A recent, well published “sales tax nexus across state lines” case involves Washington State and Mattress World, an Oregon-based bedding store with locations just across the border from Vancouver, Washington. As the story goes, some Washington State residents, in their effort to find just the right bed, traveled across the border in order to find their perfect fit. They purchased the bed, sales tax-free, but needed a way to get the bed home. Mattress World hired a third-party vendor to deliver and setup the new bed set in their Washington State residence.
Everything was fine regarding no sales tax until the last line. Using a third-party vendor, paid for and arranged by Mattress World, created “nexus” for Mattress World in Washington State. Nexus laws allow that the retailer must collect and remit sales tax to the jurisdictions where a retailer is considered to have done business. The third-party delivery service hired by Mattress World created nexus for Mattress World by entering Washington State and delivering the bed.
According to OregonLive.com, “…the moment a company becomes involved in the delivery, using its own trucks, the retailer becomes responsible. Or if the retailer hires a third party that delivers and provides a service – say setting up a mattress – then sales taxes are required. It also must register for a business license in the city where it delivers”
This report shows that Washington State’s policy regarding a third-party delivery service creating nexus is dependent on the retailer retaining the third-party service. However, had the resident of Washington retained the third-party delivery service to pick up the mattress and deliver it to their home and setup the bed, the retailer would not have been legally required to collect and remit sales tax.
The Washington State Department of Revenue website states that “[i]nstalling or assembling goods in this state, either by employees or other representatives” comprises nexus. In addition, “Effective June 1, 2010, an ‘economic nexus’ standard rather than a ‘physical presence’ standard was created. It requires some businesses earning ‘apportionable income’ (include service and royalty income) from Washington customers to be subject to taxes whether or not they maintain offices in the state or have any physical presence.” That means if Mattress World sold to enough Washington State residents, it could create economic nexus and be liable for collection and remittance of sales taxes to Washington State anyway.
Other states, such as Florida, agree that if a company delivers goods using their own or a leased truck, then they have nexus. Iowa’s law states that an “out-of-state retailer [who] regularly engages in delivery of its products by its own trucks in the state of Iowa” has the legal obligation to collect and remit sales taxes.
Pennsylvania also agrees with Washington State on the delivery issue: Any business “[e]ngaging in any activity as a business within this Commonwealth by any person, either directly or through a subsidiary, representative or an agent, in connection with the lease, sale or delivery of tangible personal property or the performances of services thereon…” [italics added] creates nexus. [Pennsylvania Sales and Use Tax Bulletin 2011-11.]
The nuances between states regarding delivery makes ensuring proper compliance a nightmare for companies operating in locations that border other states. For Mattress World, the knowledge of Washington State’s nexus requirement regarding third-party delivery services and economic nexus (which began in 2010) came a little too late. Mattress World closed 7 stores and put 80 individuals on the unemployment line this year due to their $1.7 million plus tax debt.
If you are unsure about your liability across state lines, contact Avalara’s Professional Services for a nexus study today. Visit www.avalara.com to learn more about our nexus consulting services or call 877.780.4848 and ask for help regarding a nexus study.
Note: This example is even being used as a case study to stimulate discussion on tax law and burdens in an Economics 201 class at Reed College.