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Taxpayer Wins Against Washington State Shakedown; State Appeals

2 min readBy: Joseph Bishop-Henchman

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Washington State revenue officials lost one last month when their Board of TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Appeals unanimously ruled for a taxpayer whose solo visit to the state was used as the basis for demanding $180,000 in taxes for in-state sales activity. The state has already announced it will appeal, determined not to let anyone escape the state’s notoriously aggressive assertions of nexus (scope of tax authority).

The story of the taxpayer in this case, businessman Pete Vegas, is familiar to regular listeners of our podcast. Pete runs an agribusiness company that does business mostly in California, Arkansas, and Texas, although they ship their products nationwide. In his own words:

As president of a national food company, I thought I had seen it all. Until, that is, the state of Washington decided to send me a $180,000 tax bill for simply visiting the state. I understand that states are starved for revenue these days, but Washington has gone too far. Based on one visit over a seven-year period, it decided that my company, Sage V Foods, should be required to pay business and occupation taxes. Washington made that determination even though Sage V Foods has no employees, no property, no sales offices and no inventory in the state – nothing.[…]

Washington has a sneaky way of catching companies in its tax trap. A few weeks after one of our trucks stopped at a weigh station during a routine delivery, we received a questionnaire in the mail from the Department of Revenue. The letter seemed innocuous enough, but it absolutely wasn’t.

It asked whether one of our employees visited the state once a year for business purposes. We answered yes, that was possible, and Washington pounced. It auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. ed us and imposed seven years’ worth of taxes, interest and penalties. Washington claims Sage V Foods has a substantial connection to the state because we, on very rare occasions, cross its borders to do business. That’s outrageous.

The 3-member Board of Tax Appeals agreed with him: “Mr. Vegas’s visits to Washington do not satisfy the Washington Supreme Court’s requirement that the ‘activities…be substantial and…be associated with the company’s ability to establish and maintain the company’s market within the state.’; rather, his activities were ‘slight or incidental to some other purpose or activity.’” The Department was ordered to refund tax, interest, and penalties paid by Vegas’s company.

We’ll keep everyone posted as the State of Washington fights this ruling and takes Mr. Vegas to court. Additionally, Congress is considering the Business Activity Tax Simplification Act (BATSA), which would take away Washington State’s authority to use short visits to a state like Pete’s as a pretext for huge tax bills.

More on our Center for Legal Reform here.