Washington Court of Appeals Archives

Remote Retailers Held Responsible for Tax Collection in Washington

If there’s a lesson to be learned from the Washington Court of Appeals’ recent holding in Orthotic Shop Inc. and S&F Corporation v. Department of Revenue, No. 39321-6-III (Jan. 23, 2024), it’s that the use of a marketplace does not eliminate a remote seller’s tax responsibilities, particularly for pre-Wayfair periods.

The dispute in Orthotic Shop involved a retailing business and occupation tax (B&O tax) and a retailing sales tax assessment against two merchants for sales they made on an online retailer’s website. The audit report asserted that the merchants were “retailers” who maintained a nexus to Washington because they maintained a stock of goods in the online retailer’s warehouses located in the state. As such, the audit report concluded that the merchants were liable for retailing B&O tax and sales tax on sales to Washington customers made via the online retailer’s website.

The merchants admitted before the Court of Appeals that they sold their goods to consumers and not to the online retailer. However, the merchants challenged the assessment and argued that the online retailer’s provision of fulfillment services necessarily rendered it a “consignee” responsible for remitting retailing B&O tax and sales tax on transactions facilitated through its website in accordance with WAC 458-20-159. The merchants also asserted that the assessment was unfair because they lacked an understanding that they could incur a tax collection liability in Washington through the storage of their merchandise in an in-state warehouse.

The Court of Appeals determined that the merchants failed to show that the online retailer was a consignee with sole responsibility for tax collection. “A consignee,” the Court of Appeals explained, “makes sales on behalf of the consignor.” By contrast, the merchants’ product pages on the marketplace’s website listed the merchants as the sellers, not the online retailer. Accordingly, the Court of Appeals concluded: “[s]ince the merchants sold to buyers, they are liable for retailing B&O tax on those sales.”

The merchants’ failure to list the online retailer as the “seller” on their respective sales pages was also fatal to their argument that they were not liable for retailing sales tax on sales made via the online retailer’s website. The Department of Revenue’s administrative rules explain that while a consignee is responsible for collecting and remitting sales tax on sales made in its own name, when the consignee is selling in the name of the consignor, the consignor may instead report and remit the retail sales tax. Here, the Court of Appeals noted that while the online retailer’s agreement with the merchants provided that it would remit the sales tax if the merchants asked it to do so, neither merchant made such a request.

The Court of Appeals also was unimpressed by the merchants’ assertions that they did not understand that they could establish physical presence nexus and incur a tax liability based on the storage of their goods at a warehouse in the state. The Court of Appeals explained that ignorance of the law, was not an acceptable defense.

CASE TAKEAWAYS

Although Orthotic Shop [...]

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Seattle Payroll Expense Tax Upheld by State Appellate Court

This week, the Washington Court of Appeals affirmed a lower court’s decision to dismiss a challenge to the recently enacted payroll expense tax in Seattle, WA. Seattle Metro. Chamber of Commerce v. City of Seattle, No. 82830-4-I, 2022 WL 2206828 (Wash. Ct. App. June 21, 2022).

The tax, which went into effect on January 1, 2021, applies to entities “engaging in business within Seattle” and is measured using the business’s “payroll expense” (defined as “compensation paid in Seattle to employees,” including wages, commissions, salaries, stock, grants, gifts, bonuses and stipends). The tax only applies to businesses with a payroll expense of more than $7 million in the prior calendar year, and compensation is considered “paid in Seattle” if the employee works more than 50% of the time in the city. Additionally, if the employee does not work in any city more than 50% of the time, the employee’s compensation is treated as though it was “paid in Seattle” only “if the employee resides in Seattle.”

Although the tax is based on employee compensation, the Washington Court of Appeals held that incidence of the tax is on the employer, not the employee. This was a critical distinction because, under Washington law, municipalities generally are prohibited from levying taxes directly on wages (e.g., an income tax). By finding that the tax incidence fell on the employers, the Court was able to define the tax as an excise tax on the employer’s privilege of doing business in the city.

As expected, the tax is already bringing in significant revenue for Seattle. In its first year on the books, the tax brought in more than $230 million. Yet, despite this new revenue (as well as revenue from several other recently enacted taxes), Seattle is still projecting a financing gap of more than $100 million for 2022. Taxpayers are concerned that the city will explore even more revenue options to help close the gap.

The McDermott tax team is constantly monitoring tax developments on a state-by-state basis and will provide updates on the PNW specifically as they are made known.

Remote Retailers Held Responsible for Tax Collection in Washington

Seattle Payroll Expense Tax Upheld by State Appellate Court

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