Orthotic Shop, Inc. v. Dep't of Revenue ( 2024 )

FILED
JANUARY 23,2024
In the Office of the Clerk of Court
WA State Court of Appeals Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION THREE
ORTHOTIC SHOP, INC., a Michigan )
corporation AND S & F ) No. 39321-6-III
CORPORATION, a Minnesota )
corporation, )
)
Appellant, )
) UNPUBLISHED OPINION
v. )
)
STATE OF WASHINGTON )
DEPARTMENT OF REVENUE, )
)
Respondent. )
FEARING, C.J. — Orthotic Shop Inc. and S&F Corporation sell products on the
Amazon website. In this appeal, the two merchants disavow tax liability, under the
Washington State business and occupation tax (B&O) scheme and the sales tax program,
for products sold on the website and stored by Amazon in Washington State. We affirm
the Department of Revenue’s assessments of taxes against the two.
FACTS
We garner the facts primarily from the board of tax appeals’ findings of fact and
conclusions of law. This case arises from the nonpayment of sales taxes for the sales of
goods in Washington State and from the nonpayment of business and occupation (B&O)
taxes on income generated from the storage of goods in Washington State.
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
The appellant merchants Orthotic Shop Inc. (Orthotic Shop) and S&F Corporation
(S&F) sell products on Amazon.com by participating in Amazon’s Fulfillment by
Amazon (FBA) program. S&F, a Minnesota company, sells cell phone accessories.
Orthotic Shop, a Michigan company, sells orthotic footwear.
To participate in the FBA program, a merchant must sign a contract, with Amazon
Services, LLC (Amazon), entitled Amazon Services Business Solutions Agreement
(BSA). Under the BSA, the merchants, identified as “seller,” pay Amazon monthly
subscription fees, referral fees, and closing fees for sales.
S&F and Orthotic Shop disclose information about their respective products on a
selling page on Amazon’s website. The selling page lists each of the companies as the
seller of their respective goods.
The merchants do not ship their products directly to customers. Instead, under the
FBA program, the merchants, at their own cost, send the products to an Amazon
warehouse and Amazon ships the goods to the purchasers. The BSA reads that Amazon
will store the seller’s goods, keep electronic records to track the inventory, and may
comingle the goods with other goods. The BSA allows Amazon to “move Units
[products] among facilities.” Clerk’s Papers (CP) at 25. A section of the BSA addresses
the implications of Amazon’s storing of products on tax liability:
“F-14 Tax Matters. You understand and acknowledge that storing
Units at fulfillment centers may create tax nexus for you in any country,
state, province, or other localities in which your units are stored, and you
2
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
will be solely responsible for any taxes owed as a result of such storage. If
any Foreign Shipment Taxes or Your Taxes are assessed against us as a
result of performing services for you in connection with the FBA program
or otherwise pursuant to these FBA Service Terms, you will be responsible
for such Foreign Shipment Taxes and Your Taxes and you will indemnify
and hold Amazon harmless from such Foreign Shipment Taxes and Your
Taxes as provided in Section F-10 of these FBA service terms.”
CP at 25 (emphasis added) (boldface omitted).
Other language in the BSA also addresses payment of any sales and other taxes
owed as a result of fulfillment services performed by Amazon.
Tax Matters: As between the parties, you [seller] will be responsible
for the collection, reporting, and payment of any and all of Your Taxes,
except to the extent that (i) Amazon automatically calculates, collects, or
remits taxes on your behalf according to applicable law; or (ii) Amazon
expressly agrees to receive taxes or other transaction-based charges on your
behalf in connection with tax calculation services made available by
Amazon and used by you.
“Your Taxes” means any and all sales, goods and services, use,
excise, premium, import, export, value added, consumption, and other
taxes, regulatory fees, levies (specifically including environmental levies),
or charges and duties assessed, incurred, or required to be collected or paid
for any reason (a) in connection with any advertisement, offer or sale of
products or services by you on or through or in connection with the
Services (b) in connection with any products provided for which Your
Products are, directly or indirectly, involved as a form of payment or
exchange; or (c) otherwise in connection with any action, inaction, or
omission of you or your Affiliates . . . . Also, if the Elected country is the
United States, Mexico, or Canada as it is used in the Fulfillment by
Amazon Service Terms, this defined term also means any of the types of
taxes, duties, levies, or fees mentioned above that are imposed on or
collectable by Amazon or any of its Affiliates in connection with or as a
result of fulfillment services including the storage of inventory of packaging
of Your Products and other materials owned by you and stored by Amazon
. . . . The Selling on Amazon Service (“Selling on Amazon”) is a Service
3
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
that allows you to offer certain products and services directly on the
Amazon Sites.
CP at 24-25 (emphasis added) (footnotes omitted) (boldface omitted) (alteration in
original).
As if two other paragraphs about tax liability did not suffice, the BSA incorporates
a tax indemnity clause:
In addition to your obligations under Section 6 of the General Terms
of this Agreement, you also agree to indemnify, defend, and hold harmless
us, our Affiliates, and our and their respective officers, directors,
employees, representatives, and agents against any Claim that arises from
or relates to: . . . (c) any of Your Taxes or the collection, payment, or failure
to collect or pay Your Taxes; and if applicable (d) any sales, use, value
added, personal property, gross receipts, excise, franchise, business, or
other taxes or fees.
CP at 26 (emphasis added) (alteration in original).
The BSA includes other onerous terms on the merchant sellers. Amazon disclaims
any duties as a bailee. The sellers
“WAIVE ALL RIGHTS AND REMEDIES OF A BAILOR
(WHETHER ARISING UNDER COMMON LAW OR STATUTE OR
OTHERWISE) RELATED TO OR ARISING OUT OF ANY
POSSESSION, STORAGE, OR SHIPMENT OF YOUR PRODUCTS BY
US [Amazon].”
CP at 25.
In March 2016, the State Department of Revenue requested that S&F complete a
questionnaire regarding business activities in Washington State. S&F completed and
returned the questionnaire to the Department that same month. S&F answered that it sold
4
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
products at retail to consumers in Washington and gained $170,719 of gross retailing
revenue from those sales in 2015. At the Department of Revenue’s request, S&F also
sent Amazon Inventory Event Detail reports, which listed all shipments and warehouse
transfers occurring in Amazon-owned warehouses during the tax period.
The Department of Revenue audited S&F for the period March 17, 2011 through
March 31, 2016, using sales data sent by S&F. Based on the audit, the department issued
tax assessments totaling $231,354.00, $157,563.00 of which represented the total of retail
sales tax and retailing B&O tax, and the balance constituted interest and penalties. The
audit report asserted that S&F maintained a nexus to Washington State because it had a
stock of goods in Amazon warehouses located in Washington starting in March 2011 and
continuing through the audit period.
In a declaration, Shung Log, the owner and founder of S&F, testified that, when
S&F began using Amazon’s FBA in 2010, Amazon did not instruct it to collect sales tax
in Washington. He declared that he understood, consistent with the widespread
understanding of merchants participating in the FBA program, that S&F only needed to
collect sales taxes in the state of Minnesota, its headquarters and physical place of
business. He highlighted that the definition of “Your Taxes” in the BSA did not explain
what “our taxes” represents.
5
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
Between September 2017 and June 2018, the Department of Revenue sent letters
to Orthotic Shop that requested the company complete a department questionnaire.
Orthotic Shop never responded.
The Department of Revenue later requested and received copies of Orthotic
Shop’s Amazon Inventory Event Detail reports, which listed all shipments and warehouse
transfers that occurred in Amazon warehouses during the tax period. Based on the
reports, the department audited Orthotic Shop and issued an assessment of $213,011.00
for the period December 31, 2013, through March 31, 2018. The department later revised
the assessment to $214,242.59.00. The assessment notice did not segregate the amounts
for taxes, interest, or penalties. The audit report asserted that Orthotic Shop had a nexus
with Washington State because of the storage of goods in warehouses in Washington.
In a declaration, Matthew Behnke, the president of Orthotic Shop, testified
identically to Shung Log, the president of S&F. According to Behnke, when Orthotic
Shop began participating in Amazon’s FBA program in 2010, Amazon did not instruct it
to collect sales tax in Washington. Behnke understood that Orthotic Shop only needed to
collect sales taxes in the state of Michigan, the business’ base and physical place of
operations. Behnke underscored that the definition of “Your Taxes” in the BSA did not
actually explain what “our taxes” actually represents. CP at 31.
6
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
PROCEDURE
S&F and Orthotic Shop respectively appealed the Department of Revenue’s
assessments to the Washington State Board of Tax Appeals. The merchants moved to
consolidate the appeals for a single hearing. The Board of Tax Appeals granted the
motion. Both sides filed competing summary judgment motions.
The Board of Tax Appeals granted the Department of Revenue’s summary
judgment motion and thereby affirmed the tax assessments against both S&F and
Orthotic Shop. The board entered the following conclusions of law:
2. Washington’s B&O tax is intended to apply to virtually all
business activities carried on within the state, and to leave practically no
business and commerce free of . . . tax. Simpson [Inv., Co. v. Dep’t of
Revenue, 141 Wn.2d 139, 149, 3 P.3d 741 (2001)]. Retailing B&O, and the
duty to collect retail sales tax, is imposed on every person engaged in the
business of making retail sales, unless an exemption applies.
[RCW 82.04.220, RCW 82.04.250, RCW 82.08.020, RCW 82.08.050].
3. A taxpayer claiming to be exempt from a tax has the burden of
establishing the exemption. Gartner, [Inc., v. Department of Revenue, 11
Wn. App. 2d 765, 733, 455 P.3d 1179 (2020)]. The Taxpayers had goods
stored in Washington that were sold to buyers in Washington. The
Taxpayers have provided no persuasive arguments that would exempt them
from the B&O tax.
4. Persons making retail sales of goods to buyers in Washington, as
the merchants do, are liable for retailing B&O tax. [RCW 82.04.250. See
also Bucoda Trailer Park, Inc. v. State, 17 Wn. App.79, 81, 561 P.2d 1100(1977)].
5. A “seller” is “every person . . . making sales at retail or retail sales
to a buyer, purchaser, or consumer, whether as an agent, broker, or
principal. . . .” [RCW 82.08.010(2)(a) (in effect during the audit periods at
issue)]. A seller is required to collect the sales tax from the buyer, and if
the seller fails to do so, is “personally liable to the state for the amount of
the tax.” [RCW 82.08.050.]
7
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
6. The Taxpayers are sellers of goods to buyers in Washington and
were required to collect and remit the sales tax. The Taxpayers have
argued that they did not know that they had a tax-collecting responsibility
to Washington state once they had goods in the state. There is a universal
maxim that ignorance of the law excuses no one. Leshner v. Dep’t of Labor
[&] Indus., 27 Wn.2d 911, 926, 185 P.2d 113 (1947). The Taxpayers
cannot rely on ignorance of the law to excuse their failure to
collect and remit Washington’s taxes. Further, Amazon’s contracts
specifically noted this as a possibility.
....
8. The Taxpayers have argued that Amazon should have collected
and remitted sales taxes as the consignee of the goods. In 2019 the
Washington legislature enacted SSB 5581, which explicitly required most
marketplace facilitators to collect and remit sales taxes to Washington
starting January I, 2020. The legislature is presumed not to engage in “vain
and useless acts”. [Fifteen-O-One Fourth Ave. Ltd., Partnership v. Dep’t of
Revenue, 49 Wn. App. 300, 303, 742 P.2d 747 (1987)]. If the legislature
thought marketplace facilitators could be required to collect taxes prior to
the 2019 act, it would not have needed to enact new laws.
CP at 48-49.
S&F and Orthotic Shop appealed the Board of Tax Appeals’ decision to the
superior court. The superior court forwarded the appeal to this court for direct review
under RCW 34.05.518.
LAW AND ANALYSIS
This appeal concerns two distinct Washington taxes and statutory schemes: (1)
business and occupation taxes, and (2) sales taxes. We begin with the B&O tax.
Washington State imposes the B&O tax on every person or entity for the act or
privilege of engaging in business activities in the state. RCW 82.04.220. Every person
or entity making retail sales in Washington must pay the retailing B&O tax on its gross
8
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
proceeds of sales. RCW 82.04.250. A retail sale is defined, in relevant part, as “every
sale of tangible personal property . . . to all persons.” RCW 82.04.050.
RCW 82.04.480 provides:
(1) Every consignee, bailee, factor, or auctioneer having either actual
or constructive possession of personal property, or having possession of the
documents of title thereto, with power to sell such personal property in that
person’s own name and actually so selling, is deemed the seller of such
personal property within the meaning of this chapter. Furthermore, the
consignor, bailor, principal, or owner is deemed a seller of such property to
the consignee, bailee, factor, or auctioneer.
(2) The burden is on the taxpayer in every case to establish the fact
that the taxpayer is not engaged in the business of making retail sales or
wholesale sales but is acting merely as broker or agent in promoting sales
for a principal. Such claim will be allowed only when the taxpayer’s
accounting records are kept in such manner as required by rule by the
department.
(3) For purposes of this section, “personal property” means tangible
personal property, digital goods, digital codes, and extended warranties.
The Washington State Department of Revenue adopted administrative rules
imposed on B&O taxes in the potential instance of a cosignment. Rule 159 provides, in
relevant part:
A consignee, bailee, factor, agent or auctioneer, as used in this
ruling, refers to one who has either actual or constructive possession of
tangible personal property, the actual ownership of such property being in
another, or one calling for bids on such property. The term “constructive
possession” means possession of the power to pass title to tangible personal
property of others.
Business and Occupation Tax
Retailing and wholesaling. Every consignee, bailee, factor, agent or
auctioneer having either actual or constructive possession of tangible
9
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
personal property, or having possession of the documents of title thereto,
with power to sell such tangible personal property in his or its own name
and, actually so selling, shall be deemed the seller of such tangible personal
property and taxable under the retailing or wholesaling classification of the
business and occupation tax, depending upon the nature of the transactions.
In such case the consignor, bailor, principal or owner shall be deemed a
seller of such property to the consignee, bailee, factor or auctioneer and
taxable as a wholesaler with respect to such sales.
The mere fact that consignee, bailee or factor makes a sale raises a
presumption that such consignee, bailee or factor actually sold in his or its
own name. This presumption is controlling unless rebutted by proof
satisfactory to the department of revenue.
WAC 458-20-159 (boldface omitted.)
The Department of Revenue also provided guidance on tax responsibilities of
entities making consignment sales:
Owner’s Tax Reporting
If the owner of the consigned goods is engaged in a business
activity, then they are also subject to the B&O tax on income they receive
from the sales of their goods and may be required to remit the sales tax.
We assume a person is engaged in business if they put themselves out to the
public as being a business or make sales on more than a periodic basis.
When the consigned goods are sold by a consignee acting as an
agent for the owner:
If the seller acts pursuant to an agency relationship and keeps their
books as an agent under WAC 458-20-159, then the owner of the goods
should report as follows:
• Report consignment sales under the Retailing B&O tax
classification.
• Report consignment sales under the Retail Sales tax classification.
If the consignee remits the sales tax to the Department, the owner may take
a deduction from retail sales tax. On the deduction detail section of the tax
return, identify the deduction as Sales tax reported by agent. (WAC 458-
20-159) Otherwise, remit sales tax (both state and local sales taxes).
10
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
CP at 42-43 (boldface omitted).
Washington law intends to apply the B&O tax to virtually all business activities
carried on within the state and to leave practically no business and commerce free of tax.
Simpson Investment Company v. Department of Revenue, 141 Wn.2d 139, 149, 3 P.3d
741 (2001). The retailer B&O tax is imposed on every person engaged in the business of
making retail sales, unless an exemption applies.
The merchants S&F and Orthotic Shop agree that they sold goods to consumers.
They agree that they delivered the goods to Amazon and that Amazon stored some of the
goods in Amazon’s Washington warehouses. The merchants agree that they provided
information about the products used by Amazon to create a selling page for the respective
products on Amazon’s website. The merchants concede that the selling page lists them
as the sellers of the goods. Finally, the merchants agree that they sell the goods to
consumers in Washington. But the merchants argue that Amazon, as the consignee, sold
the goods in retail to the consumers such that they avoid liability for any B&O tax.
A consignee makes sales on behalf of the consignor. The B&O statute explains
that the consignee, if selling the goods in its own name, is the seller of the goods.
RCW 82.08.040(1) reads, in relevant part:
Every consignee, bailee, factor, or auctioneer selling or calling for
bids on personal property belonging to another, is deemed the seller of such
personal property within the meaning of this chapter.
11
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
The consignor is, under Washington law, still a seller of those goods.
The Amazon website product pages for the goods of S&F and Orthotic Shop did
not list Amazon as the seller. The respective pages identified S&F and Orthotic Shop as
the sellers. In turn, no facts suggest that the merchants made wholesale sales to Amazon.
The merchants agree that they did not sell goods to Amazon, the purported consignee.
Logically, if the merchants did not sell their products to Amazon, they must sell the
goods to the consumers.
Since the merchants sold to buyers, they are liable for retailing B&O tax on those
sales. This conclusion accords with the merchants’ descriptions of their business
activities and the contractual agreements between the merchants and Amazon to sell
goods on Amazon’s site.
A separate statutory chapter governs the retail sales tax. RCW 82.08.010(2)(a)(i),
in effect during the audit periods in question in these cases, defines “seller,” for purposes
of the tax, as: “every person, including the state and its departments and institutions,
making sales at retail or retail sales to a buyer, purchaser, or consumer, whether as agent,
broker, or principal.” A seller must collect the sales tax from the buyer, and, if the seller
fails to do so, the seller becomes personally liable to the state for the amount of the tax.
RCW 82.08.050.
The State imposes retail sales tax “on each retail sale in this state of . . . [t]angible
personal property.” RCW 82.08.020(1)(a). RCW 82.08.040 declares:
12
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
(1) Every consignee, bailee, factor, or auctioneer selling or calling
for bids on personal property belonging to another, is deemed the seller of
such personal property within the meaning of this chapter. All sales made
by such persons are subject to the provisions of this chapter even though
the sale would have been exempt from the tax imposed in this chapter had it
been made directly by the owner of the property sold.
(2)(a) Except as provided in (b) of this subsection (2), every
consignee, bailee, factor, or auctioneer must collect and remit the amount of
tax due under this chapter with respect to sales made or called by that seller.
(b) If the owner of the property sold is engaged in the business of
making sales at retail in this state, the tax imposed under this chapter may
be remitted by such owner under such rules as the department may adopt.
The Washington State Department of Revenue adopted administrative rules
imposed on sales taxes. Rule 159 provides, in relevant part:
A consignee, bailee, factor, agent or auctioneer, as used in this
ruling, refers to one who has either actual or constructive possession of
tangible personal property, the actual ownership of such property being in
another, or one calling for bids on such property. The term constructive
possession means possession of the power to pass title to tangible personal
property of others.
Retail Sales Tax
Consignees, bailees, factors, agents or auctioneers. Every consignee,
bailee, factor, agent or auctioneer authorized, engaged or employed to sell
or call for bids on tangible personal property belonging to another, and, so
selling or calling, is deemed a seller, and shall collect the retail sales tax
upon all retail sales made by him, except sales of certain farm property as
hereinafter provided. The tax applies to all such sales even though the sales
would have been exempt if made directly by the owner of the property sold.
It shall be the duty of every consignee, bailee, factor, agent or
auctioneer to collect and remit the retail sales tax directly to the department
with respect to all retail sales made or called by them: Provided, however,
[t]hat if the owner of the property sold is engaged in the business of selling
tangible property and the sale by the consignee, bailee, factor, agent or
auctioneer has been made in the owner’s name and the owner continues to
13
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
engage in business, the owner may report and pay the tax collected directly
to the department.
WAC 458-20-159 (boldface omitted).
RCW 82.08.040(2)(b) explains that a person, who is a seller of goods to people in
this state, may be required to report the retail sales tax when selling through a consignee.
Rule 159 explains that when the consignee is selling in the name of the seller, the seller
may report and remit the retail sales tax.
The Department of Revenue explained in the Department’s Industry Guide for
Convenience Stores, Tax Reporting for Consignment Sales, that the consignee is
generally responsible for remitting the sales tax to the department. Nevertheless, if the
owner of the goods registers with the department and otherwise reports sales tax, the
consignee can remit the sales tax to the owner to report.
S&F’s name and Orthotic Shop’s name are listed as the seller on their respective
Amazon sales pages. Buyers saw the listing of the seller before finalizing the transaction.
Even if the arrangement between Amazon and the merchants involved a consignment, the
merchants, as sellers, remained ultimately responsible for collecting and remitting the tax.
The merchants argue that Amazon, as consignee, should have collected and
remitted the sales tax to the state. But Amazon did not do so, and Amazon’s BSA read
that it will not do so unless the merchant elects for Amazon to do so. The merchants
never asked Amazon to collect sales taxes for them in Washington. Regardless, the
14
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
merchants failed to show that the agreement between them and Amazon is a consignment
agreement. To the contrary, the contract reads that its purpose is to facilitate the
merchants’ ability to sell their own goods through Amazon’s site.
The merchants contend that they did not know what the language in the agreement
meant. In addition, they assert that they lacked an understanding that they could incur a
tax collection liability in other states because of the storage of their merchandise in those
states. They maintain that their understanding of tax law during the audit periods at issue
was that the seller only had to collect sales taxes in states in which the merchants were
physically located. The merchants cannot rely on ignorance or a lack of understanding.
Ignorance of the law excuses no one. Leshner v. Department of Labor & Indus., 27
Wn.2d 911, 926, 185 P .2d 113 (1947).
The merchants insist that the Department of Revenue should not allow Amazon to
avoid its tax liabilities through contract or by its use of affiliates. The merchants may
insist on a change in the contract when the current one expires.
In 2019, the Washington Legislature enacted SSB 5581, which explicitly requires
most marketplace facilitators to collect and remit sales taxes to Washington starting
January 1, 2020. LAWS OF 2019, ch. 8. We presume the legislature does not engage in
vain and useless acts. Fifteen-O-One Fourth Ave. Ltd., Partnership v. Dep’t of Revenue,
49 Wn. App. 300, 303 (1987). If the legislature thought that the law before SSB 5581
15
No. 39321-6-III,
Orthotic Shop, Inc. v. Department of Revenue
required marketplace facilitators such as Amazon to collect taxes, it would have faced no
need to enact the new provisions.
CONCLUSION
We uphold the Department of Revenue’s assessments of tax liabilities against
S&F and Orthotic Shop.
A majority of the panel has determined this opinion will not be printed in the
Washington Appellate Reports, but it will be filed for public record pursuant to RCW
2.06.040.
______________________
Fearing, C.J.
WE CONCUR:
______________________________
Staab, J.
______________________________
Cooney, J.
16