Recent WA Case Highlights Importance of Compliance with State Taxes; Even When Conducting Limited Business in the State
A recent court of appeals case highlighted what happens if you don’t pay your business and occupation tax (B&O tax) to the state of Washington. In Space Age Fuels v. State of Washington, Space Age argued that the dormant commerce clause prohibits Washington from taxing its activities because they lack a substantial nexus with Washington. The dormant commerce clause is implied under Article I of the United States Constitution and prohibits a state from passing legislation that improperly burdens or discriminates against interstate commerce. The court of appeals disagreed with Space Age and affirmed the lower court’s ruling denying a refund of the paid B&O tax. If you do any business in WA, it may make sense (after this case) to evaluate again whether you should be paying taxes in WA to avoid interest and penalties.
Space Age is a retail and wholesale fuel seller incorporated in Oregon with its principal headquarters in Clackamas, Oregon. Space Age has all of its retail fuel stations in Oregon, but it has approximately 40 wholesale customers in Washington. It does not maintain offices in Washington. Instead, it does the majority of its business with its Washington wholesale customers via fax, phone, and email. Orders are placed and Space Age delivers its fuel to Washington wholesalers using its own trucks and equipment.
Space Age’s activities in Washington are very limited and the company does not make any effort to secure new Washington customers—no Space Age employees have visited Washington to solicit sales or assess customer needs. Space Age owns no real property in Washington and it has no Washington-based employees or assets.
The Washington State Department of Revenue audited Space Age’s books and records for the period between January 1, 2004, and June 30, 2007. During that timeframe, Space Age grossed over $48 million from its Washington wholesale customers. Further, Space Age’s delivery vehicles drove roughly 150,000 miles on Washington roadways in order to make deliveries to Washington customers. Based on its audit, the Department of Revenue determined that Space Age owed $235,834 in unpaid B&O taxes. The Department also tacked on interest and penalties.
Space Age paid the tax and filed a claim for refund in superior court, arguing that there was no substantial nexus between Space Age and the State of Washington, and without such a nexus, imposing the B&O tax is a violation of the dormant commerce clause. The trial court granted the Department’s motion for summary judgment and dismissed Space Age’s refund claim.
The Court’s Analysis
The court discussed the two clauses in the U.S. Constitution that limit a state’s power to tax interstate commerce: the Fourteenth Amendment due process clause; and the dormant commerce clause implied under Article I (Quill Corp. v. North Dakota). The court noted that a state may tax interstate commerce if the tax (1) applies to an activity having a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Since Space Age only contested the first element, the court analyzed only this element.
A substantial nexus exists when a company’s activities in Washington are both substantial and significantly associated with its ability to establish and maintain a market in Washington for its sales. The court explained that a company may have a physical presence in Washington even though it lacks a brick and mortar location in the state. The court reasoned that based on Space Age’s regular deliveries to Washington customers, it had a physical presence in Washington. The deliveries were substantial because of the volume of sales the company recorded and because the company’s vehicles drove extensive miles on Washington roads.
The court concluded that both Space Age’s physical presence in Washington and its delivery activities are significantly associated with its ability to establish and maintain a market in Washington for its sales. Thus, there is a substantial nexus between Space Age and the State of Washington, and the Department’s B&O tax did not violate the dormant commerce clause.
The court ultimately dismissed all of Space Age’s less-than-compelling arguments regarding the lack of a substantial nexus.
You can check out the full case opinion here. And here’s a helpful guide for out-of-state businesses in Washington.
Moral of the Story
This case illustrates the difficulty in proving there is no substantial nexus between a company and the state of Washington if that company does any business in Washington, including very limited business.
If you’re doing business in Washington, you should be aware of your tax and licensing obligations with the state of Washington. Even if you do not hold a physical office in Washington, you may be subject to certain state tax liabilities if you’re conducting business and making sales in Washington. The additional interest and penalties on these unpaid tax liabilities can add up quickly, so it is best to pay any tax obligations on time.
If you’re interested in learning more about Washington’s B&O tax or have questions about making sure your business is complying with state tax obligations, please comment below or contact us today.
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*Thanks to Nannette Turner for the gas pump photo.