Courts Take Liberties with "Physical Presence" Test

With no permanent facilities, offices, employees – or even a Washington state phone number – Lamtec Corp. still must pay state taxes, says a new court ruling.

Still, Lamtec pointed out that even if a “brick and mortar” physical presence or substantial sales force is not required under the due process and the dormant commerce clauses, the court should still adopt such a standard as a matter of policy “for clarity sake.” But the court refused to accommodate the company’s request.

In another Washington DoR case, Tyler Pipe Industries v. Washington Department of Revenue, 105 Wn. 2d 318 (1986), the pipe manufacturer had its principal place of business in Texas and distributed its products nationwide. Tyler did not have a place of business or employees within Washington but used independent contractors to perform the function of sales representatives. The court concluded that “the crucial factor” governing nexus is whether the activities performed in the state on behalf of the taxpayer are “significantly associated with the taxpayer’s ability to establish and maintain a market in [this] state.” The court found that Tyler had a sufficient economic relationship with Washington to satisfy the nexus requirement despite the fact that it had no employees residing in Washington. The court looked to the actual activities by the in-state sales representatives that helped Tyler establish and maintain its market in Washington.

Using the activity yardstick, the court concluded that to the extent there is a physical presence requirement, it can be satisfied by presence of activities within the state. The court also noted that it does not require a presence in the sense of having a brick and mortar address within the state. The court did not see any “material difference” whether the activities are performed by a staff permanently employed within the state, independent agents contracted to perform the activities within the state, or persons who travel into the state from without. Therefore, the court concluded that the activities whose presence can establish nexus must be substantial and must be associated with the corporation’s ability to establish and maintain its market within the state.

Regarding Lamtec, the contacts made by the company’s sales representatives were designed to maintain its relationships with its customers within Washington, and those activities were significantly associated with the company’s ability to establish and maintain its market. Accordingly, there was substantial nexus, with the result that the DoR had the authority under the commerce clause to impose, in the instant case, a B&O tax.

Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for


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