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STATE OF WASHINGTON,                                                           VJ3    3C*K--

DEPARTMENT OF REVENUE,

                       Respondent.                      FILED: July 25, 2016

       Spearman, J. — 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 &0) 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.




       1 Irwin does not contest the taxes assessed on its wholesale sales.
No. 73966-2-1/2


                                      FACTS

       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.

       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
No. 73966-2-1/3


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.


       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.

          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.

          In 2004, Irwin implemented its retail strategy with its Dual Action Cleanse

product, under the brand "Cellular Research" Formulas. It marketed the product
No. 73966-2-1/4


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.

       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.

       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
No. 73966-2-1/5


nexus to Washington, the revenues from those sales were properly subject to the

State's B&O and sales tax. Irwin appeals.

                                         DISCUSSION

        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 Wn. 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.

        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 III., 340 U.S. 534, 71

S.Ct 377, 95 L.Ed 517 (1951). That case held that an interstate seller who



        2 The issue in this case concerns what is frequently referred to as the "dormant" or
"negative" commerce clause. As explained in Quill Corp. v. North Dakota by and through
Heitkamp, 504 U.S. 298, 309,112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), "the Commerce Clause is
more than an affirmative grant of power; it has a negative sweep as well. The Clause ... 'by its
own force' prohibits certain state actions that interfere with interstate commerce" (quoting South
Carolina State Highway Dep't v. Barnwell Brothers. Inc.. 303 U.S. 177, 185, 58 S.Ct. 510, 82
L.Ed.734 (1938). All references to the commerce clause in this opinion pertain to this aspect of
commerce clause jurisprudence.
No. 73966-2-1/6


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. 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. 374, 97 S.Ct.

1076, 51 LEd.2d 326 (1977) and Quill Corp. 504 U.S. 298, 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.

       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,
No. 73966-2-1/7


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 Wn. App. 427, 348 P.3d 1273 (2015), review granted. 184

Wn.2d 1026, 364 P.3d 120 (2016).

       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.

       We first address Irwin's liability for the sales tax. We begin with a

discussion of the two cases upon which the parties principally rely.

       In Norton, 340 U.S. at 535, a Massachusetts corporation, sold machines

and supplies in Illinois through an in-state office and warehouse in Chicago. But

the record appeared to show that some sales occurred directly between a

customer and the home office in Massachusetts without any intervention by the

Chicago office. In these instances orders were sent by the customer directly to

the home office which, in turn, sent the purchased product directly to the
No. 73966-2-1/8


customer. Jd. at 539. Even though the Illinois tax statute specifically exempted

"business in interstate commerce" as required by the commerce clause of the

U.S. Constitution, the state collected a B&O tax on these direct sales as well as

those that went through Norton's Chicago facilities, id. at 535-36.

       The Illinois Supreme Court affirmed the lower court's finding that the tax

was validly imposed even though, as the Norton court observed, it acknowledged

that "'there could be no tax on solicitation of orders only' in the State." jd. at 537

(quoting Norton Co. v. Dep't of Revenue, 405 III. 314, 320, 90 N.E.2d 737

(1950)). The Illinois court concluded that "the presence of [Norton's] local retail

outlet, in the circumstances of this case, was sufficient to attribute all income

derived from Illinois sales to that outlet and render it all taxable." Id. The Norton

court explicitly rejected this reasoning because a B&O tax is a direct tax that

"falls on the vendor." jd. The court concluded that the presence of a local office in

the state was, by itself, insufficient to support the imposition of a B&O tax on

transactions that did not involve the local office in any way. The court stated:

       Where a corporation chooses to stay at home in all respects except
       to send abroad advertising or drummers to solicit orders which are
       sent directly to the home office for acceptance, filling, and delivery
       back to the buyer, it is obvious that the State of the buyer has no
       local grip on the seller. Unless some local incident occurs sufficient
       to bring the transaction within its taxing power, the vendor is not
       taxable.


IdL, (citing McLeod v. J.E. Dilworth Co., 322 U.S. 327, 64 S.Ct. 1023, 88 L.Ed.

1304(1944)).




                                           8
No. 73966-2-1/9


       The court expressly limited its holding to a tax like a B&O tax, because it is

imposed directly on the vendor. It did not express an opinion on whether in the

case of a sales or use tax, the mere presence of a local office was sufficient to

bring the vendor within the state's taxing power. The court did note, however,

that the state's burden of establishing its right to impose a tax was "more easily"

met in that context, "because the impact of those taxes is on the local buyer or

user." Id. Thus, for B&O taxes, the court concluded that a corporation "can avoid

taxation on some Illinois sales only by showing that particular transactions are

dissociated from the local business and interstate in nature." jd. But it left for

another day the showing necessary to dissociate in the case of a sales or use

tax.


       The opportunity to address that issue arose in Nat'l Geographic, 430 U.S.

551. There, the National Geographic Society, a District of Columbia (D.C.)

corporation, maintained two offices in California that solicited advertising copy for

the Society's monthly magazine. The California offices performed no activities

related to the Society's operation of a mail order business for the sale of maps,

atlases, globes, and books from its offices in D.C. Orders for these items were

solicited by inserts in magazines or other announcements mailed to subscribers

and Society members. Orders and payments were sent directly to the Society's

D.C. headquarters. Purchased items were mailed directly to the consumer from

the Society's D.C. or Maryland offices.
No. 73966-2-1/10


       California law required retailers "'engaged in business in this state and

making sales of tangible personal property for storage, use, or other consumption

in this state' to collect from the purchaser a use tax in lieu of a sales tax imposed

upon local retailers." Nat'l Geographic, 430 U.S. at 553, (quoting California Rev.

&Tax Code § 6203 (West Sup. 1976)). The retailer is liable for the full amount of

the tax whether collected or not. jd. The California Supreme Court held that the

Society was liable for the tax and the U.S. Supreme Court accepted its appeal.

       As framed by Justice Brennan, the question before the court was "whether

the Society's activities at the offices in California provided sufficient nexus

between the out-of-state seller appellant and the State as required by the Due

Process Clause of the Fourteenth Amendment and the Commerce Clause to

support the imposition upon the Society of a use-tax-collection liability. ..." Id. at

554.


       The Society argued that to impose use-tax-collection liability "there must

exist a nexus or relationship not only between the seller and the taxing State, but

also between the activity of the seller sought to be taxed and the seller's activity

within the State." Id, at 560. It maintained that because its mail order sales were

separate and distinct from the activities of its two in-state offices which involved

only soliciting advertising copy, the requisite nexus or relationship was not

present. The Court disagreed. It concluded that while a transactional nexus may

be necessary to sustain a direct tax, like that at issue in Norton, "such

dissociation does not bar the imposition of the use-tax-collection duty." jd. It was

                                          10
No. 73966-2-1/11


sufficient that the Society had a "substantial presence" in the state, which

included two offices that solicited approximately $1 million dollars of business

annually, jd. at 556. The court held that,

       the relevant constitutional test to establish the requisite nexus for
       requiring an out-of-state seller to collect and pay the use tax is not
       whether the duty to collect the use tax relates to the seller's activities
       carried on within the State, but simply whether the facts demonstrate
       some definite link, some minimum connection, between 'the State
       and the person ... it seeks to tax.'

id, at 561, (quoting Miller Bros, v. Maryland, 347 U.S. 340, 344-345, 74 S.Ct.

535, 98 L.Ed. 744 (1954)).

       In light of this holding, DOR relies heavily on National Geographic to

support its claim that Irwin is liable for the sales tax obligation at issue here. Irwin

contends however, that the decision is not controlling. It claims the decision may

be disregarded as "an anachronistic landmark" in the evolution of the Court's

commerce clause jurisprudence. Reply Br. of Appellant at 10.

       Irwin argues that National Geographic's commerce clause analysis fails to

distinguish between the nexus necessary to satisfy the due process clause and

that necessary to satisfy the commerce clause. It argues that the analysis

conflates the issues and thus, fails to explicitly address commerce clause

concerns regarding the free flow of commerce between the states. Instead, its

conclusion that sufficient nexus was established by "some minimum connection,

between 'the State and the person ... it seeks to tax'" actually addressed only

due process concerns with notice and fundamental fairness. National


                                             11
No. 73966-2-1/12


Geographic, 430 U.S. at 561, (quoting Miller Bros., 347 U.S. at 344-45). For that

reason, according to Irwin, the case does not control here. Irwin cites Quill Corp.,

504 U.S. 298, in support of this argument.

       Quill was a Delaware corporation with offices in several states, but it

owned no property in North Dakota nor did any of its employees work or reside

there. Quill solicited customers for its office equipment and supply business

catalogs, flyers, advertisements in national periodical and phone calls. It earned

about $1 million dollars annually from approximately 3000 customers in North

Dakota. Quill delivered all of its merchandise to its North Dakota customers by

mail or common carrier from out-of-state locations. When Quill failed to collect a

use tax from its customers, North Dakota sued, seeking an order directing Quill

to collect and pay the tax. Quill disputed the state's claim, arguing that under the

due process and commerce clauses of the U.S. Constitution, North Dakota did

not have the power to compel it to collect the tax. After the North Dakota

Supreme Court rejected Quill's arguments on both grounds, the U.S. Supreme

Court accepted its appeal.

       The Quill court first observed that although due process and commerce

clause claims are closely related, each poses "distinct limits on the taxing powers

of the States. Accordingly, while a State may, consistent with the Due Process

Clause, have the authority to tax a particular taxpayer, imposition of the tax may

nonetheless violate the Commerce Clause." jd, at 305 (citing Tyler Pipe Indus.,

483 U.S. 232).

                                         12
No. 73966-2-1/13


       Due process centrally concerns the fundamental fairness of
       governmental activity. Thus, at the most general level, the due
       process nexus analysis requires that we ask whether an
       individual's connections with a State are substantial enough to
       legitimate the State's exercise of power over him. We have,
       therefore, often identified 'notice' or 'fair warning' as the
       analytic touchstone of due process nexus analysis. In contrast,
       the Commerce Clause and its nexus requirement are informed
       not so much by concerns about fairness for the individual
       defendant as by structural concerns about the effects of state
       regulation on the national economy.

Id, at 312. These fundamental fairness concerns are met where there is "'some

definite link, some minimum connection, between a state and the person,

property or transaction it seeks to tax[.]'" Id, at 306 (quoting Miller Bros., 347 U.S.

at 344-45).

       Caselaw prior to Quill had utilized a bright line test to determine whether

the due process minimum connection was established in the case of a use tax.

Regardless of other factors, if the foreign corporation engaged in some form of

activity within the taxing state, such as the presence of sales personnel or

maintenance of local retail stores, due process was satisfied. Id, (citing Scripto,

Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960). If not, imposing

the duty to collect the tax was unconstitutional, id, (citing National Bellas Hess,

Inc. v. Dep't of Revenue of III., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505

(1967)) (overruled by Quill only as to the due process clause analysis).

       Quill noted, however, that in the 25 years since Bellas Hess, due process

jurisprudence had evolved substantially:



                                          13
No. 73966-2-1/14


       [W]e have abandoned more formalistic tests that focused on a
       defendant's 'presence' within a State in favor of a more flexible
       inquiry into whether a defendant's contacts with the forum made
       it reasonable, in the context of our federal system of
       Government, to require it to defend the suit in that State.

id, at 307. Accordingly, the court overruled those cases applying a presence/non-

presence bright-line test, id, at 308. Instead, the court held that due process is

satisfied if"a foreign corporation purposefully avails itself of the benefits of an

economic market in the forum State." Id, at 307. Because it was beyond question

that Quill had done so in North Dakota, imposition of the duty to collect the use

tax did not offend the due process clause, id, at 308.

       The Quill court then turned to the nexus necessary under the commerce

clause. It noted that the commerce clause jurisprudence had likewise trended

away from formalism and bright-line tests. The court cited Complete Auto, 430

U.S. 374, as a case which "emphasized the importance of looking past 'the

formal language of the tax statute [to] its practical effect." Id, at 310 (quoting

Complete Auto, 430 U.S. at 279). Instead, the court in that case set out a flexible

four-part test to govern the validity of state taxes under the commerce clause. A

tax will be sustained against a commerce clause challenge so long as it "is

applied to an activity with a substantial nexus with the taxing State, is fairly

apportioned, does not discriminate against interstate commerce, and is fairly

related to the services provided by the State." Complete Auto, 430 U.S. at 279.

       At first blush, Quill appears to support Irwin's argument that National

Geographic is no longer good law. Quill makes clear that the nexus requirements

                                           14
No. 73966-2-1/15


of the due process clause and the commerce clause are not identical. The court

expressly disagreed with North Dakota's assertion that

       the nexus requirements imposed by the Due Process and
       Commerce Clauses are equivalent and that if, as we concluded
       above, a mail-order house that lacks a physical presence in the
       taxing State nonetheless satisfies the due process 'minimum
       contacts' test, then that corporation also meets the Commerce
       Clause 'substantial nexus' test.

Id, at 312. Quill establishes that the proper test is set forth in Complete Auto and

that for the first factor, which the parties agree is the only factor at issue in this

case, the issue is whether the tax is being applied to an activity with a substantial

nexus with the taxing state.

       But in determining what constitutes a substantial nexus under the

commerce clause for purposes of a sales or use tax, Quill did not reject National

Geographic in its entirety. Instead, the court embraced "'the sharp distinction ...

between mail-order sellers with [a physical presence in the taxing] State and

those ... who do no more than communicate with customers in the State by mail

or common carrier as part of a general interstate business'" as a basis for

determining when a state could properly impose a use tax collection obligation.

Id, at 311 (quoting National Geographic, 430 U.S. at 559). In other words, the

determinative factor in National Geographic, that the Society had a substantial

presence in California, continued to be the determinative factor under Quill. The
Quill court explicitly acknowledged that for purposes of its commerce clause

analysis of the use tax collection obligation it was adopting the same bright-line


                                            15
No. 73966-2-1/16


test of National Geographic and Bellas Hess, that it rejected in its due process

analysis.

       The court also recognized that retaining the bright-line test in the use tax

context went against the trend of eschewing formalistic, inflexible rules, but

observed that "not all formalism is alike." Quill 504 U.S. at 314. The court

concluded that a bright-line demarcating when a state could impose a use tax

obligation was consistent with fundamental commerce clause concerns about the

effects of state regulation on the national economy.

       Like other bright-line tests, the Bellas Hess rule appears artificial at its
       edges: Whether or not a State may compel a vendor to collect a sales or
       use tax may turn on the presence in the taxing State of a small sales
       force, plant, or office. CI National Geographic Society v. California Bd. of
       Egualization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977); Scripto,
       Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960). This
       artificiality, however, is more than offset by the benefits of a clear rule.
       Such a rule firmly establishes the boundaries of legitimate state authority
       to impose a duty to collect sales and use taxes and reduces litigation
       concerning those taxes. . . .
             Moreover, a bright-line rule in the area of sales and use taxes also
       encourages settled expectations and, in doing so, fosters investment by
       businesses and individuals. Indeed, it is not unlikely that the mail-order
       industry's dramatic growth over the last quarter century is due in part to
       the bright-line exemption from state taxation created in Bellas Hess.

Id, at 315-16.

       Because it is undisputed that Irwin has a substantial physical presence in

Washington, we conclude that the commerce clause does not prohibit the state

from imposing on Irwin an obligation to collect the sales tax and because it is

conceded that Irwin failed to do so, the state may properly assess against it the

obligation to pay the amount due.

                                          16
No. 73966-2-1/17


       We turn next to the assessment of the B&O tax against Irwin. The parties

agree that resolution of the issue turns on whether, as to its retail sales, Irwin has

a substantial nexus with Washington. The dispute concerns whether the issue of

"transactional nexus" is essential to establishing a substantial nexus. According

to Irwin, "[i]f a transactional (sic) or activity does not have a transactional nexus

with a state, the taxpayer will have succeeded in dissociating the disputed

transaction or activities[,]" thereby disproving the existence of a substantial

nexus. Br. of Appellant at 8, n.1. Irwin concedes that its wholesale activities have

a transactional nexus with Washington but argues that its retail sales do not. This

is so, it contends, because its retail sales and wholesale sales were completely

independent of each other during the tax period.

       DOR, on the other hand, contends that under modern commerce clause

jurisprudence, establishing a transactional nexus is not essential to finding a

substantial nexus. It argues "[t]here need not be a direct connection between

Irwin's in-state activities and particular sales to impose business and occupation

tax." Br. of Respondent at 29. Relying primarily on Avnet, DOR argues it is only

necessary that "Irwin's in-state activities were significant in establishing and

maintaining a market for its goods in this state." Br. of Respondent at 29.

       Whether an out-of-state company has substantial nexus with Washington

is a question of law reviewed de novo. Space Age Fuels, Inc. v. State, 178 Wn.

App. 756, 762, 315 P.3d 604 (2013). Taxes are presumed valid and it is well
settled that the taxpayer carries the heavy burden of establishing that no

                                           17
No. 73966-2-1/18


substantial nexus exists. Accordingly, here, the burden is on Irwin to establish it

is exempt from the disputed B&O tax assessment.

       Irwin relies primarily on Norton and B.F. Goodrich Co. v. State, 38 Wn.2d

663, 231 P.2d 325 (1951), a case decided by our state supreme court a few

months after Norton. As in Norton, B.F. Goodrich did substantial business within

the taxing state. At issue was whether some of B.F. Goodrich's interstate sales

were subject to the B&O tax. The court acknowledged that under Norton even

"where a corporation has gone into a state to do local business by state

permission, and has set up an office which performs service helpful to its

competition for local trade ... this ... does not prevent it being tax-free with

respect to sales separate and distinct from its local business." jd, at 672. The

critical issue was whether the services rendered by the B.F. Goodrich's

Washington offices were "decisive factors in establishing and holding" the

Washington market. Id, To establish that certain interstate sales are "separate

and distinct," the taxpayer has to show that it does not "channel business through

a local outlet. ..." id, at 673. In other words, the state may not tax "the

proceeds from sales with which the local outlet had nothing to do." id, at 675.

       Applying this test to the facts of the case before it, the B.F. Goodrich court

concluded that the tax was impermissible as to those sales which arose from an

order sent directly from a Washington customer to an out-of-state B.F. Goodrich

office, which was filled and shipped directly to the customer from an out-of-state

office, id, at 673. But interstate sales which were connected to a Washington

                                           18
No. 73966-2-1/19


office in anyway, even if only to approve or deny credit for the Washington

customer, fell within the state's taxing authority.

        Irwin contends that, like Norton, B.F. Goodrich is still good law and

controls the outcome here. According to Irwin, its wholesale activities "had

nothing to do" with its retail sales, thus, the proceeds from the latter are beyond

the reach of Washington's taxing authority.

        In response, DOR cites Avnet for the proposition that the foundation

supporting Norton and B.F. Goodrich "ha[s] been eroded by subsequent

precedent." Avnet, 187 Wn. App. at 445. It argues that the modern test for

substantial nexus is whether the bundle of corporate activity "carried on within

the state supported the taxpayer's ability to establish and hold a market for its in

state sales." Br. of Respondent at 24. According to it, "[n]o direct connection

between Irwin's Washington activities and retail sales is required" to establish a

sufficient nexus to lawfully impose a B&O tax. id.

        In Avnet, the company had a Washington office that engaged in building

and maintaining its worldwide market. Employees at that office serviced

accounts, developed and implemented new marketing programs, recruited new

customers, and offered extensive engineering support. Avnet sought to

dissociate two categories of sales, only one of which is relevant here.3 In its



         3 Avnet's "drop-shipped" sales involve out-of-state customers placing orders with an out-
of-state office but directing Avnet to ship the products directly to a third party in Washington.
Avnet, 187 Wn. App. at 432. This scenario is not at issue in this case.


                                                19
No. 73966-2-1/20


"national sales," Avnet customers placed orders from a location outside of

Washington with an Avnet office also located outside the state, but received the

orders at a Washington location.

       The Avnet court rejected the argument that Norton and B.F. Goodrich

controlled. It first expressed the view that "the United States Supreme Court has

explicitly removed at least two of Norton's chief doctrinal underpinnings." Avnet,

187 Wn. App. at 446. The court cited Scripto, 362 U.S. 207, as rejecting the idea

expressed in Norton, that mere lack of an interstate vendor's presence in a state

was sufficient to insulate sales in that state from a tax. It also cited Complete

Auto as rejecting the then prevailing concept that interstate commerce was

immune from state taxation, a proposition upon which Norton relied. Instead, the

court viewed later cases such as Gen. Motors Corp. and Tyler Pipe Indus., Inc.

as demonstrating "a progressive broadening of the types of activities that may

establish substantial nexus for purposes of state taxation of interstate

commerce." jdL at 447. Relying on those cases, but particularly on Tyler Pipe, the

court concluded that Avnet was liable for the B&O tax on all of its Washington

sales because Avnet's marketing activities in Washington "all served the creation

and maintenance of Avnet's market in Washington, as well as other locations."

id, at 448.

       In Tyler Pipe, the company sold goods in Washington that were

manufactured outside of the state. It maintained no office, owned no property,

and had no employees residing in the state. Tyler Pipe solicited business in

                                          20
No. 73966-2-1/21


Washington through executives whose offices were located out-of-state and by a

firm, retained as an independent contractor, located in Seattle. The trial court

upheld the constitutionality of Washington's B&O tax against Tyler Pipe's

commerce clause challenge, concluding that the state had sufficient nexus to tax

the company. The trial court found that the firm engaged in substantial activities

that helped Tyler Pipe to establish and maintain its market in Washington.

       On appeal to our state supreme court, the firm's activities, as found by the

trial court, were summarized as follows:

       The sales representatives acted daily on behalf of Tyler Pipe in
       calling on its customers and soliciting orders. They have long-
       established and valuable relationships with Tyler Pipe's customers.
       Through sales contacts, the representatives maintain and improve
       the name recognition, market share, goodwill, and individual
       customer relations of Tyler Pipe.

       Tyler Pipe sells in a very competitive market in Washington. The
       sales representatives provide Tyler Pipe with virtually all their
       information regarding the Washington market, including: product
       performance; competing products; pricing, market conditions and
       trends; existing and upcoming construction products; customer
       financial liability; and other critical information of a local nature
       concerning Tyler Pipe's Washington market. The sales
       representatives in Washington have helped Tyler Pipe and have a
       special relationship to that corporation. The activities of Tyler Pipe's
       agents in Washington have been substantial.

Tyler Pipe v. Dep't of Revenue, 105 Wn.2d 318, 325, 715 P.2d 123 (1986).

Despite these extensive activities in support of its Washington market, Tyler Pipe

argued, as Irwin does here, that any receipts "from sales of orders placed directly

to it from its Washington customers should be exempted from Washington's B&O

tax." id, at 36. Our supreme court rejected the argument. The court determined

                                           21
No. 73966-2-1/22


that "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." id, at 323. It

concluded this standard was satisfied because Tyler Pipe's "sales

representatives perform any local activities necessary for maintenance of Tyler

Pipe's market and protection of its interests...." id, at 321. The U.S. Supreme

Court affirmed. It "agree[d] that the activities of Tyler's sales representatives

adequately support the State's jurisdiction to impose its wholesale tax on Tyler."

Tyler Pipe. 483 U.S. at 251.

       We agree with Avnet, that Tyler Pipe controls the analysis of whether a

substantial nexus exists. Tyler Pipe, makes two things clear. First, for businesses

with a presence in the taxing state, the fact that orders are received and filled

out-of-state for delivery within the taxing state does not, by itself, immunize the

sales from a B&O tax. And second, the activities that form the nexus with the

taxing state need not be tied to specific sales, but instead need only generally

support the out-of-state vendor's ability to establish and maintain a market for its

goods in the taxing state. Applying those concepts to this case, it is evident that

the requisite nexus exists to support Washington's imposition of the B&O tax on

all of Irwin's retail sales.

        Irwin's wholesale and retail sales each involved nutritional products. When

Irwin started selling retail products to Washington consumers, it had already had

invested considerable resources into its store presence in Washington. Senior

                                           22
No. 73966-2-1/23


company employees had spent considerable amounts of time in Washington

during the tax period at issue. 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 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 matter. As a result of these activities,

Irwin became very familiar with Washington nutritional products market. It knew

what types of products sold best and for what prices. Like the sales

representatives in Tyler Pipe, Irwin gathered "virtually all their information

regarding the Washington market" through its extensive wholesale marketing and

sales apparatus. Tyler Pipe, 105 Wn.2d at 325.

       Irwin claims that the lack of brand overlap shows that the wholesale and

retail lines were unrelated. The argument is unpersuasive because it ignores that

the packaging for nearly every Irwin product sold at a Washington grocery or

drug store contained 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. While it is likely that these sales resulted in visits

to Irwin's website, it is undisputed that the sales resulted in phone inquiries from

individuals who had purchased Irwin products from its wholesale customers.

Irwin acknowledges receipt of the phone calls but points out that the callers were

                                          23
No. 73966-2-1/24


directed back to the retailer. But the issue is not whether these calls resulted in

specific sales but instead whether it shows that Irwin's wholesale activities were

creating a market for its retail sales. The phone calls resulting from its wholesale

sales show that it was.


       Finally, Irwin's own marketing strategy establishes the symbiotic

relationship between its wholesale activities and retail sales, with each

supporting the other. The admitted goal was "to maximize the revenue of the sale

of 'Dual Action Cleanse' over its product life" by eventually switching the product

from retail to wholesale sales. Br. of Appellant at 14. Irwin claims that because

the strategy "worked in the opposite direction," i.e., utilized its retails sales to

promote its wholesale market, there is no substantial nexus between Washington

and its retail sales. Reply Br. of Respondent at 9. But Irwin cites no authority that

such a relationship between its in-state activities and interstate sales is

insufficient to "adequately support the State's jurisdiction to impose its wholesale

tax." Tyler Pipe, 438 U. S. at 251. Moreover, the record shows that despite

making Dual Action Cleanse available to its retailers, Irwin continued to earn

substantial revenue through its retail sales. Irwin cannot show that these sales

were unrelated to its wholesale activities.

       We conclude that Irwin has not borne its burden of showing that it should

be exempt from imposition of Washington's sales and B&O taxes on all of it retail




                                           24
No. 73966-2-1/25


sales for the alleged tax period. The trial court did not err in granting summary

judgment in favor of DOR.4

        Affirmed.




                                                                 Q>e cir^p^- Q
WE CONCUR:




        4Irwin argues that regardless of the merits of its constitutional claim, the former WAC
458-20-193 (2010) provides an additional basis for dissociation in addition to the common law
issues of nexus. We disagree. The regulation, known as "Rule 193," set forth DOR's view of the
parameters for Washington's B&O tax. Under the rule, a B&O tax is not assessed on sales of
goods which originate outside this state unless the goods were received by the purchaser in this
state and the seller had nexus. If a seller "carries on significant activity in this state and conducts
no other business in the state except the business of making sales, this person has the distinct
burden of establishing that the instate activities are not significantly associated in any way with
the sales into the state." Former WAC 458-20-193(7)(c). Because we conclude that Irwin has
failed to carry this burden, it is not entitled to relief under the rule.



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