Orthotic Shop, Inc. v. Dep't of Revenue

544 P.3d 1072

ORTHOTIC SHOP, INC., a Michigan corporation and S & F Corporation, a Minnesota corporation, Appellant,

v.State of Washington DEPARTMENT OF REVENUE, Respondent.

No. 39321-6-III

Court of Appeals of Washington, Division 3.

Filed January 23, 2024

Ordered Published Dated March 7, 2024

Appeal from Thurston Superior Court, Docket No: 22-2-01010-7, Honorable Indu Thomas, Judge.

David Andrew Petteys, Law Offices of David A. Petteys PLLC, P.O. Box 3398, Edmonds, WA, 98020-0078, Aaron K. Block, The Block Law Firm, LLC, 309 East Paces Ferry Road, Ne., Suite 400, Atlanta, GA, 30305, for Appellant.

Heidi A. Irvin, David Christopher Moon, Office of the Attorney General of Washington, P.O. Box 40123, 7141 Cleanwater Dr. Sw., Olympia, WA, 98504-0123, for Respondent.

Fearing, C.J.

¶1 Orthotic Shop Inc. and S&F Corporation sell products on the Amazon website. In this appeal, the two merchants disavow tax liability, under the Washington State business and occupation tax (B&O) scheme and the sales tax program, for products sold on the website and stored by Amazon in Washington State. We affirm the Department of Revenue’s assessments of taxes against the two.

FACTS

¶2 We garner the facts primarily from the board of tax appeals’ findings of fact and conclusions of law. This case arises from the nonpayment of sales taxes for the sales of goods in Washington State and from the nonpayment of business and occupation (B&O) taxes on income generated from the storage of goods in Washington State.

¶3 The appellant merchants Orthotic Shop Inc. (Orthotic Shop) and S&F Corporation (S&F) sell products on Amazon.com by participating in Amazon’s Fulfillment by Amazon (FBA) program. S&F, a Minnesota company, sells cell phone accessories. Orthotic Shop, a Michigan company, sells orthotic footwear.

¶4 To participate in the FBA program, a merchant must sign a contract, with Amazon Services, LLC (Amazon), entitled Amazon Services Business Solutions Agreement (BSA). Under the BSA, the merchants, identified as "seller," pay Amazon monthly subscription fees, referral fees, and closing fees for sales.

¶5 S&F and Orthotic Shop disclose information about their respective products on a selling page on Amazon’s website. The selling page lists each of the companies as the seller of their respective goods.

¶6 The merchants do not ship their products directly to customers. Instead, under the FBA program, the merchants, at their own cost, send the products to an Amazon warehouse and Amazon ships the goods to the purchasers. The BSA reads that Amazon will store the seller’s goods, keep electronic records to track the inventory, and may comingle the goods with other goods. The BSA allows Amazon to "move Unite [products] among facilities." Clerk’s Papers (CP) at 25. A section of the BSA addresses the implications of Amazon’s storing of products on tax liability:

"F-14 Tax Matters. You understand and acknowledge that storing Units at fulfillment centers may create tax news for you in any country, state, province, or other localities in which your units are stored, and you will be solely responsible for any taxes owed as a result of such storage. If any Foreign Shipment Taxes or Your Taxes are assessed against us as a result of performing services for you in connection with the FBA program or otherwise pursuant to these FBA Service Terms, you will be responsible for such Foreign Shipment Taxes and Your Taxes and you will indemnify and hold Amazon harmless from such Foreign Shipment Taxes and Your Taxes as provided in Section F-10 of these FBA service terms."

CP at 25 (emphasis added) (boldface omitted).

¶7 Other language in the BSA also addresses payment of any sales and other taxes owed as a result of fulfillment services performed by Amazon.

Tax Matters: As between the parties, you [seller] will be responsible for the collection, reporting, and payment of any and all of Your Taxes, except to the extent that (i) Amazon automatically calculates, collects, or remits taxes on your behalf according to applicable law; or (ii) Amazon expressly agrees to receive taxes or other transaction-based charges on your behalf in connection with tax calculation services made available by Amazon and used by you.

"Your Taxes" means any and all sales, goods and services, use, excise, premium, import, export, value added, consumption, and other taxes, regulatory fees, levies (specifically including environmental levies), or charges and duties assessed, incurred, or required to be collected or paid for any reason (a) in connection with any advertisement, offer or sale of products or services by you on or through or in connec-tion with the Services (b) in connection with any products provided for which Your Products are, directly or indirectly, involved as a form of payment or exchange; or (c) otherwise in connection with any action, inaction, or omission of you or your Affiliates …. Also, if the Elected country is the United States, Mexico, or Canada as it is used in the -Fulfillment by Amazon Service Terms, this defined term also means any of the types of taxes, duties, levies, or fees mentioned above that are imposed on or collectable by Amazon or any of its Affiliates in connection with or as a result of fulfillment services including the storage of inventory of packaging of Your Products and other materials owned by you and stored by Amazon …. The Selling on Amazon Service ("Selling on Amazon") is a Service that allows you to offer certain products and services directly on the Amazon Sites.

CP at 24-25 (emphasis added) (footnotes omitted) (boldface omitted) (alteration in original).

¶8 As if two other paragraphs about tax liability did not suffice, the BSA incorporates a tax indemnity clause:

In addition to your obligations under Section 6 of the General Terms of this Agreement, you also agree to indemnify, defend, and hold harmless us, our Affiliates, and our and their respective officers, directors, employees, representatives, and agents against any Claim that arises from or relates to: … (c) any of Your Taxes or the collection, payment, or failure to collect or pay Your Taxes; and if applicable (d) any sales, use, value added, personal property, gross receipts, excise, franchise, business, or other taxes or fees.

CP at 26 (emphasis added) (alteration in original).

¶9 The BSA includes other onerous terms on the merchant sellers. Amazon disclaims any duties as a bailee. The sellers

"WAIVE ALL RIGHTS AND REMEDIES OF A BAILOR (WHETHER ARISING UNDER COMMON LAW OR STATUTE OR OTHERWISE) RELATED TO OR ARISING OUT OF ANY POSSESSION, STORAGE, OR SHIPMENT OF YOUR PRODUCTS BY US [Amazon]."

CP at 25.

¶10 In March 2016, the State Department of Revenue requested that S&F complete a questionnaire regarding business activities in Washington State. S&F completed and returned the questionnaire to the Department that same month. S&F answered that it sold products at retail to consumers in Washington and gained $170,719 of gross retailing revenue from those sales in 2015. At the Department of Revenue’s request, S&F also sent Amazon Inventory Event Detail reports, which listed all shipments and warehouse transfers occurring in Amazon-owned warehouses during the tax period.

¶11 The Department of Revenue audited S&F for the period March 17, 2011 through March 31, 2016, using sales data sent by S&F. Based on the audit, the department issued tax assessments totaling $231,354.00, $157,563.00 of which represented the total of retail sales tax and retailing B&O tax, and the balance constituted interest and penalties. The audit report asserted that S&F maintained a nexus to Washington State because it had a stock of goods in Amazon warehouses located in Washington starting in March 2011 and continuing through the audit period.

¶12 In a declaration, Shung Log, the owner and founder of S&F, testified that, when S&F began using Amazon’s FBA in 2010, Amazon did not instruct it to collect sales tax in Washington. He declared that he understood, consistent with the widespread understanding of merchants participating in the FBA program, that S&F only needed to collect sales taxes in the state of Minnesota, its headquarters and physical place of business. He highlighted that the definition of "Your Taxes" in the BSA did not explain what "our taxes" represents.

¶13 Between September 2017 and June 2018, the Department of Revenue sent letters to Orthotic Shop that requested the company complete a department questionnaire. Orthotic Shop never responded.

¶14 The Department of Revenue later requested and received copies of Orthotic Shop’s Amazon inventory Event Detail reports, which listed all shipments and warehouse transfers that occurred in Amazon warehouses during the tax period. Based on the reports, the department audited Orthotic Shop and issued an assessment of $213,011.00 for the period December 31, 2013, through March 31, 2018. The department later revised the assessment to $214,-242.59.00. The assessment notice did not segregate the amounts for taxes, interest, or penalties. The audit report asserted that Orthotic Shop had a nexus with Washington State because of the storage of goods in warehouses in Washington.

¶15 In a declaration, Matthew Behnke, the president of Orthotic Shop, testified identically to Shung Log, the president of S&F. According to Behnke, when Orthotic Shop began participating in Amazon’s FBA program in 2010, Amazon did not instruct it to collect sales tax in Washington. Behnke understood that Orthotic Shop only needed to collect sales taxes in the state of Michigan, the business’ base and physical place of operations. Behnke underscored that the definition of "Your Taxes" in the BSA did not actually explain what "our taxes" actually represents. CP at 31.

PROCEDURE

¶16 S&F and Orthotic Shop respectively appealed the Department of Revenue’s assessments to the Washington State Board of Tax Appeals. The merchants moved to consolidate the appeals for a single hearing. The Board of Tax...