The Washington Court of Appeals has held that an out-of-state wholesale fuel distributor that routinely made deliveries in Washington using its own vehicles had substantial nexus for purposes of the business and occupation (B&O) tax.1 The taxpayer's regular deliveries established its physical presence in Washington. Also, the taxpayer conducted substantial business activities in Washington because, as a wholesale fuel distributor, it sold both the fuel and the delivery service to customers in the state. Thus, the taxpayer's physical presence and its delivery activities were significantly associated with its ability to establish and maintain a market in Washington for its sales.
Background
The taxpayer was an Oregon corporation that sold fuel as both a retailer and a wholesaler. All of the taxpayer's retail fuel stations were in Oregon, but approximately 40 of its wholesale customers were located in Washington. Following a wholesale customer's request, the taxpayer quoted fuel prices by telephone, fax or email. The taxpayer delivered fuel to its wholesale customers using vehicles that the taxpayer owned and operated. The fuel prices were increased to reflect the delivery costs and were greater for deliveries made over longer distances. Prior to transferring fuel, the taxpayer's employee would measure the contents of a customer's storage tank to ensure that it could hold the fuel.2
The Washington Department of Revenue audited the taxpayer for the period between January 1, 2004 and June 30, 2007. During this period, the taxpayer grossed over $48 million from 1,675 recorded sales to wholesale customers in Washington. Between July 1, 2005 and the end of the audit period, the taxpayer-owned vehicles were driven over 141,000 miles in the state. The Department determined that the taxpayer owed B&O tax for its activities in Washington. After paying the assessment, the taxpayer filed a refund claim and argued that it did not have substantial nexus. The trial court granted the Department's motion for summary judgment and dismissed the taxpayer's refund claim. The taxpayer sought direct review by the Washington Supreme Court, but the case was transferred to the Court of Appeals.
Substantial Nexus Required
Washington imposes its B&O tax on entities that have a substantial nexus with the state for the act or privilege of engaging in business activities.3 Two clauses of the U.S. Constitution limit a state's power to tax interstate commerce: (i) the Due Process Clause; and (ii) the "dormant" Commerce Clause.4 Under the Due Process Clause, an out-of-state taxpayer must have sufficient minimum contacts with the taxing state.5 The dormant Commerce Clause prohibits a state from discriminating against or unduly burdening interstate commerce.6 In Complete Auto Transit v. Brady,7 the U.S. Supreme Court provided a four-part test to determine whether the dormant Commerce Clause is violated. In order for a state to tax an out-of-state entity, the tax must be (1) applied to an activity with a...
