In order to raise cash, a business will often sell some of its assets. Occasionally, the business will carry the contract on the sale of these assets by accepting installment payments with interest, even though doing so is not part of its usual business activity. Such businesses are often unsure whether the interest income that they accrue from the contract is subject to the business and occupation (B&O) tax, exempt as non-business income, or exempt as a casual and isolated sale.
For example, a taxpayer took over the mortgage payments of a marina and wanted to upgrade the facilities. The mortgage holder was willing to finance the improvements, but wanted a substantial portion of the original mortgage paid off immediately and the balance paid in a set time after that before it would make the loan. In order to raise money, the taxpayer decided to give the marina’s customers the opportunity to buy the slips they occupied, with shared common areas in the manner of a condominium. The taxpayer sold seventy five percent of the slips it controlled on an installment payment basis.
Such a sale was outside the normal activities of the business. However, the interest accrued by the taxpayer from the installment payments was business income and was taxable under the “service and other activities” classification of the B&O tax.
RCW 82.04.140 defines the term “business” to include “all activities engaged in with the object of gain, benefit, or advantage to the taxpayer …directly or indirectly.” Even though the taxpayer did not originally intend to sell the property, it did so and thereby accrued gain, benefit, or advantage in the form of interest income.
While one minor sale of assets by a business not normally engaged in selling such assets might be considered a casual or isolated sale, a significant sale of assets, even though done only once, cannot be so considered.
Therefore, interest income resulting from the installment sale of business assets is subject to the B&O tax under the “service and other activities” classification.