Trade-ins

Trade-in of like kind property

A trade-in of like kind property reduces the measure of sales tax or use tax by the value of the property traded in. A valid trade-in is a transaction between a buyer and seller (a dealer or broker can act as a buyer of the traded-in property). A wrecked vessel may be traded-in toward the purchase of a working vessel. (Note - The measure of the business and occupation tax is not reduced by the value of the traded-in property.)

Value of property traded-in

The seller and buyer must agree to the value of property traded-in property and the sales agreement must show that agreed upon value. However, the parties may not overstate the value of the property traded-in in order to artificially lower the amount of sales or use tax due. Without proof of a higher value, value must be determined by the fair market value of similar property of like quality, quantity, and age, sold or traded under comparable conditions.

Reference: WAC 458-20-247

Documenting a valid trade-in

The property traded-in must be specifically identified and clearly indicated as "trade-in" by model, serial number and year of manufacture where applicable. The full trade-in value must be shown on the sales agreement or invoice given to the purchaser, with a copy retained in the seller's records.

Any and all documents or accounting entries created by a sale are subject to examination and review by the Department. To substantiate a valid trade-in for sales tax credit, the broker or dealer should retain documents/records for five years. These records should include copies of documentation verifying that the traded-in vessel, and all underlying obligations associated with it, were transferred to the party accepting the trade-in.

Vessel dealers and brokers must keep bills of sale for traded-in boats and are not required to transfer title while it is held for resale.

Acceptable documentation includes, but is not limited to, copies of the following:

• sales agreements between parties
• bill of sale
• commission or listing agreements between parties
• financing agreements and transfers of obligation by lending institutions
• title and transfer documents required by government agencies
• evidence of transfer fees being paid
• evidence of funds being transferred between parties or through escrow accounts

References: WAC 458-20-247, RCW 82.32.070

Encumbered property

Encumbered property can be a trade-in provided that the encumbered property will actually be transferred to the seller of the new or used property for which it is traded. The value of the trade-in property will be the fair market value regardless of liens.

Broker sales and trade-ins

Valid like-kind trade-ins reduce the amount subject to sales tax when the owner or the broker/dealer accepts the traded-in property as payment or consideration. The trade-in does not have to happen simultaneously as long as the broker/dealer accepts the traded-in property as payment or consideration against the vessel being purchased.

Scenario 1: Buyer Jones makes an offer on an Ocean Alexander boat through Honest Yacht Brokerage. Mr. Jones wants to trade-in his Sea Ray. The seller of the Ocean Alexander, Mr. Smith, does not want the trade-in, so Honest Yacht Brokerage agrees to take it.

Mr. Jones buys the Ocean Alexander on the same day he passes ownership of the trade-in to Honest Yacht Brokerage which accepts the Sea Ray into its inventory. The Ocean Alexander is purchased for $500,000, and the value of the traded boat is set at $100,000. Sales tax is collected by Honest Yacht Brokerage on $400,000. Mr. Smith receives $400,000 from Mr. Jones and $100,000 from Honest Yacht Brokerage for a total of $500,000.

Scenario 2: Same facts as Scenario 1, except the broker found a buyer for the Sea Ray prior to the completion of the purchase of the Ocean Alexander. Mr. Jones trades the Sea Ray into the brokerage; the brokerage sells the Sea Ray to Mr. Anderson and keeps the proceeds in its’ trust account until the completion of the purchase of the Ocean Alexander. One week after the Sea Ray transferred from Mr. Jones to Honest Yacht Brokerage and then to Mr. Anderson, Mr. Jones’ purchase of the Ocean Alexander is completed. Mr. Smith receives $400,000 from Mr. Jones and $100,000 from the broker. Honest Yacht Brokerage collects and remits sales tax on $400,000 and allows a $100,000 trade-in credit to Mr. Jones for the value of the traded-in Sea Ray. The fact that the traded-in Sea Ray is sold prior to the completion of the sale of the Ocean Alexander does not disqualify the trade-in allowance.

Scenario 3: Same facts as Scenario 2, except the purchase of the Ocean Alexander is delayed. There are engine problems that need to be addressed. The purchase and sales agreement is extended. The sale is completed 90 days after the sale of the Sea Ray to Mr. Anderson. Mr. Smith receives $400,000 from Mr. Jones and $100,000 from the broker. The fact that there is a delay in the transfer of the Ocean Alexander does not disqualify the trade-in allowance as long as there is a timely contract extension covering the delay so that there is no lapsed period from the original sale/purchase agreement.

Scenario 4: Buyer Jones makes an offer on an Ocean Alexander through Honest Yacht Brokerage. Mr. Jones wants to trade-in his Sea Ray. The seller of the Ocean Alexander, Mr. Smith, does not want the trade-in, and so, Honest Yacht Brokerage agrees to take it. Mr. Anderson makes an offer on the Sea Ray and wants to buy it before the purchase of the Ocean Alexander is complete. Mr. Jones transfers ownership of the Sea Ray to Honest Yacht Brokerage, who sells it to Mr. Anderson and holds the proceeds in its’ trust account pending the completion of the purchase of the Ocean Alexander.

However, the purchase of the Ocean Alexander does not go through; there are engine issues and Mr. Jones chooses not to buy the boat. He finds another boat that he would like to buy instead and he requests that the broker substitute a different Ocean Alexander for the same sales price. Mr. Jones gives the seller of the second Ocean Alexander $400,000 and the broker gives him the remaining $100,000 (the original agreed upon trade-in valuation). However, the purchase of the second Ocean Alexander boat does not qualify for a trade-in reduction because the Sea Ray was not accepted as payment towards the purchase of the second Ocean Alexander boat.

Scenario 5: Buyer Mr. Jones makes an offer on an Ocean Alexander through ZXY Yacht Brokerage. Mr. Jones wants to trade-in his Sea Ray. The seller of the Ocean Alexander, Mr. Smith, does not want the trade-in, so ZXY agrees to take the Sea Ray in on trade; however, they inform Mr. Jones that the amount of the trade-in is dependent on them being able to sell the Sea Ray within 45 days and if they do sell, they will credit him 80 percent of the selling price of the Sea Ray against the purchase of Ocean Alexander. This scenario does not qualify for the trade-in reduction. Although ZXY has “taken the vessel in on trade,” there is no set (agreed upon in contract) trade-in value (it is dependent on what it eventually sales for); therefore, the trade-in does not qualify for the trade-in allowance.

Out-of-state brokers

Brokers located outside of Washington, but with Washington nexus, must register and report the same way as in-state businesses.

Reference: WAC 458-20-193

Dealer/Broker reporting requirements when there is a trade-in

The vessel dealer/broker must pay B&O tax on the full amount of the sale. The trade-in credit doesn’t apply to the B&O tax. Sales tax is collected on the adjusted value of transactions after applicable trade-ins.

Vessel brokers report their gross commissions or fees under the service and other activities classification of the B&O tax. Sales tax is collected and remitted by the broker, on the adjusted value of a transaction after applicable trade-in or other exemptions or deductions.

Reference: WAC 458-20-224

Tax paid on trade-in

To qualify for the sales tax trade-in exclusion, there is no requirement for tax to have been paid on the item traded-in.

More Trade-in examples

Example 1: Broker enters into a consignment sales contract with Susan Smith to sell her Boat A. John Doe contacts Broker expressing interest in purchasing Boat A, provided his Boat B is accepted as a trade-in on the purchase. John Doe executes a purchase agreement with Broker which specifically identifies both Boat A being purchased and the trade-in. Susan Smith declines to accept the trade-in, but Broker accepts delivery and ownership of Boat B and places Boat B into Broker's own inventory. The Broker arranges delivery of the vessel purchased to John Doe.

The buyer (John Doe) has delivered the trade-in property (Boat B) to the Seller (Broker), who takes ownership of Boat B. There is no requirement that Broker purchase Boat A from Susan prior to selling Boat A to John Doe and accepting Boat B as trade-in property because broker, Broker is a seller under the law (RCW 82.08.010).

John Doe is entitled to the trade-in exclusion because Boat B was delivered to Broker as consideration paid towards the purchase of Boat A.

Example 2: Broker 1 enters into a consignment sales contract with Susan Smith to sell her Boat X. John Doe contacts Broker 2 expressing interest in purchasing Boat X, provided his Boat Y is accepted as a trade-in on the purchase. Broker 2 contacts Broker 1 about the possibility of entering into a Co-brokerage Agreement on the sale of Susan Smith's Boat X. John Doe executes a purchase agreement with Broker 1 which specifically identifies both Boat X being purchased and the trade-in Boat Y. Susan Smith declines to accept the trade-in, but Broker 1 accepts delivery and ownership of Boat Y and places it into Broker 1's own inventory. In turn, Broker 1 arranges delivery of Boat X to John Doe.

The buyer (John Doe) has delivered the trade-in property (Boat Y) to the Seller (Broker 1), who takes ownership of Boat Y. There is no requirement that Broker 1 purchase Boat X from Susan prior to selling Boat X to John Doe and accepting Boat Y as trade-in property.

This situation qualifies for the trade-in allowance.

Example 3: Sally Jones decides to upgrade from her existing sailboat to a new, larger sailboat. The salesperson at the local sailboat dealership explains that while the dealership does not currently have a sailboat meeting Sally's needs, it can order one for her from the manufacturer. The salesperson also explains that if Sally trades in her sailboat at the time she enters into the purchase contract, the dealership will accept the sailboat as one of three payments needed before the delivery of the new sailboat. Sally executes a purchase contract with the salesperson which specifically identifies both the new sailboat being purchased for $250,000 and the trade-in of her current boat (valued at $55,000). Sally signs the purchase contract, and the dealership orders the new sailboat, with a proposed delivery date of eight months hence. Sally makes a down payment of $50,000 cash. Four months later, Sally delivers the trade-in to the dealership. They agree the value of the trade-in is now worth $50,000. The dealership accepts delivery of the trade-in sailboat as a second payment of $50,000. Four months later, Sally takes delivery of her new sailboat and pays the dealership a final payment of $150,000.

Sally is entitled to the trade-in exclusion of $50,000 because the sailboat was delivered to the sailboat dealership as consideration paid towards her purchase of the new sailboat. Sally will pay the dealership sales tax on $200,000.

Example 4: Broker 1 enters into a consignment sales contract with Susan Smith to sell her Boat X. John Doe contacts Broker 2 expressing interest in purchasing Boat X, provided his Boat Y is accepted as a trade-in on the purchase. Broker 2 contacts Broker 1 about the possibility of entering into a Co-brokerage Agreement on the sale of Susan Smith's Boat A. John Doe executes a purchase agreement with Broker 1 which specifically identifies both Boat X being purchased and the trade-in Boat Y. Susan Smith declines to accept the trade-in of Boat Y, but Broker 2 accepts delivery and ownership of Boat B and places Boat B into Broker's own inventory. In turn, Broker 1 arranges delivery of Boat A to John Doe. The buyer (John Doe) has delivered the trade-in property (Boat Y) to the Seller (Broker 2), who takes ownership of Boat Y. There is no requirement that Broker 2 purchase Boat X from Susan Smith (thereby becoming the owner) prior to selling Boat X to John Doe and accepting Boat Y as trade-in property.

If pursuant to a sales contract, Broker 2 is authorized to receive a sales commission on selling Boat X, Broker 2 can take Boat Y into inventory as a trade-in against the purchase of Boat X and have the transaction (sale of Boat X with trade-in of Boat Y) qualify for the trade-in allowance.

Example 5: Broker enters into a consignment sales contract with Susan Smith to sell her Boat A valued at $100,000. John Doe contacts Broker expressing interest in purchasing Boat A, provided his Boat B, valued at $40,000, is accepted as a trade-in on the purchase. John Doe executes a purchase agreement with Broker which specifically identifies both Boat A being purchased and the trade-in of Boat B.

Susan Smith agrees to take the trade-in, and accepts delivery of Boat B from John Doe. In turn the Broker arranges delivery of Boat A to John.

The buyer (John Doe) has delivered the trade-in property (Boat B) to the Seller (Susan Smith), who takes ownership of Boat B. Susan Smith may either sail off into the sunset with Boat B or she may enter into a new consignment arrangement with Broker for the sale of Boat B. John Doe is entitled to the trade-in exclusion of $40,000 because Boat B was delivered to Susan Smith as consideration paid towards his purchase of Boat A.

Example 6: Is "constructive possession" required to gain the trade-in allowance?

The requirements for a valid trade-in are established in WAC 458-20-247. One of the requirements to gain the trade-in allowance (for application of retail sales tax), is that the original boat owner must accept the like-kind property as a reduction in the selling price of the original boat being sold. It is not necessary for tax purposes that a boat accepted as a trade-in against the price of another boat have title transferred before that traded-in boat is resold.

Example 7: Broker A has a 40' sailboat listed for $65,000. Broker B has a potential buyer for this vessel, but his client wants to trade-in an older motor boat as part of the consideration. The sailboat owner agrees to the transaction. Both parties agree on a value for the trade-in. All transaction records and ownership transfers occur.

Broker A's customer may place the vessel up for sale or keep it.

Example 8: Broker A has a potential buyer (Customer Y) for a listed vessel, but the selling owner (Customer X) is unwilling to accept a trade-in as part of the payment. The sale will not occur unless Broker A purchases Customer X's vessel and then accepts Customer Y's trade-in. Both customers agree to carry promissory notes as financing/flooring on the vessels involved, but Broker A has complete risk of loss/gain while the vessels are in his possession. Broker A wants to make the sale and so decides to proceed with the transaction.

The sale by Broker A to Customer Y and the acceptance of the trade-in boat qualifies this transaction for the trade-in allowance. The amount subject to the retailing B&O tax classification is not reduced by the trade-in.

Example 9: Broker A has Customer JO's $100,000 vessel listed for sale. Customer SAM offers to buy the vessel but wants to trade-in his vessel worth $125,000. SAM is willing to accept a $25,000 promissory note on the balance due for the vessel. JO agrees to the trade-in knowing that he/she has complete liability for the note regardless of how much the larger vessel eventually sells for.

This is a trade down for SAM, but is a trade-in for JO who owes sales tax on the $25,000. The result is the same if the $25,000 was a cash payment.

Example 10: Customer Q owns a 50-foot motor boat and wants to trade it in on the purchase of a new boat from Dealer Z. The purchase agreement is created and both parties agree on a trade-in value of $50,000. The purchase balance is due in full at time of delivery of the new vessel, estimated to occur in six months.

Title (or assumption of risk, underlying liability) to Customer Q's boat must pass to the dealer prior to delivery of the new vessel as agreed within the purchase contract. It must become part of Dealer Z's inventory. The trade-in value was agreed upon when the transaction was negotiated and can’t be contingent on its subsequent sale. Sales tax must be collected on the selling price of the new vessel less the $50,000 agreed upon trade-in value.

Note: Once a vessel is in a broker’s inventory, allowing the owner to use it is considered "bailment" and requires payment of the use tax by the owner on the current value of the vessel.

Co-brokers and sales tax

Generally, either the listing broker or the selling broker can be responsible for collecting and remitting the sales tax on a boat sale due to the cooperative nature of their relationship to the sale. See Broker's Transaction Report

Co-broker example

Broker A is the listing agent for a $100,000 motor boat. Broker B has a buyer for the vessel and therefore becomes the selling agent. Both Brokers are located in Washington. The listing agreement/contract and any amendments authorize Broker A to enter into co-brokerage agreement with other Brokers to facilitate the sale of the vessel. In this example, the percentages which may be negotiated are specified, in this case 7 percent for Broker B and 3 percent for Broker A (a total of 10 percent of the selling price). XYZ Title Services handles the documentation and disburses funds. Broker B receives a commission for $7,000 and Broker A gets $3,000.

Each broker reports the commission they each actually retain.