Would You Fight Aggressive State Policy, or Get Trampled?
- Feb 28, 2014 | Gail Cole
Sage V Foods manufactures rice based ingredients used in processed foods. It is headquartered in Los Angeles, has production facilities in Arkansas and Texas, and sells into virtually every state in the country, including Washington State.
A few years back Pete Vegas, President of Sage V Foods, took a trip to Washington State and visited one of his customers. Somehow or another, the Washington State Department of Revenue learned that a Sage V Foods truck crossed into the state. Not long after that, the company received a letter that Mr. Vegas likened to a speed-trap. One question on the form was this: How many times per year do you visit the State of Washington?
The form was completed by the company comptroller, who knew that Mr. Vegas didn’t travel to Washington often but also that he had recently visited the state. “How do you answer a question like that, knowing you’ve been before,” Mr. Vegas mused. The comptroller wrote, “One time per year,” and mailed it in. Shortly thereafter, the company was “sent an invoice for seven years of back taxes, interest and penalties.”
Mr. Vegas claims his trip was the only time a representative from Sage V Foods entered Washington during the seven-year audit period. How could the Washington State Department of Revenue claim one visit to a customer is enough to trigger nexus and a tax bill?
During a May 2012 interview with The Tax Foundation, Mr. Vegas said he’s tried to understand Washington’s tax rules and finds them “not clear.” The laws have changed, he said. “If you’d gone to the state’s website a year ago, you never would have known in a million years that you were subject to this.”
As explained by Mr. Vegas, Washington’s tax rules changed as the state became more hungry for revenue. Initially, a physical presence was required to trigger nexus in Washington State, then a sales office, then a broker, and then a salesman frequently visiting the state. In May 2012, exactly how many visits to the State of Washington during a seven year period would trigger nexus was “up in the air.” He felt his case would set the precedence.
Mr. Vegas challenged the department’s findings. Since attorneys told him he would either lose or spend at least the $180,000 he owed the state in attorney’s fees, he opted to represent himself in court. And guess what? He won.
The Tax Foundation’s Joseph Henchman wrote this week that “for every Pete Vegas who fights overly aggressive state tax activity, lots of businesses get trampled.” Mr. Henchman was on his way to the U.S. House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Administrative Law to speak on behalf of the Business Activity Tax Simplification Act (BATSA) of 2013. BATSA seeks to re-affirm that states can only place a tax burden on businesses when those businesses have a physical presence in the state. Pete Vegas was there, too, sharing his story with the subcommittee.
At its core, Mr. Vegas’s experience is similar to that of many businesses that sell into multiple states. States want more revenue. One way to find it is to expand tax laws, rules and regulations to capture more tax revenue. That’s what happened with Mr. Vegas. That’s what’s happened with many remote retailers.
Remote retailers have responded in a variety of ways. Amazon.com, the world’s largest online seller, has itself responded in different ways in different states: sometimes paying and expanding a physical presence into the state (California); sometimes paying and fighting the law (New York); and sometimes simply severing the ties with affiliates that newly triggered the tax obligation (Maine, Minnesota, Missouri). Smaller businesses feel more vulnerable to protean state laws.
The House Judiciary Committee is scheduled to discuss online sales tax next week. It’s already talking about nexus, with BATSA. Many, including Amazon, believe only the federal government can simplify this increasingly complex issue.
Do you sell into multiple states? Don’t get trampled. Automate.
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