Naturals v. State, Dep't of Revenue

• Citation: 195 Wash.App. 788,382 P.3d 689
• Decision Date: 25 July 2016
• Docket Number: No. 73966–2–I,73966–2–I
• Parties: Irwin Naturals, Appellant; v. State of Washington, Department of Revenue, Respondent.
• Court: Washington Court of Appeals

195 Wash.App. 788

382 P.3d 689

Irwin Naturals, Appellant;

v.State of Washington, Department of Revenue, Respondent.

No. 73966–2–I

Court of Appeals of Washington, Division 1.

FILED: July 25, 2016

Publication Ordered September 12, 2016

Norman J. Bruns, Michelle Delappe, Garvey Schubert Barer, 1191 2nd Ave., Fl. 18, Seattle, WA, 98101–2939, Michael J. Bowen, Akerman LLP, 50 North Laura Street, Jacksonville, FL, 32202–3659, for

Joshua Weissman, WA Atty. General's Office, 7141 Cleanwater Lane S.W., P.O. Box 40123, Olympia, WA, 98504–0123, for Respondent.

Spearman

, J.

¶1 Irwin Naturals (Irwin) is a California company that sells wholesale and retail nutritional supplements

to Washington consumers. Irwin disputes the Department of Revenue's (DOR) assessment of a Business and Occupation (B & O) and Retail Sales Tax (sales tax) on its retail sales in the State of Washington for the period from 2002 through 2009.¹ Irwin paid the tax and brought an action to refund the amount paid, claiming that the tax violated the commerce clause of the United States Constitution because the retail sales were dissociated from its in-state wholesale activities. The trial court disagreed and granted summary judgment in DOR's favor. Irwin appeals. We affirm.

FACTS

¶2 Irwin Naturals is a corporation with its principal place of business in Los Angeles, California. Irwin is in the business of developing, marketing, and selling retail and wholesale nutritional products. From 2002 through 2009, Irwin made wholesale sales to retailers and distributors in Washington. During this time, Irwin invested considerable resources into its store presence in Washington. Senior company employees spent a considerable amount of time in the state. They participated in new item presentation, category review, promotional planning, educating sales staff and trade show exhibitions. Irwin also engaged four marketing firms to aid in marketing its products in Washington. The firms engaged in a wide variety of activities with Irwin's wholesale customers, such as soliciting sales, receiving product orders, attending retailer shows on Irwin's behalf and acting as an intermediary with Irwin's retailers on promotional programs and other business matters. Irwin's products are available at Washington health food stores, as well as numerous well-known grocery, drug, and convenience store chains. According to one of its sales representatives, “people know the Irwin name.” Clerk's Papers (CP) at 118.

¶3 Irwin began making retail sales to Washington residents in 2004. It characterizes its operations during the tax period as being divided into a “Retail Sales Channel” and a “Wholesale Sales Channel.” Brief of Appellant at 2. According to Irwin, the retail and wholesale sales operated completely independently of each other during the period from 2004 through 2009. Irwin handled all of the wholesale advertising and promotion in-house, along with the shipment of orders, the collection of payments, and the inquiries from its wholesale customers. Irwin sold wholesale products under the brands “Irwin Naturals,” “Nature's Secret” and “Applied Nutrition” from 2002 through 2006. CP at 193.

¶4 All of the products sold in Washington stores listed Irwin's phone number and/or email address and website address. The website provided information about Irwin Naturals' product line and how to obtain product samples. During that period, consumers were not permitted to place online orders. It is undisputed that Irwin received phone inquiries from individuals who had purchased Irwin products from its wholesale customers. However, when it received these calls, Irwin directed the callers back to the retailer.

¶5 Irwin's strategy for developing retail sales was to offer particular products for sale through infomercials. Once the retail sales of those products peaked, Irwin planned to offer the same products to its established retailers and distributors, with the goal of maximizing revenue from both retail and wholesale sales. From 2004 through 2009, Irwin's retail sales used third party companies for its advertising and promotion, solicitation and taking of consumer orders, assembly and shipment, collection of consumer payments, and customer service inquiries.

¶6 In 2004, Irwin implemented its retail strategy with its Dual Action Cleanse product, under the brand “Cellular Research” Formulas. It marketed the product directly to Washington consumers through infomercials. CP at 47–48. Annual retail sales of Dual Action Cleanse peaked just short of $2 million dollars in 2006. As planned, Irwin made the product available to its retailers who advertised the product through “As Seen on TV” campaigns at a much lower price. But the market did not immediately shift from retail sales to wholesale sales. In 2007 and 2008, Irwin's retail sales far exceeded those of its retailers. Irwin's annual retail revenues were approximately $1.3 million and $820,000 respectively and its annual wholesales revenues were approximately $45,000 and $91,000, respectively. By 2009, Irwin's annual revenue was still comparable to that of its retailers, approximately $635,000 and $693,000, respectively.

¶7 From 2002 through 2009, Irwin earned approximately $10 million in gross revenue from wholesale sales. From 2004 through 2009, Irwin earned approximately $5 million in gross revenue on its retail sales. DOR audited Irwin's records and issued assessments for unpaid business and occupation, retail sales, and litter taxes for 2002 through 2008. Although Irwin disputed the amount assessed on it retail sales, it paid the assessment under protest along with penalties and interest. Irwin filed this action seeking a refund for the disputed amount under RCW 82.32.180

.

¶8 The parties filed cross-motions for summary judgment. The trial court rejected Irwin's argument that the tax violated the commerce clause and granted DOR's motion. It concluded that because Irwin's retail sales had a substantial nexus to Washington, the revenues from those sales were properly subject to the State's B & O and sales tax. Irwin appeals.

DISCUSSION

¶9 We review a decision granting summary judgment de novo, engaging in the same inquiry as the trial court and viewing the facts and inferences in the light most favorable to the non-moving party. Lamtec Corp. v. Dep't. of Revenue, 151 Wash.App. 451, 456, 215 P.3d 968 (2009)

. Summary judgment is proper when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Id. The parties agree that there are no genuine issues of material fact; Irwin contends that the trial court should have granted summary judgment in its favor.

¶10 Irwin claims that its retail sales are separate and distinct from its wholesale activities in Washington. As a result, it contends that the commerce clause prohibits Washington from imposing either the B&O tax or an obligation to collect a sales tax.² In support of its argument concerning the B & O tax, Irwin relies primarily on Norton Co. v. Dep't of Revenue, State of I ll ., 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951)

. That case held that an interstate seller who engages in activities within a state can still avoid taxation on some in-state sales by showing that particular transactions are dissociated from the local business and solely interstate in nature. Id. at 537, 71 S.Ct. 377. As to the use tax, Irwin concedes Nat'l Geographic Soc. v. Cal. Bd. of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977)

, “held that the taxpayer was not permitted to dissociate its mail order sales for sales and use tax purposes.” Brief of Appellant at 23. But it contends that recent U.S. Supreme Court cases interpreting the commerce clause, particularly Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977) and Quill Corp. 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91, have “diminished, if not tacitly overruled, the holding in National Geographic” and “ma[de] clear that dissociation applies to all tax types.” Br. of Appellant at 23; 28.

¶11 DOR takes the opposite view. It contends that dissociation is no longer a viable means for an interstate seller to avoid a tax imposed by a state with which it has a substantial nexus. As to the sales tax, DOR relies primarily on National Geographic

and notes Irwin's concession “that National Geographic, if still good law, forecloses its argument.” Brief of Respondent at 17. But DOR also concedes, as it must, that National Geographic does not expressly apply to a B & O tax. Nonetheless, DOR argues that Irwin's reliance on Norton to contest that tax, is misplaced. According to DOR, Norton's precedential vitality has been undermined by more recent U.S. Supreme Court cases, specifically, Gen. Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964) and Tyler Pipe Indus., Inc. v. Wash. Dep't of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987)which overruled Gen. Motors

on other grounds). It also cites a recent decision by Division Two of this court which rejected an interstate seller's reliance on dissociation to contest B & O tax liability. Avnet v. State, Dep't of Revenue, 187 Wash.App. 427, 348 P.3d 1273 (2015), review granted, 184 Wash.2d 1026, 364 P.3d 120 (2016).

¶12 We conclude that an out-of-state corporation is not subject to a state tax if it can prove the sales or activity in question does not have a substantial nexus to the taxing state. For purposes of a sales tax, a substantial nexus exists if the corporation has a presence in the taxing state. For purposes of a B & O tax, a substantial nexus exists if the corporation's in-state activity aids in establishing or maintaining a market within the taxing state. We further conclude, for the reasons explained below, that Irwin has not proved that it does not have a substantial nexus with Washington and accordingly, it is liable for both taxes on its retail sales in Washington.

¶13 We first address Irwin's...