In a majority opinion filed November 14, 2023, with the Washington State Court of Appeals Division II (Court), a Washington state appellate panel affirmed the Board of Tax Appeals’ final decision granting summary judgment finding in favor of the Washington Department of Revenue (DOR) for a Business and Occupation (B&O) tax assessment. At issue was what constitutes the “business activities” in Washington of appellant Citibank (South Dakota), National Association (Citibank) who had no physical presence in Washington.
The tax assessment was initiated as a result of audit. Citibank did not file B&O tax returns from 2007 to May 31, 2010, and was assessed under audit for B&O tax for this period totaling $6,010,265. In addition to B&O tax, delinquency penalty of $1,104,440 and assessment penalty of $300,513 and interest of $775,368 were assessed. Citibank appealed the DOR’s assessment, and the DOR Appeals Division affirmed the assessment. Citibank appealed to the Board of Tax Appeals, and the Board issued summary judgment in favor of the DOR and affirmed the DOR’s determinations. Citibank paid the assessment in dispute and appealed to the Superior Court who transferred the case to this court which affirmed the Board of Tax Appeals’ final decision granting summary judgment in favor of the DOR.
For the years in question, Citibank had no physical presence based on employees, property, or place of business in Washington. Citibank issued credit cards, some of which were private label store branded cards for use at certain retailers, to Washington residents and generated income as a result of interest and fees on these cards. Citibank had agreements with retailers for the private label cards obligating the retailers to market the cards to customers in Washington stores with the intention of soliciting new Citibank accounts. Additionally, the retailers were authorized to accept payment from customers on behalf of Citibank on amounts customers owed to Citibank. Citibank used Washington attorneys when filing some 3,000 lawsuits in Washington courts for debt collection.
Citibank argued that based on RCW 82.04.220 (1961), which stated that a B&O tax would be collected from every person “for the act or privilege of engaging in business activities”, it was not subject to B&O tax because it did not have a physical presence in Washington to engage in business. As of June 1, 2020, the statute was amended and stated that a B&O tax would be collected from every person “that has a substantial nexus with this state”… “for the act or privilege of engaging in business activities.”
The B&O tax is an excise tax imposed on the privilege of doing business in Washington. Prior to June 2010, it was the DOR’s practice, as acknowledged by the DOR, to assess B&O tax against out of state businesses only when they met the requirement of a physical presence in Washington. The DOR argued that Citibank met the requirement through its activities by having contractual relationships with retailers who promoted private label credit cards that were issued by Citibank to Washington customers and by utilizing the Washington courts when collecting unpaid debts from Washington residents.
The Board found that Citibank’s activities met the constitutional requirements for the imposition of Washington B&O tax and were sufficient to constitute nexus during the audit period regardless of whether characterized as physical presence. Based on the activities of third parties performed on behalf of the taxpayer, the Board determined it constituted sufficient nexus. Ultimately, the Court considered all arguments and agreed with the Board’s decision on Citibank meeting the standards for sufficient nexus and physical presence based on all of the factors presented to show that Citibank was physically present in Washington based on its activities and those of others acting on its behalf. As found in other cases cited (Tyler Pipe, Lamtec), the Court stated “the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” The Court concluded that Citibank engaged in such activities. Apportioning gross income based on the billing address of cardholders in Washington, the Court found it does fairly represent Citibank’s business activities in Washington and gross income attributable to Washington.
The Washington B&O tax is extensive and can encompass income attributable to Washington for business activities even without physical presence. Taxpayers with sales to Washington customers should evaluate their requirements for registration and reporting. Businesses should consider not only what constitutes physical presence in a state but also additional types of nexus that may qualify them to be considered doing business in a jurisdiction. Many states enacted (and some have repealed) click-through nexus, affiliate nexus, and notice and reporting requirements over the years. With economic nexus and marketplace nexus being enacted in all states in recent years, businesses who wish to be compliant with sales and use tax must undergo a comprehensive evaluation of all of the factors that may be result in nexus obligations and potential tax liabilities for prior periods and must consider all the types of nexus that may be applicable to them. Additionally, a number of states and some localities have a tax similar to the Washington B&O tax where gross receipts are taxed and imposed on the seller for the privilege of doing business with the state. A few examples of these include Ohio Commercial Activity Tax, Nevada Commerce Tax, and Oregon Corporate Activity Tax.
(Citibank (South Dakota) National Association v. State of Washington Department of Revenue, No. 57127-7-II, Washington Court of Appeals, Division II, November 14, 2023)