Washington Ruled that a Subsidiary’s Sales to its Parent Were Subject to Washington B&O Tax

February 28, 2024

By: Jess Johannesen, SALT Director

At a glance

  • The main takeaway: While economic nexus has received most of the focus the last several years, companies still need to consider their physical presence, which can be created through the activities of related companies. 
  • Assess the impact: This case highlights the importance of examining the state tax implications related to how a company’s sales and marketing activities can create tax nexus for its affiliates.  
  • Take the next step: Aprio’s State and Local Tax (SALT) team can assist your business to ensure your organizational structure minimizes your multi-state tax obligations.  

Schedule a free consultation today to learn more!

The full story:

Washington’s Administrative Review and Hearings Division (ARHD) recently held that a national retailer’s sales activities on behalf of its subsidiary created Business & Occupation (B&O) tax nexus for the subsidiary.1 As a result, the subsidiary’s sales to its parent and to third-party customers in Washington were subject to B&O tax. Following a merger of the subsidiary into its parent, the ARHD ruled that B&O tax did not apply to the intercompany transactions since there was no separate transaction subject to tax.

A closer look at the case

The subsidiary (the Taxpayer) in the case was a distributor of tangible goods based outside of Washington. A national retailer (the Parent) purchased the Taxpayer, which then operated as a subsidiary for a period of time. The Taxpayer later merged into the Parent to operate as a division of the Parent.  

Before the merger, the Taxpayer was structured to focus on business-to-business (B2B) sales transactions and primarily made wholesale sales of tangible goods. The Taxpayer did not have any property, employees, or independent contractors located in Washington for the pre-merger period, and the Taxpayer primarily sold through the Parent’s catalog, which featured logos of both the Taxpayer and the Parent.2 At the Parent’s retail locations in Washington, a customer could place a special order for the Taxpayer’s goods with a sales associate who would then initiate the Parent’s purchase of the good from the Taxpayer.

Generally, a taxpayer will be viewed as having physical presence in the state if it has a representative in the state that “engages in activities in this state that are significantly associated with the [taxpayer’s] ability to establish or maintain a market for its products [in the state].”3 Therefore, the activities of an affiliated company in the state that supports the market for an out-of-state affiliate can establish taxing nexus for the out-of-state affiliate.

Unpacking the ruling 

The ARHD analyzed whether the Parent’s marketing and sales activities on behalf of the Taxpayer were sufficient to establish nexus for the B&O tax. The Taxpayer emphasized that the catalogs were not distributed through the Parent’s retail stores, but the ARHD noted that the Parent directly promoted the Taxpayer’s products and allowed customers to directly place orders for the Taxpayer’s products at the Parent’s retail stores located in Washington.  

While the Taxpayer did not have property, employees, or independent contractors physically located in the state, the ARHD determined that the Parent’s cross-promotion and marketing and sales activities that occurred in Washington allowed the Taxpayer to maintain a market in the state and were sufficient to establish B&O tax nexus for the Taxpayer.

For purposes of the B&O tax, transactions between affiliated companies are taxable, even if a subsidiary is disregarded for federal income tax purposes. After the merger, the Taxpayer continued to use its old federal employer identification number to track its activities and transactions in the Parent’s records. The ARHD ultimately determined that the mere use of the old identification number did not indicate that the Taxpayer continued to exist as a separate entity after the merger. Therefore, the Taxpayer’s transfers of inventory to the Parent were not subject to B&O tax when the Taxpayer was a division of the Parent since there is no separate taxable event.

The bottom line

This case serves as an important reminder that a related party’s sales and marketing activities can establish tax nexus for an affiliate. This can be true of sales and marketing activities performed by unrelated third-parties as well, which we addressed in an article from our November/December 2023 SALT Newsletter.4

In addition, this case also highlights the importance of examining the state tax implications of a business’ organizational structure, which can create tax liability on intercompany transactions. Aprio’s SALT team has experience with these types of taxes and issues, and we can assist your business to ensure that your organizational structure minimizes your multi-state tax obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.   


1 Washington Tax Determination 21-0083, 42 WTD 066, 12/22/2023.

2 It is worth noting that for the pre-merger period at issue, Washington’s Retailing and Wholesaling B&O tax nexus rules were based on establishing a physical presence in the state. Economic nexus standards for these B&O tax classifications were not adopted until later years.

3 Wash. Rule 193(102). This common nexus principle is applied by other states as well.

4 For income tax nexus, it may be necessary to address whether the in-state party’s activities on behalf of the out-of-state party exceed the protections of Public Law 86-272.  That was not an issue in this case since the B&O tax is a gross-receipts tax, thus Public Law 86-272 does not apply. 


Recent Articles

Stay informed with Aprio.

Get industry news and leading insights delivered straight to your inbox.

Stay informed with Aprio. Subscribe now.