of its commerce clause
analysis of the use tax collection obligation it was adopting the same bright-line
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No. 73966-2-1/16
test of National Geographic and Bellas Hess, that it rejected in its due process
analysis.
The court also recognized that retaining the bright-line test in the use tax
context went against the trend of eschewing formalistic, inflexible rules, but
observed that "not all formalism is alike." Quill 504 U.S. at 314. The court
concluded that a bright-line demarcating when a state could impose a use tax
obligation was consistent with fundamental commerce clause concerns about the
effects of state regulation on the national economy.
Like other bright-line tests, the Bellas Hess rule appears artificial at its
edges: Whether or not a State may compel a vendor to collect a sales or
use tax may turn on the presence in the taxing State of a small sales
force, plant, or office. CI National Geographic Society v. California Bd. of
Egualization, 430 U.S. 551, 97 S. Ct. 1386, 51 L. Ed. 2d 631 (1977); Scripto,
Inc. v. Carson, 362 U.S. 207, 80 S. Ct. 619, 4 L. Ed. 2d 660 (1960). This
artificiality, however, is more than offset by the benefits of a clear rule.
Such a rule firmly establishes the boundaries of legitimate state authority
to impose a duty to collect sales and use taxes and reduces litigation
concerning those taxes. . . .
Moreover, a bright-line rule in the area of sales and use taxes also
encourages settled expectations and, in doing so, fosters investment by
businesses and individuals. Indeed, it is not unlikely that the mail-order
industry's dramatic growth over the last quarter century is due in part to
the bright-line exemption from state taxation created in Bellas Hess.
Id, at 315-16.
Because it is undisputed that Irwin has a substantial physical presence in
Washington, we conclude that the commerce clause does not prohibit the state
from imposing on Irwin an obligation to collect the sales tax and because it is
conceded that Irwin failed to do so, the state may properly assess against it the
obligation to pay the amount due.
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No. 73966-2-1/17
We turn next to the assessment of the B&O tax against Irwin. The parties
agree that resolution of the issue turns on whether, as to its retail sales, Irwin has
a substantial nexus with Washington. The dispute concerns whether the issue of
"transactional nexus" is essential to establishing a substantial nexus. According
to Irwin, "[i]f a transactional (sic) or activity does not have a transactional nexus
with a state, the taxpayer will have succeeded in dissociating the disputed
transaction or activities[,]" thereby disproving the existence of a substantial
nexus. Br. of Appellant at 8, n.1. Irwin concedes that its wholesale activities have
a transactional nexus with Washington but argues that its retail sales do not. This
is so, it contends, because its retail sales and wholesale sales were completely
independent of each other during the tax period.
DOR, on the other hand, contends that under modern commerce clause
jurisprudence, establishing a transactional nexus is not essential to finding a
substantial nexus. It argues "[t]here need not be a direct connection between
Irwin's in-state activities and particular sales to impose business and occupation
tax." Br. of Respondent at 29. Relying primarily on Avnet, DOR argues it is only
necessary that "Irwin's in-state activities were significant in establishing and
maintaining a market for its goods in this state." Br. of Respondent at 29.
Whether an out-of-state company has substantial nexus with Washington
is a question of law reviewed de novo. Space Age Fuels, Inc. v. State, 178 Wn.
App. 756, 762, 315 P.3d 604 (2013). Taxes are presumed valid and it is well
settled that the taxpayer carries the heavy burden of establishing that no
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No. 73966-2-1/18
substantial nexus exists. Accordingly, here, the burden is on Irwin to establish it
is exempt from the disputed B&O tax assessment.
Irwin relies primarily on Norton and B.F. Goodrich Co. v. State, 38 Wash. 2d
663, 231 P.2d 325 (1951), a case decided by our state supreme court a few
months after Norton. As in Norton, B.F. Goodrich did substantial business within
the taxing state. At issue was whether some of B.F. Goodrich's interstate sales
were subject to the B&O tax. The court acknowledged that under Norton even
"where a corporation has gone into a state to do local business by state
permission, and has set up an office which performs service helpful to its
competition for local trade ... this ... does not prevent it being tax-free with
respect to sales separate and distinct from its local business." jd, at 672. The
critical issue was whether the services rendered by the B.F. Goodrich's
Washington offices were "decisive factors in establishing and holding" the
Washington market. Id, To establish that certain interstate sales are "separate
and distinct," the taxpayer has to show that it does not "channel business through
a local outlet. ..." id, at 673. In other words, the state may not tax "the
proceeds from sales with which the local outlet had nothing to do." id, at 675.
Applying this test to the facts of the case before it, the B.F. Goodrich court
concluded that the tax was impermissible as to those sales which arose from an
order sent directly from a Washington customer to an out-of-state B.F. Goodrich
office, which was filled and shipped directly to the customer from an out-of-state
office, id, at 673. But interstate sales which were connected to a Washington
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No. 73966-2-1/19
office in anyway, even if only to approve or deny credit for the Washington
customer, fell within the state's taxing authority.
Irwin contends that, like Norton, B.F. Goodrich is still good law and
controls the outcome here. According to Irwin, its wholesale activities "had
nothing to do" with its retail sales, thus, the proceeds from the latter are beyond
the reach of Washington's taxing authority.
In response, DOR cites Avnet for the proposition that the foundation
supporting Norton and B.F. Goodrich "ha[s] been eroded by subsequent
precedent." Avnet, 187 Wash. App. at 445. It argues that the modern test for
substantial nexus is whether the bundle of corporate activity "carried on within
the state supported the taxpayer's ability to establish and hold a market for its in
state sales." Br. of Respondent at 24. According to it, "[n]o direct connection
between Irwin's Washington activities and retail sales is required" to establish a
sufficient nexus to lawfully impose a B&O tax. id.
In Avnet, the company had a Washington office that engaged in building
and maintaining its worldwide market. Employees at that office serviced
accounts, developed and implemented new marketing programs, recruited new
customers, and offered extensive engineering support. Avnet sought to
dissociate two categories of sales, only one of which is relevant here.3 In its
3 Avnet's "drop-shipped" sales involve out-of-state customers placing orders with an out-
of-state office but directing Avnet to ship the products directly to a third party in Washington.
Avnet, 187 Wash. App. at 432. This scenario is not at issue in this case.
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No. 73966-2-1/20
"national sales," Avnet customers placed orders from a location outside of
Washington with an Avnet office also located outside the state, but received the
orders at a Washington location.
The Avnet court rejected the argument that Norton and B.F. Goodrich
controlled. It first expressed the view that "the United States Supreme Court has
explicitly removed at least two of Norton's chief doctrinal underpinnings." Avnet,
187 Wash. App. at 446. The court cited Scripto, 362 U.S. 207, as rejecting the idea
expressed in Norton, that mere lack of an interstate vendor's presence in a state
was sufficient to insulate sales in that state from a tax. It also cited Complete
Auto as rejecting the then prevailing concept that interstate commerce was
immune from state taxation, a proposition upon which Norton relied. Instead, the
court viewed later cases such as Gen. Motors Corp. and Tyler Pipe Indus., Inc.
as demonstrating "a progressive broadening of the types of activities that may
establish substantial nexus for purposes of state taxation of interstate
commerce." jdL at 447. Relying on those cases, but particularly on Tyler Pipe, the
court concluded that Avnet was liable for the B&O tax on all of its Washington
sales because Avnet's marketing activities in Washington "all served the creation
and maintenance of Avnet's market in Washington, as well as other locations."
id, at 448.
In Tyler Pipe, the company sold goods in Washington that were
manufactured outside of the state. It maintained no office, owned no property,
and had no employees residing in the state. Tyler Pipe solicited business in
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No. 73966-2-1/21
Washington through executives whose offices were located out-of-state and by a
firm, retained as an independent contractor, located in Seattle. The trial court
upheld the constitutionality of Washington's B&O tax against Tyler Pipe's
commerce clause challenge, concluding that the state had sufficient nexus to tax
the company. The trial court found that the firm engaged in substantial activities
that helped Tyler Pipe to establish and maintain its market in Washington.
On appeal to our state supreme court, the firm's activities, as found by the
trial court, were summarized as follows:
The sales representatives acted daily on behalf of Tyler Pipe in
calling on its customers and soliciting orders. They have long-
established and valuable relationships with Tyler Pipe's customers.
Through sales contacts, the representatives maintain and improve
the name recognition, market share, goodwill, and individual
customer relations of Tyler Pipe.
Tyler Pipe sells in a very competitive market in Washington. The
sales representatives provide Tyler Pipe with virtually all their
information regarding the Washington market, including: product
performance; competing products; pricing, market conditions and
trends; existing and upcoming construction products; customer
financial liability; and other critical information of a local nature
concerning Tyler Pipe's Washington market. The sales
representatives in Washington have helped Tyler Pipe and have a
special relationship to that corporation. The activities of Tyler Pipe's
agents in Washington have been substantial.
Tyler Pipe v. Dep't of Revenue, 105 Wash. 2d 318, 325, 715 P.2d 123 (1986).
Despite these extensive activities in support of its Washington market, Tyler Pipe
argued, as Irwin does here, that any receipts "from sales of orders placed directly
to it from its Washington customers should be exempted from Washington's B&O
tax." id, at 36. Our supreme court rejected the argument. The court determined
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No. 73966-2-1/22
that "the crucial factor governing nexus is whether the activities performed in this
state on behalf of the taxpayer are significantly associated with the taxpayer's
ability to establish and maintain a market in this state for the sales." id, at 323. It
concluded this standard was satisfied because Tyler Pipe's "sales
representatives perform any local activities necessary for maintenance of Tyler
Pipe's market and protection of its interests...." id, at 321. The U.S. Supreme
Court affirmed. It "agree[d] that the activities of Tyler's sales representatives
adequately support the State's jurisdiction to impose its wholesale tax on Tyler."
Tyler Pipe. 483 U.S. at 251.
We agree with Avnet, that Tyler Pipe controls the analysis of whether a
substantial nexus exists. Tyler Pipe, makes two things clear. First, for businesses
with a presence in the taxing state, the fact that orders are received and filled
out-of-state for delivery within the taxing state does not, by itself, immunize the
sales from a B&O tax. And second, the activities that form the nexus with the
taxing state need not be tied to specific sales, but instead need only generally
support the out-of-state vendor's ability to establish and maintain a market for its
goods in the taxing state. Applying those concepts to this case, it is evident that
the requisite nexus exists to support Washington's imposition of the B&O tax on
all of Irwin's retail sales.
Irwin's wholesale and retail sales each involved nutritional products. When
Irwin started selling retail products to Washington consumers, it had already had
invested considerable resources into its store presence in Washington. Senior
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No. 73966-2-1/23
company employees had spent considerable amounts of time in Washington
during the tax period at issue. They participated in new item presentation,
category review, promotional planning, educating sales staff and trade show
exhibitions. Irwin also engaged four marketing firms to aid in marketing its
products in Washington. The firms engaged in a wide variety of activities with
Irwin's wholesale customers, such as receiving product orders, attending retailer
shows on Irwin's behalf and acting as an intermediary with Irwin's retailers on
promotional programs and other business matter. As a result of these activities,
Irwin became very familiar with Washington nutritional products market. It knew
what types of products sold best and for what prices. Like the sales
representatives in Tyler Pipe, Irwin gathered "virtually all their information
regarding the Washington market" through its extensive wholesale marketing and
sales apparatus. Tyler Pipe, 105 Wash. 2d at 325.
Irwin claims that the lack of brand overlap shows that the wholesale and
retail lines were unrelated. The argument is unpersuasive because it ignores that
the packaging for nearly every Irwin product sold at a Washington grocery or
drug store contained Irwin's phone number and/or email address and website
address. The website provided information about Irwin Naturals' product line and
how to obtain product samples. While it is likely that these sales resulted in visits
to Irwin's website, it is undisputed that the sales resulted in phone inquiries from
individuals who had purchased Irwin products from its wholesale customers.
Irwin acknowledges receipt of the phone calls but points out that the callers were
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No. 73966-2-1/24
directed back to the retailer. But the issue is not whether these calls resulted in
specific sales but instead whether it shows that Irwin's wholesale activities were
creating a market for its retail sales. The phone calls resulting from its wholesale
sales show that it was.
Finally, Irwin's own marketing strategy establishes the symbiotic
relationship between its wholesale activities and retail sales, with each
supporting the other. The admitted goal was "to maximize the revenue of the sale
of 'Dual Action Cleanse' over its product life" by eventually switching the product
from retail to wholesale sales. Br. of Appellant at 14. Irwin claims that because
the strategy "worked in the opposite direction," i.e., utilized its retails sales to
promote its wholesale market, there is no substantial nexus between Washington
and its retail sales. Reply Br. of Respondent at 9. But Irwin cites no authority that
such a relationship between its in-state activities and interstate sales is
insufficient to "adequately support the State's jurisdiction to impose its wholesale
tax." Tyler Pipe, 438 U.S. at 251. Moreover, the record shows that despite
making Dual Action Cleanse available to its retailers, Irwin continued to earn
substantial revenue through its retail sales. Irwin cannot show that these sales
were unrelated to its wholesale activities.
We conclude that Irwin has not borne its burden of showing that it should
be exempt from imposition of Washington's sales and B&O taxes on all of it retail
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No. 73966-2-1/25
sales for the alleged tax period. The trial court did not err in granting summary
judgment in favor of DOR.4
Affirmed.
Q>e cir^p^- Q
WE CONCUR:
4Irwin argues that regardless of the merits of its constitutional claim, the former WAC
458-20-193 (2010) provides an additional basis for dissociation in addition to the common law
issues of nexus. We disagree. The regulation, known as "Rule 193," set forth DOR's view of the
parameters for Washington's B&O tax. Under the rule, a B&O tax is not assessed on sales of
goods which originate outside this state unless the goods were received by the purchaser in this
state and the seller had nexus. If a seller "carries on significant activity in this state and conducts
no other business in the state except the business of making sales, this person has the distinct
burden of establishing that the instate activities are not significantly associated in any way with
the sales into the state." Former WAC 458-20-193(7)(c). Because we conclude that Irwin has
failed to carry this burden, it is not entitled to relief under the rule.
25