Washington law provides that for this State to assert B & O tax jurisdiction over an out of state business that makes wholesales into this State two things must occur: (1) the seller must have nexus with this State, and (2) the goods must be received by the buyer in this state. WAC 458-20-193(7). That there are two distinct requirements has generally been understood, even though there are questions as to what fact patterns create nexus, or whether nexus, once established, means that all goods delivered to Washington (that is, received in Washington) are taxable regardless of whether their sale resulted from the nexus creating activity, or what, exactly, does “receipt” in Washington mean. On December 31, 2013, a Washington State Court of Appeals issued a decision finding that the delivery of fuel by an out of state company in its own trucks satisfied both delivery and nexus requirements so that the sales were subject to B & O tax. Space Age Fuels, Inc. v. State of Washington, No. 44195-1-II, December 31, 2013. This decision also states several propositions that will likely energize the Department of Revenue’s effort to capture more out of state businesses and subject them to Washington’s B & O tax.
Space Age Fuels, Inc., is a retail and wholesale seller of fuel, that is incorporated in Oregon and maintains its principal place of business in that state. All of its retail fuel stations are in Oregon, but it does have about 40 wholesale customers in Washington. No Space Age employees have visited Washington to solicit sales or assess a customer’s needs, nor does the company own or lease any real property in Washington and it has no Washington-based employees or assets.
Upon a wholesale customer’s request, Space Age quotes fuel prices via telephone, fax, or email. Once it receives an order, Space Age delivers fuel to wholesale customers using vehicles it owns and operates. Space Age marks up its fuel prices to account for delivery costs, and charges more for deliveries made at longer distances – a fact which Space Aage acknowledged made delivery “another profit center.” Before transferring fuel from its delivery vehicle into a customer’s storage tank, a Space Age employee will “stick the tank,” i.e., measure its contents to ensure the tank can hold the fuel. When Space Age uses specialized vehicles to pump fuel into aboveground storage tanks for some customers, it charges more for this extra pumping service. But Space Age’s activities in Washington are limited. Space Age makes “no effort to secure new customers for its fuel in Washington” because it believes its wholesale customers base their purchases solely on price.
The Department of Revenue audited Space Age and made a substantial assessment of B & O wholesaling tax for 2004-2007. Space Age paid the assessment and sued for a refund, appealing the Superior Court’s grant of summary judgment in the DOR’s favor directly to the State Supreme Court. The State Supreme Court transferred the case to the Court of Appeals where the Court affirmed the trial court’s grant of summary judgment in the State’s favor.
The principal argument urged by Space Age before the Court of Appeals was that while it did deliver goods to Washington it did not have sufficient local business activity in Washington to satisfy the “substantial nexus” requirement of the U.S. C:onstituion Commerce Clause. Therefore, Washington could not subject the company to B & O tax simply because it delivered its fuel to customers in Washington.
The Court first stated the general rule for substantial nexus: 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.” A company’s physical presence in Washington can establish a substantial nexus, as can periodic visits. Thus, said the Court, “[A] company may have a physical presence in Washington even though it lacks a “brick and mortar address within the state.” Examining the facts surrounding Space Age’s delivery of product the Court determined that Space Age’s regular deliveries established a physical presence in Washington. Moreover, “these delivers are substantial because Space Age’s recorded sales to Washington customers occurred, on average, more than once per day during the audit period” and because “Space Age’s vehicles drove extensively on Washington roads while delivering over $48 million of fuel to Washington customers.”
Further, the Court continued, Space Age conducted “substantial activities” in Washington because it sold both fuel and the service of delivery. The Court was convinced that the delivery was a service because employees stick the tank and transfer fuel into the Washington customers’ storage tank, because the company charges more for longer distance deliveries and because the company made additional charges to pump fuel into above ground tanks when necessary. It doubtlessly did not help Space Age’s case that it had admitted that delivery charges were “another profit center.” The Court concluded its factual analysis by finding that both Space Age’s physical presence” and “delivery activities” were “significantly associated with Space Age’s ability to establish and maintain a market for its sales” – thus establishing a “substantial nexus.”
Space Age contended that deliveries alone could not create nexus, arguing for one thing that nexus – creating activities were limited to those which were designed to generate sales, and that delivery did not generate sales. The Court disagreed, saying that “generating sales is not the touchstone of all nexus-creating activity.” The Court agreed that nexus was created when a company’s activities in Washington are significantly associated with its ability to establish and maintain a market in this state for sales, but said that Space Age’s argument ignored the extent to which its deliveries make possible “the realization and continuance” of sales to its customers.
The Court cited to several earlier cases where the court had found nexus when company representatives came to Washington to share information about products with customers, or discussed with customers their needs and any issues with company products, even though the personnel did not directly solicit sales. From this writer’s perspective, however, such activities would appear to be different from activities which are merely incidental to delivery. Dipping a tank, for example, is an ordinary and necessary part of a competent delivery process, since without it a delivery of fuel could flood premises, start fires, etc. It is hard to see how an ordinary and necessary delivery practice, taking into account the type of product being delivered, promotes the “realization and continuance” of sales. Finishing its discussion on the subject of nexus – creating activities, the Court also curiously cites to one of its earlier cases, the Lamtec case, for the proposition that “Space Age fails to account for Lamtec’s statement that a company’s physical presence can establish a substantial nexus.” This comment by the Space Age Court appears to be at odds with established law that the physical presence must be related to activities which relate to “establishing and maintaining a Washington market.”
Space Age also argued that its delivery activities did not create nexus under the reasoning of the U. S. Supreme Court case of Quill Corp. v. North Dakota, 504 U.S. 298(1992). The Court rejected this argument because the Quill “safe harbor” for non-nexus creating deliveries was limited to cases of delivery by mail or common carrier, not deliveries by the seller itself. But, because Space Age did not come within the safe harbor of Quill (delivery by mail or common carrier), the Court did not address the Department’s broader assertion that the safe harbor protects a company only from sales and use taxes, and not from all taxes, including the B & O tax. Thus, for the time being, taxpayers delivering by mail or common carrier, but having no activities in Washington which could arguably constitute the substantial nexus required by the commerce clause, should not face assertion of B & O tax on the basis of the Space Age ruling.
There are good grounds to argue that the Space Age case should be limited to its facts and not have wider application: unfortunately, the case is likely to be a “hard case that makes bad law” for out of state companies selling into Washington. For example, as we discussed above, the Court’s reasoning, that ordinary and necessary components of delivery, such as that related to sticking a tank or charging more for longer hauls, may energize the Department of Revenue to find that other aspects of competent delivery by sellers also promote the “realization and continuance of sales.” Another example is this: what is the relevance to nexus of a finding that delivery charges differed depending on distance, or that delivery charges were a “profit center?” Delivery charges frequently differ over distances because cost increases over distance: nor should a company that delivers its own product be expected to do so at cost, any more than should a common carrier be expected to deliver product without a mark up over the actual cost. But the fact is that the Court of Appeals has increased the likelihood that the Department of Revenue will assert across the board that delivery in company vehicles establishes nexus for B & O taxation, period.