Washington Sales tax / Use Tax: Direct seller's exemption applies even if product is ultimately sold in retail store

Dot Foods, Inc. v. Washington , Wash. (9/10/09). In a 5:4 decision, the Washington Supreme Court reversed the Washington Court of Appeals to hold that an out-of-state company qualified for the State's business and occupation (B&O) tax exemption as an out-of-state vendor selling products within Washington "exclusively to or through a direct seller's representative," even though some of its products:
- Were not "consumer" products, and
- Ended up for sale in permanent retail establishments in the subsequent chain of distribution.

Despite the department's revised interpretation of the unchanged exemption statute that imposed these two additional requirements via administrative rule, the Court explained that the term "exclusively" only requires that vendors sell to or through a direct seller's representative and does not refer to the type of product (consumer v. non-consumer) sold. The fact that the statute describes the type (portion) of gross income that meets the exemption, the Court reasoned, shows that an out-of-state seller may derive portions of its gross income from something other than the sales of consumer products (i.e., non-consumer products).

Additionally, the Court explained that the exemption applies regardless of what subsequently happens to the products in downstream commerce, as the statute focuses on the out-of-state seller's transaction with its products to/through the direct seller's representative, rather than on what those purchasers opt to do with the products after their transactions with the out-of-state vendor are completed. Applied here, the out-of-state vendor's sales through the direct seller's representative are the final sales as far as the transaction concerns the out-of-state vendor; if its final sale customer later resells the product or a byproduct of that product to a permanent retail establishment, that transaction does not affect the out-of-state vendor's exempt B&O tax status. A dissenting opinion follows.