Digital Reassignment of Inventory Creates Substantial Nexus in Washington

A remote seller who makes sales through a marketplace facilitator established physical presence nexus in Washington by having inventory digitally reassigned to a warehouse location within Washington in order to complete sales. The seller used the facilitator’s inventory management system. The facilitator commingles items of property that are identified and tracked using manufacturer barcodes in a seller’s inventory with items of identical products owned by other third-party sellers who also use manufacturer barcodes for these items. When a customer purchases a product from a seller, the facilitator will ship the item closest to the customer even if the seller’s inventory doesn’t include any of the items in that fulfillment center. This is done by digitally reassigning ownership of the property between the two sellers (the seller that generated the order and the third-party seller whose closer-located item was used to fulfill the order). The facilitator electronically transfers an item from the seller’s inventory to the third-party seller whose inventory item is needed to fulfill the order, and the generating seller is credited for the sale. This inventory management process is based on the voluntary use of the manufacturer barcode to identify and track seller inventory. Sellers may choose not to use this inventory tracking method by updating the barcode preference in their facilitator account.

The seller was issued tax assessments as a result of having inventory digitally reassigned to Washington. The seller disputed the assessments, contending that it has not established nexus under Washington law because it has no physical presence or inventory storage in Washington. The seller argued that digital assignment of inventory for certain sales in Washington by the facilitator should not be considered physical storage and cannot create nexus. Further, the seller argued that its product sales and inventory activity in Washington represent such a small portion of its overall inventory and sales that these should be considered de minimis and insufficient to be considered significant activity for tax purposes.

The Washington Department of Revenue (DOR) disagreed, stating that maintaining a stock of goods within the state is sufficient to establish a physical presence. The seller was aware that the goods could be relocated to fulfillment centers in other states using the digital reassignment process and agreed to the use of digital reassignment. Additionally, the seller had the ability to “opt out” and choose to have the facilitator manage the seller’s inventory separately, with no commingling or digital reassignment. As such, the seller was unable to show that its goods were sent to, and stored in, Washington without its knowledge and consent.

Under the agreement between the seller and facilitator, the facilitator did not take title to the goods. The goods remained the property of the seller until delivered to the purchaser. The contracts signed by the seller show that the seller agrees it is the seller of record and is responsible for all taxes due. The use of the inventory management system resulted in the seller’s legal ownership of products that were physically stored in Washington warehouses.

The DOR also disagreed with the seller’s de minimis argument, stating that “…a person who sells tangible personal property need only have demonstrably more than the slightest physical presence.” The fact that goods owned by the seller were physically stored in Washington until sale – even briefly via digital reassignment of ownership – is sufficient to establish substantial nexus. As such, the assessment of tax, penalties and interest for the seller was upheld.

This is a significant determination for anyone who makes sales via a marketplace facilitator. Marketplace sellers should take note and be aware of if and where they have authorized the use of digital inventory reassignment by a marketplace facilitator as it can potentially be creating nexus for them in Washington. (Determination No. 18-0255, Washington Department of Revenue, November 2, 2020)

Posted on November 24, 2020