Washington High Court Affirms Right of State to Collect B&O Tax from Out-of-State businesses

If you do business in Washington State, watch out for nexus! In a January 20th ruling, Washington State Supreme Court confirmed that the state was correct in imposing its Business & Occupation Tax on Lamtec Corp., an out-of-state company that had no permanent location, no employees, and no local sales force. The ruling was 6-3 in favor of the State. You can read the ruling here, and you can also read the dissenting opinion here.

In this case, the New Jersey-based company sold goods into Washington, but from its New Jersey office. Occasionally it would send out personnel, not for sales purposes, but to answer questions and provide information about the company’s products. Over an 8 year period, personnel came to Washington somewhere between 50 and 70 times.

As far as the court was concerned, those visits were enough, combined with the revenue generated in Washington during 1997-2003 (the years in question) to create nexus, under the “substantial economic activity” test that so many states have begun to use. Federal law doesn’t address the issue, and the US Supreme Court decisions to date have dealt with sales tax and income tax. Washington’s B&O tax is one of those “not-income-taxes,” which are neither a straight income tax nor a sales tax. It is, instead, a privilege tax, assessed over earnings, and considered to be payable for the right to earn income within the state.

In making their majority decision, the court compared Lamtec to another company, Tyler Pipe Industries. However, the 3 Justices who disagreed also looked at Tyler and said that the facts weren’t the same. In the Tyler case, independent contractors were used as an in-state sales force, and those contractors were involved in all of Tyler’s sales in Washington. In fact, the contractor duties were found to be no different than those of Tyler’s direct employee sales force in other parts of the country.

The danger with the Lamtec decision is its connection of passive, informational activities to active sales activities. Essentially, what the court is saying is that where a company makes substantial income from Washington-based customers, nexus may be applied with very little cause.

The state tax department was pleased with the result. In an interview after the ruling, Revenue Department spokesman Mike Gowrylow said that a ruling the other way would have seriously hurt the state’s ability to collect taxes from out-of-state companies. He also noted that much of the income generated through enforcement of the B&O tax will be used to chase down other out-of-state businesses. Gowyrlow also noted that Gov. Chris Gregoire recently authorized the Revenue Department to hire a half-dozen auditors to focus on collecting taxes from out-of-state businesses.

Would the state have succeeded if Lamtec’s staff had not come physically to the state? That’s hard to tell. Many of the substantial economic activity rulings currently being made are simply based on overall revenue generated in-state, and don’t rely on anyone actually coming across state lines. However, by the same token, if simply coming into the state can trigger nexus, then perhaps video conferencing can be used to offset the nexus argument.

In any event, Lamtec can still apply to the US Supreme Court for a review of the case. So far that court has declined all requests, but there is increasing pressure for it to get involved, as states push boundaries further, and Congress is involved elsewhere.