Washington Administrative Code › Title 458 - Revenue, Department of › Chapter 458-20 - Excise tax rules › Section 458-20-246 - Sales to or through a direct seller's representative

Current through Register Vol. 24-14, July 15, 2024
(1)
Introduction.
The
			 legislature passed chapter 23, Laws of 2010, (2ESSB 6143), which reaffirms and
			 clarifies the legislature's intent in establishing the direct seller's
			 exemption. The legislation also repeals the exemption provided by
			 RCW
			 82.04.423 effective May 1, 2010.
Through April 30, 2010,
				RCW
				82.04.423 provides an exemption from the
				business and occupation (B&O) tax on wholesale and retail sales by a person
				who does not own or lease real property in the state, is not incorporated in
				the state, does not regularly maintain inventory in this state, and makes sales
				in this state exclusively to or through a "direct seller's representative."
				This section explains the statutory elements that must be satisfied in order to
				be eligible to take this exemption.
(2)
Federal law background.
The
			 statutory language describing the direct seller's representative is
			 substantially the same language as contained in the federal Tax Equity and
			 Fiscal Responsibility Act (TEFRA) of 1982, PL 97-248. See
			 26 U.S.C.
			 3508. The federal law designates types of
			 statutory nonemployees for Social Security tax purposes. In the federal law,
			 the "direct seller's representative," as used in this section and under
			 RCW
			 82.04.423, is designated as the direct
			 seller. The purpose of the direct seller provision in the federal tax law is to
			 provide that a direct seller is not an employee of the direct selling company,
			 thereby relieving the direct selling company of a tax duty. Under the federal
			 law, the direct selling company is a business that sells consumer products
			 using a direct seller who either purchases from the direct selling company and
			 resells the consumer products or sells for or solicits sales of consumer
			 products on behalf of the direct selling company. Retail sales are limited to
			 those occurring in the home or in a temporary retail establishment, such as a
			 vendor booth at a fair.
(3)
Washington's direct seller's exemption.
The 1983 Washington state
			 legislature used the same criteria to delineate, for state tax purposes, the
			 necessary relationship between a direct seller and a direct seller's
			 representative. In this section "direct seller" refers to the selling company,
			 and the "direct seller's representative" refers to the person who purchases
			 consumer products from the direct seller and resells the products, or sells for
			 or solicits sales on behalf of the direct seller.
The exemption provided by
				RCW
				82.04.423 is limited to the B&O tax on
				wholesaling or retailing imposed in
				chapter
				82.04 RCW (Business and
				occupation tax). A direct seller is subject to other Washington state tax
				obligations, including, but not limited to, the sales tax under
				chapter
				82.08 RCW, the use tax
				under chapter 82.12
				RCW, and the litter tax imposed by chapter 82.19 RCW.
(4)
Who may take the exemption.
The B&O tax exemption may be taken by a person (the direct seller) selling
			 consumer products using the services of a representative who sells at retail or
			 solicits the sales for retail of only consumer products as outlined in statute.
			 There are ten elements in the statute that must be present in order for a
			 person to qualify for the exemption for Washington sales. The person must
			 satisfy each element to be eligible for the exemption. The taxpayer must retain
			 sufficient records and documentation to substantiate that each of the ten
			 required elements has been satisfied.
			 RCW
			 82.32.070.
(a) The four statutory elements describing
			 the direct seller.
			 RCW
			 82.04.423 provides that a direct seller:
(i) Cannot own or lease real property within
			 this state. For example, if the direct seller's representative is selling
			 vitamins door to door for the direct seller, but the direct seller owns or
			 leases a coffee roasting factory in the state, the direct seller is not
			 eligible for this exemption; and
(ii) Cannot regularly maintain a stock of
			 tangible personal property in this state for sale in the ordinary course of
			 business. This provision does not, however, prohibit the direct seller from
			 holding title to the consumer product in the state. For instance, the direct
			 seller owns the consumer products sold by the direct seller's representative
			 when the representative is making retail sales for the direct seller. However,
			 the personal property must not be a stock of goods in the state that is for
			 sale in the ordinary course of business. The phrase "sale in the ordinary
			 course of business" means sales that are arm's length and that are routine and
			 reasonably expected to occur from time to time; and
(iii) Is not a corporation incorporated under
			 the laws of this state; and
(iv)
			 Makes sales in this state exclusively to or through a direct seller's
			 representative. This provision of the statute describes how sales by the direct
			 seller may be made. To be eligible for the exemption, all sales by the direct
			 seller in this state must be made to or through a direct seller's
			 representative. The direct seller may not claim any B&O tax exemption under
			 RCW
			 82.04.423 if it has made sales in this state
			 using means other than a direct seller's representative. This requirement does
			 not, however, limit the methods the direct seller's representative may use to
			 sell these products. For example, the representative can use the mail or the
			 internet, if all other conditions of the exemption are met. The direct seller's
			 use of mail order or internet, separate from the representative's use, may or
			 may not be found to be "sales in this state" depending on the facts of the
			 situation. If the direct seller's use of methods other than to or through a
			 direct seller's representative constitutes "sales in this state," the exemption
			 is lost. Additionally, a direct seller does not become ineligible for the
			 exemption due to action by the direct seller's representative that is in
			 violation of the statute, such as selling a product to a permanent retail
			 establishment, if the department of revenue (department) finds by a review of
			 the facts that the ineligible sales are irregular, prohibited by the direct
			 seller, and rare.
If a seller uses a direct seller's representative to sell
				"consumer products" in Washington, and also has a branch office, local outlet,
				or other local place of business, or is represented by any other type of
				selling employee, selling agent, or selling representative, no portion of the
				sales are exempt from B&O tax under
				RCW
				82.04.423. For example, a person who uses
				representatives to sell consumer products door to door and who also sells
				consumer products through retail outlets is not eligible for the exemption. The
				phrase "sales exclusively to ... a direct seller's representative" describes
				wholesale sales made by the direct seller to a representative. The phrase
				"sales exclusively ... through a direct seller's representative" describes
				retail sales made by the direct seller to the consumer. The B&O tax
				exemption provided by
				RCW
				82.04.423 is limited to these types of
				wholesale and retail sales.