Washington State: Inventory Stored at Facilitator’s Distribution Center Creates Pre-Wayfair Nexus for Seller

A Tax Review Officer from the Administrative Review and Hearings Division of the Washington State Department of Revenue recently released a determination addressing whether an out of state retailer had substantial nexus in the state for the 2014-2017 tax years. The retailer made sales of household products through its own website and through a marketplace facilitator. The facilitator had a distribution center and other facilities in Washington State. Pursuant to the retailer’s agreement with the facilitator, the seller’s inventory was stored at the facilitator’s distribution center pending sales to customers. The facilitator was free to move the inventory to other centers.  The agreement between the parties required the retailer to acknowledge that storage of inventory at the distribution center may create nexus for the retailer. Following an investigation into its facilitated sales, the Department assessed retail sales tax and retailing B&O, as well as penalties and interest for the period from December 22, 2014 to June 30, 2017.  The retailer protested, and the matter came before the Tax Review Officer.

The basis for the Department’s assertion of nexus was that the taxpayer had a physical presence—inventory—in Washington state. The retailer argued that (1) because it did not direct or ship the inventory into Washington State, the presence of the inventory could not create nexus for it, and (2) that it was no longer the owner of the goods while they were present in Washington because risk of loss transferred to the facilitator.  The Tax Review Officer rejected both arguments. By signing the agreement, the retailer was aware that the goods could be relocated to different distribution centers and, in fact, the facilitator was required to provide the retailer with a digital “Inventory Event Detail” schedule that informed it of the locations of the centers in which particular goods were located. Thus, the Tax Review Officer rejected the taxpayer’s position that the goods were sent to, and stored in, Washington without its knowledge and consent. The Tax Review Officer next determined that although the facilitator might have contractually agreed to bear the risk of loss for the retailer’s inventory in its possession, this did not mean that the facilitator acquired any ownership rights over retailer’s property. The Tax Review Officer therefor upheld the assessments. Please contact Michele Baisler with questions on 40 WTD 093.