Out-of-state diamond and gold wholesaler subject to Washington tax

An out-of-state diamond and gold wholesaler was recently found to have nexus with Washington state. As a result, the wholesaler is liable for Washington’s business and occupation (B&O) tax on its sales to Washington retailers. Nexus is the connection between a business and a state that permits the state to tax the business.

What kind of connection to Washington does an out-of-state wholesaler have? The company has no employees in Washington, owns or leases no Washington real estate, and makes no retail sales there. However, it does have “relationships with numerous jewelry retailers” in The Evergreen State. Since these types of relationships are standard in an industry that deals in rare and precious gems, the Washington decision could have far-reaching consequences.

Jewelry retailers in Washington (and other states) typically don’t maintain a large stock of jewels, since they’re rare and expensive. When a retailer needs a gem (i.e., to repair existing jewelry or make custom pieces), it searches through inventory lists provided by one or more wholesalers, then arranges for the wholesaler(s) to send jewels for review. Wholesalers ship the gems to the retailer via common carrier, along with a standard consignment memo that generally consigns the gems to the retailer for a period of five days.

The retailer then shows the consigned gems to the customer. If none of the wholesaler’s consigned gems are selected, all are returned to the wholesaler within the time allotted by the memo. If the retailer’s customer selects one of the wholesaler’s gems, the retailer purchases the jewel from the wholesaler and later resells it to the customer, either individually or as part of a finished good (i.e., jewelry).

In 2015, the Washington Department of Revenue audited an out-of-state wholesaler and determined that the wholesaler “had physical presence nexus due to its ownership of personal property in the State of Washington” because consigned goods remain the property of the wholesaler while on consignment in Washington.

The facts are undisputed. The wholesaler’s standard memo reads: “The merchandise described below is delivered to you on memorandum, at your risk from all hazards, regardless of the cause of the loss or damage, only for examination and inspection by prospective purchasers, upon the express condition that all such merchandise shall remain the property of … and shall be returned on demand, in full in its original form.”

Washington doesn’t have an income tax. Instead, it imposes a gross receipts tax — the B&O tax — which is “measured on the value of products, gross proceeds of sale, or gross income” of a business.

B&O tax is imposed on “the gross proceeds of sales for the act or privilege of engaging in all activities, either directly or indirectly, within Washington State with the object of gain, benefit, or advantage to the taxpayer.” However, the state may only impose its B&O tax on sales made by a remote retailer when there is “both nexus with the out-of-state seller and receipt of the goods by the purchaser within Washington.”

A remote retailer is considered to have nexus with Washington when the seller or its representative “establish or maintain a market for its products in this state.” This includes activities where:

• The goods are located in Washington at the time of sale and the goods are received by the customer or its agent in the state
• The delivery of the goods is made by a local outlet or from a local stock of goods of the seller in the state

Since both conditions are met when the wholesaler consigns its products to Washington retailers, the department’s Administrative Review and Hearings Division determined that the out-of-state wholesaler has nexus and an obligation to collect and remit Washington’s B&O tax on its Washington sales. Additional details are available in the determination.

It will be interesting to see if other states follow Washington’s lead here. To stay up to date on important transaction tax news, subscribe to the Avalara newsletter.