Today I want to talk about how your company may have more exposure to states in your market that have a gross receipts tax as opposed to an income tax. Let’s say you are a company that makes goods in state A and sells nationwide, including in state B. You sell into state B through independent sales representatives.
Your only connection to state B is the independent sales representatives and the delivery of your goods by common carrier to your state B customers. You have no property or payroll in state B. Your independent sales representatives are only authorized to solicit sales. They cannot sign a purchase order. Orders can only be accepted by your company in state A.
Under these facts, federal law (referred to as P.L. 86-272), would prohibit state B from taxing the net income your company earned from state B customers. However, this federal law would not prohibit state B from taxing the gross receipts earned from your state B customers.
This is what happened to an out of state bakery under these facts which are set out in a decision of a Washington hearing officer:
“[Taxpayer] manufactures and sells baked goods such as pastries, croissants, and fast food cakes to retailers throughout the country. It runs its bakery operation [out-of-state], and has also opened a facility [out-of-state]. Taxpayer ships its goods by common carrier directly from either of these locations to its customers, including those in the state of Washington. Taxpayer [states that it] had no employees in Washington during the audit period, and neither owned nor rented property here.
“Taxpayer contracts with independent commissioned sales representatives to broker sales of Taxpayer’s products in this state. Taxpayer provided a copy of its contract with [Sales Company], a commissioned sales company in Washington that brokered sales in a territory that included the state of Washington. Taxpayer’s contract requires [Sales Company] to enter Washington in order to “generate,” “obtain,” and “negotiate” sales of Taxpayer’s products in this state. Orders solicited by [Sales Company] must be sent to the Taxpayer for approval.”
The company’s use of sales representatives in Washington and delivery of the bakery goods to Washington customers was enough to subject it to the state’s gross receipts tax:
“Because Taxpayer established nexus with the State of Washington through its representatives, and delivered products to its customers in this state, we hold that the assessment of Washington’s B&O tax on these sales was correct.”.
The Washington Administrative Review and Hearing Division of the Department of Revenue determination is Det. No. 16-0149, 35 WTD 613 (2016) and can be found at: https://dor.wa.gov/sites/default/files/35WTD613.pdf
Comment. Washington has the right under the federal constitution to tax this company either under an income tax or gross receipts tax. However, the federal government provides extra protection under a federal statute (P.L. 86-272) to out of state companies from state income taxes under these facts. This federal statute can be found at: https://www.law.cornell.edu/uscode/text/15/381
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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