Tax practitioners holding out hope for establishment of a physical presence test to determine nexus for purposes of income taxation suffered another setback with the recent decision from the Washington Supreme Court. In Lamtec Corp. v. Dept. of Revenue, 170 Wash. 2d 838 (2011), the state’s high court examined how much instate activity was necessary to establish nexus for purposes of Washington’s business and occupancy (“B&O”) tax (which imposes a gross receipts tax for the act or privilege of engaging in business activities in the state) and concluded that the taxpayer’s practice of regularly sending sales representatives into the state to maintain its market satisfied the nexus requirement.
In Lamtec, the taxpayer sold products to Washington state customers from its facility in New Jersey. All orders were placed by telephone, and although Lamtec had no permanent facilities, office address, telephone number, or employees in Washington, it did send three employees into the state two or three times a year. Those employees did not solicit sales directly during their visits, but they did answer questions and provide product information to the extent that the Department of Revenue (“Department”) determined Lamtec had substantial nexus with the state of Washington. Thus, when the Department discovered this activity was taking place, it issued an assessment for back taxes, penalties, and interest.
Lamtec paid the assessment under protest and filed a refund claim in superior court, which was dismissed pursuant to the Department’s motion for summary judgment. The Court of Appeals affirmed the lower court’s action, so Lamtec appealed to the state’s Supreme Court, arguing that it had insufficient nexus with Washington to be subject to the B&O tax.
In its analysis of the commerce clause argument raised by Lamtec, the court started with the test set forth in Complete Auto Transit v. Brady, 430 U.S. 274 (1977) for imposing tax on out of state corporations, and narrowed its focus to the question of whether the employee visits were enough to satisfy the substantial nexus prong. Lamtec contended that in order to have substantial nexus, the taxpayer must have a physical presence, and that such physical presence requires a small sales force, plant, or office in the taxing state. Thus Lamtec urged the court to adopt the same “bright-line” physical presence test generally required for the collection of sales and use taxes.
Although the court noted that there is some appeal to a bright-line test for business taxation, it ultimately rejected Lamtec’s arguments. In particular, the court concluded that to the extent there is a physical presence requirement, it can be satisfied merely by the presence of activities within the state. According to the court, nexus does not require a “presence” in the sense of having a brick and mortar address within the state. Indeed, the court found no material difference between activities that are performed by a staff permanently employed within the state, by independent agents contracted to perform the activity within the state, or by persons who travel into the state from other jurisdictions. According to the court, the crucial factor governing nexus is whether the subject activities are significantly associated with the taxpayer’s ability to establish and maintain a market within the state. Here, the court found that the contacts by Lamtec’s sales representatives were designed to maintain its relationships with its customers and to maintain its market within Washington State. Because the activities were neither slight nor incidental to some other purpose or activity, the court held that although Lamtec did not have a permanent presence within the state, by regularly sending sales representatives into the state to maintain its market, Lamtec satisfied the nexus requirement. Thus the court affirmed the Court of Appeals’ decision, and held that the Department had authority under the commerce clause to impose the B&O tax on Lamtec.