In-State Subsidiary Creates Nexus in Washington for Mail Order Retailer

An out-of-state mail order company was determined to have substantial nexus in Washington due to the activities of one of its in-state sister entities. The sister company sold gift cards to customers that could be used to place catalog orders from any of the 3 retail entities, distributed the out-of-state company’s catalogs, and assisted the out-of-state company’s customers with returns. When gift cards were sold, the cash was received by and recorded in the financial records of the selling entity. The cash receipts were subsequently transferred to the parent company. When the gift cards were redeemed, the sale was recorded in the financial records of the redeeming company. As a result, the in-state sister entity was facilitating sales on behalf of the out-of-state company. All of the in-state entity’s activities were significantly associated with the out-of-state company’s ability to establish or maintain a market for sales in Washington. In addition, the 3 retail entities shared significant management activities. The three retail subsidiaries and the parent continued to share the same offices, and shared the same Chief Executive Officer, Secretary, and President. Pursuant to a shared services agreement, the parent provided the following services to the retail subsidiaries: executive management, financial services, advertising services, management information system services, regulatory affairs, procurement of all inventory items which are resold by the subsidiaries, management of gift card program, and miscellaneous other services. Therefore, the out-of-state company has substantial nexus in Washington for purposes of retail sales tax and retail and wholesale business and occupation tax. (Tax Determination No. 10-0057, Washington Department of Revenue, December 2011)

Posted on February 22, 2012