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An out-of-state mail-order retailer has substantial nexus with Washington based on its relationship with an in-state affiliate that sold gift cards to customers, distributed the out-of-state company's catalogs, and assisted the out-of-state company's customers, the Washington Department of Revenue determined, because the activities are significantly associated with the retailer's ability to establish or maintain a market in the state. [Wash. Dept. of Rev., Decision Det. No. 10–0057, 12/20/11]
The taxpayer, one of four wholly-owned subsidiaries of a parent corporation, is an out-of-state corporation that sells supplies by mail order catalog but has no employees or inventory in Washington. One of the taxpayer's sister companies, which owns and manages the retail stores, operates two retail stores in Washington.
Most significant to the nexus determination, the department stated, is the fact that the sister company's retail stores sell gift cards that customers may redeem at the taxpayer's mail order store.
Under the taxpayer's gift card program, which is managed by the parent corporation, proceeds from the subsidiaries'sales of gift cards are passed through to the parent, and when redeemed, the sale is recorded in the appropriate subsidiary's financial records.
Thereby, the department reasoned, the taxpayer's sister company actually facilitates or makes sales on behalf of the taxpayer. Therefore, the activity of selling gift cards that can be redeemed by mail order is significantly associated with the taxpayer's ability to establish or maintain a market in Washington, the department concluded.
Catalog Distribution, Merchandise Returns
Additionally, the sister company purchased the taxpayer's catalogs at a nominal price and subsequently distributed them to customers at retail stores free of charge and provides assistance to customers in returning catalog purchases by calling or emailing customer service to request a free shipping label be sent to the customer. While the taxpayer's return policy is to direct customers to mail return to its out-of-state office and the taxpayer does not advertise that returns will be accepted at the sister company's retail locations, the retail stores routinely accept returns for full refund of items purchased by catalog if the items are carried into the store.
The department distinguished the taxpayer's situation from that of out-of-state mail order companies with in-state affiliates found not to have substantial nexus by the court in Bloomingdale's By Mail Ltd. v. Pennsylvania Dept. of Rev., 567 A.2d 773 (Pa. Commw. Ct. 1989), SFA Folio Collections Inc. v. Tracey, 652 N.E.2d 693 (Ohio 1995), and SFA Folio Collections Inc. v. Bannon, 585 A2d 666 (Conn. 1991), when the companies had in-state affiliates that accepted returns according to the retail location's own policy or as an aberration from the store's policy or normal practice.
With respect to the taxpayer, the department found the sister company's activities are more extensive. Reasoning that, “not only does [taxpayer's sister company] distribute catalogs and accept returns, but it sells gift cards that can be redeemed for merchandise in those catalogs.”
Customer Versus Agent Relationship
The department rejected the taxpayer's argument that the taxpayer's sister company buys the catalogs from the parent and therefore is a customer of the taxpayer rather than an agent. Based on the facts, the department found the taxpayer's sister company acts as the taxpayer's authorized representative in Washington, and the sister company's activities were significantly associated with the taxpayer's ability to establish or maintain a market for sales in the state.
In rejecting the taxpayer's position, the department questioned the business purpose for buying a competitor's catalog and distributing it free of charge to customers, and also noted that the taxpayer does not purchase and distribute any other competitor's catalogs. Under the circumstances, the taxpayer's claim that the sister company is the taxpayer's customer “is not credible,”the department added.
The text of the determination is available on the internet at http://taxpedia.dor.wa.gov/Default.aspx.
By Christine Boeckel
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