Washington: Marketplace seller has B&O tax nexus

A Washington Tax Review Officer recently concluded that a marketplace seller had Washington B&O tax nexus due to title transfers of commingled inventory by a marketplace facilitator. The taxpayer was an out-of-state company that made online sales of tangible personal property into Washington via a marketplace facilitator. The taxpayer used the marketplace facilitator’s inventory management system that commingled inventory items between sellers making sales of the same items across the facilitator’s warehouses. Once an order was placed, the facilitator shipped the item from the warehouse closest to the customer. If the particular inventory item belonged to a seller other than the one receiving the inventory, the facilitator would digitally reassign ownership of the property from the seller whose item was closer to the customer and was used to fulfill the order to the seller that generated the order. Sellers had the ability to opt in or out of having their inventory commingled in this way. All of the taxpayer’s sales in Washington were performed using the digital transfer during the audit period. After an audit, the taxpayer was determined to be the owner of digitally-assigned inventory in Washington for multiple years in question and was assessed B&O tax. The taxpayer filed for review with the Administrative Review and Hearings Division, arguing that did not have nexus with Washington because it had no physical presence or inventory storage in Washington, and that the digital assignment of inventory should not be considered physical storage. Washington’s B&O tax is imposed for the privilege of engaging in business activities and is imposed on every person that has" “substantial nexus.” Substantial nexus is established if a person has physical presence in Washington that is more than the slightest presence. The taxpayer argued that because it did not ship the goods into Washington and the facilitator had complete control over the goods, it had no inventory in Washington and did not have nexus.  The Tax Review Officer noted that the Department’s rules provide that maintaining a stock of goods within the state is sufficient to establish a physical presence.  Furthermore, the taxpayer agreed to the inventory management program and was provided information regarding the location of its inventory.  The Tax Review Officer rejected taxpayer’s arguments determining, that the taxpayer, as the owner of the goods before they were transferred to buyers, had a physical presence in Washington. The taxpayer also argued that its ownership of the inventory was de minimis. The Tax Review Officer again disagreed, concluding that the taxpayer had more than the slightest physical presence and that the B&O assessment should be affirmed. It should be noted that the tax years at issue were prior to the adoption of economic nexus and marketplace facilitator laws in Washington. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 18-0255.