Taxpayer Victory in the WA Board of Tax Appeals


There have been a wave of nexus cases nationally and they seem to have largely gone against taxpayers. However, in the case Sage V Foods, LLC. v. State of Washington (BTA docket no. 11-704), the Washington’s Board of Tax Appeals (BTA) thoughtfully considered Sage V’s commerce clause arguments and agreed with Sage V. This is considered a substantial win for taxpayers.

Visitation and Transportation

Sage V processes rice into various food products and Sage V makes wholesale sales of its products to many, including to various Washington customers.  One rice product is flour that can be combined with other ingredients to produce a coating that causes deep fried food products to be crispier and to retain heat longer.  Burger King uses rice flour for that purpose and requested proposals to supply the rice flour.  Sage V bid and won the Burger King proposal, allowing it to be the supplier of this discrete rice flour ingredient.  Burger King also uses a special coating that includes the rice flour as an ingredient, and it requested proposals to manufacture and to supply the coating.  The proposal required the successful bidder to buy all of the rice flour from Sage V.  Lamb Weston won the bid and had its Washington-located affiliate, Columbia Basin Blends, manufacture the coating for Burger King.  This single customer accounted for over 90% of Sage V’s Washington sales.

Sage V visited Columbia Basin Blends once in seven years just to put a face on its rice flour supplier.  Sage V delivered its products to Columbia Basin Blends in railcars that Sage V leased on a long term leases.  Other than the one visit and the 450 railcar deliveries over that seven year period, Sage V did nothing in Washington State.  It had no need to market its rice flour to Columbia Basin Blends because Columbia Basin Blends could buy from no other suppliers under its agreement with Burger King.

Making the Case for Fairness

Sage V argued that the four-prong test of the Complete Auto Transit case applied to Washington’s tax system, contending that substantial nexus was lacking.  The BTA agreed.  The BTA concluded that the one visit was not enough and that leasing the railcars by itself was not enough, noting that in other cases, the customer might lease the railcars, implying that the railcars are not relevant factors to the buyer determining whether to buy the products. (Indeed, the Burger King contract is the only factor that determines whether to buy product from Sage V.)  These activities or presence in the state did not help establish or maintain a market.  The BTA also found it noteworthy that the market was made prior to any activity in the state and those sales into the state were premised on the bid activity with Burger King, not with Columbia Basins Blends.

The state has or will appeal this decision to the Thurston Superior Court.

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