In Lamtec Corp. v. Dep't of Revenue, 2011 Wash. LEXIS 77 (Wash. Jan. 20, 2011), the Washington Supreme Court recently addressed the question of how much activity is required for a taxpayer to be considered to have nexus. The taxpayer, Lamtec Corp., sold products at wholesale to customers who placed their orders over the telephone. Lamtec had no permanent facilities, no office, no employees, no phone number and no address in Washington. Over a 6-year period, Lamtec sold $9 million of its products to customers in Washington. Lamtec did send three employees into Washington on two or three occasions each year to visit customers. These employees did not solicit or accept orders. Instead, the activities of these employees were limited to listening to customer concerns, participating in phone calls with the customers and other employees in New Jersey, and generally maintaining customer relations.
The Washington Department of Revenue determined that the activities of Lamtec were sufficient to establish nexus for state business and occupancy (B&O) tax purposes, and issued an assessment for tax due. Lamtec paid the tax and sought a refund arguing that subjecting Lamtec to the tax violated the Commerce Clause. The tax was upheld on administrative review and through the lower trial and intermediate appellate court. Lamtec ultimately sought review by the Washington Supreme Court. Lamtec argued that nexus for the B&O tax required physical presence under Quill Corp. v. N.D., 504 U.S. 298 (U.S. 1992), to establish sufficient nexus to subject it to the tax.
The Washington Supreme Court, largely repeating the analysis of the lower appellate court, announced that the physical presence test of Quill was limited to sales and use taxes. The court refused to adopt the same bright line test for the B&O tax. The court went on to explain that its decision was largely controlled by its prior decision in Tyler Pipe Indus. v. Dep't of Revenue, 105 Wn.2d 318 (Wash. 1986), in which it was determined that taxpayers have nexus for the B&O tax if they engage in business activities that create and maintain a sales market. The court made clear that the traditional "brick and mortar" concept of physical presence was not required to establish nexus. The court concluded that Lamtec's act of sending its employees into Washington was "significantly associated" with its ability to create and maintain a sales market in Washington, so it was sufficient activity to create nexus.
The decision, while not surprising in today's jurisprudence, clearly displays the ongoing deterioration of common notions of physical presence being required for an out of state taxpayer to be subjected to a state's taxing jurisdiction. This case, and others across the nation, scream out for some concerted action on the federal level to provide, if nothing else, at least a sense of certainty so that taxpayer's can make informed decisions on how to structure their business activities.
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