A Case Study of What Happened to Mattress World - Could You Be Next?
Mattress World, Incorporated ("Mattress World", a Portland, Oregon-based mattress retailer, will be closing all seven company-owned stores over the next few months. The closures are partly due to an audit conducted by the Washington State Department of Revenue ("DOR") resulting in a tax assessment and subsequent warrant for nearly $1.7 million in unpaid Business and Occupation ("B&O") tax, retail sales tax, interest, and penalties. As a result of the audit, the DOR found that Mattress World's various business activities in Washington were significantly associated with the company's ability to establish and maintain a market for its products in the state. Therefore, Mattress World was subject to B&O tax and retail sales tax on all sales delivered into Washington.
Mattress World routinely made sales to Washington residents who traveled to the Oregon stores to make their purchases. Mattress World did not charge retail sales tax on the sales to Washington residents. As is expected in this industry, many customers wanted the mattresses to be delivered to their homes. Accordingly, Mattress World would arrange for either company-owned or third party delivery trucks to deliver the mattresses to the customers in Washington. In some cases, the delivery truck drivers would assemble the beds at the customer's location and also haul away the old mattresses.
The DOR initiated the tax audit of Mattress World sometime during 2009. Because Mattress World's activities in Washington were revealed through tax discovery on the part of the DOR, the auditor could and did go back and examine Mattress World's sales for a look-back period of seven years, or 2003. As a result of the audit, the DOR determined that Mattress World's activities in the State of Washington constituted doing business in the State. Consequently, sales made from Oregon stores to Washington residents and delivered into Washington were subject to B&O and retail sales tax. The DOR then issued a tax assessment of nearly $800,000, plus interest and penalties. Mattress World began making monthly installment payments to the State, however in late 2011; a warrant was issued by the DOR in the amount of $1.7 million for delinquent taxes, interest and penalties owed.
What Gives DOR the Right
You might be asking yourself, what gives the Washington DOR the right to tax Oregon companies that sell tangible personal property to Washington residents who make purchases in Oregon? In general, states have the right to tax companies they consider to be doing business in their jurisdiction. Washington has set a very low threshold as to the types of activities performed in Washington that constitute doing business and establish nexus for purposes of Washington B&O and retail sales taxes. For example, when an out-of-state company solicits sales, installs or assembles goods, provides services, repairs or maintenance, or delivers products into Washington either using company-owned or third-party representatives, the company is considered to be doing business in Washington for sales tax purposes, resulting in a filing obligation and a requirement to collect and remit applicable taxes.
Washington also imposes a B&O tax on any person with substantial nexus, for the privilege of doing business within the state. Similar to the threshold for retail sales tax nexus above, a company has substantial nexus for B&O tax purposes if, among other things, such company either directly or through an agent or other representative engages in activities in the state that are significantly associated with the company's ability to establish and maintain a market for its products. It's important to also note that for service-based businesses, sufficient contact or nexus with the State of Washington for B&O tax purposes may be created based solely on the amount of gross receipts from the state. This is also knows as economic nexus and applicable only for B&O tax.
How Do I Avoid Having Nexus with Washington Sales
The easiest way for an Oregon company that has no stores, employees, or other property in Washington to not create nexus in the state is to not make deliveries or enter the state either themselves or through a representative or agent. Of course, this is easier said than done. However, one simple alternative to making deliveries into Washington is to have the purchaser arrange for pick-up themselves. An agent or representative for the purchaser may also accept delivery of the goods on behalf of the purchaser in Oregon. However, the agent's acceptance is not receipt of the goods by the purchaser unless the agent is authorized to receive the goods with the power to inspect and accept or reject. It's important to note that proper documentation must be gathered by the retailer as support. Another alternative is to ship products into Washington via common carrier or U.S. mail as this does not constitute doing business in the state and does not create nexus.
What Can You Do If You Have Nexus
Once a company has determined that nexus has been established, the company may come forward and voluntarily register, pay prior tax obligations and become compliant. The benefits of entering into a voluntary disclosure program are the limited look-back period, which may be reduced to four years plus the current year, as well as partial or full abatement of penalties. To qualify for the voluntary disclosure program in Washington, the company must not have been previously contacted by the DOR, must never have been registered or reporting taxes to the DOR, and must not have engaged in evasion or misrepresentation in reporting tax liabilities or other tax requirements.
The Mattress World scenario in Washington is not unique. Due to the state of our economy and budget shortfalls, many states are becoming extremely aggressive in evaluating out-of-state companies' activities in their jurisdictions and assessing state taxes including retail sales and/or income taxes. Companies engaging in activities discussed in this article or similar activities should take the time to evaluate whether they have a state tax exposure in those jurisdictions. An accounting firm, such as the authors' firm of Moss Adams LLP, can assist you with making the determination of whether you have established nexus in a certain state as well as assist you with entering into a voluntary disclosure agreement and becoming compliant.
This article was authored by Rob O'Neill, Partner, State and Local Tax in Portland; Shannon Wright, Manager, State and Local Tax in Portland; Marke Greene, Partner, State and Local Tax in Seattle; and Sarah Correia, Manager, State and Local Tax in Seattle.
©2012 Moss Adams LLP