WAC 106

Legislative Change to Use Tax

"Sale, "casual or isolated sale."

"Gross proceeds of sales."

"Gross income of the business."

"Value proceeding or accruing."

Use tax imposed.

Casual or isolated sales - business reorganizations.

TRANSFER OF CAPITAL ASSETS TO JOINT VENTURES Revised 2/2/09. See ETA 3137.2009

COLLECTION OF RETAIL SALES TAX ON CASUAL SALES OF MOTOR VEHICLES Revised 2/2/09. See ETA 3132.2009

Sale of tangible personal property by a joint venturer to the joint venture

Taxable transfers of capital assets

Collection of retail sales tax on casual sales of motor vehicles

Reimbursement of a venturer in a joint venture

Transfer of capital assets to joint ventures

Business and Occupation Tax on Sale of or Granting a License to Use Intangibles

SALES AND/OR TRADE-INS OF TANGIBLE PERSONAL PROPERTY FROM RENTAL INVENTORY -Revised 12/31/92 - Cancelled effective December 29, 2006 This document explains that when trading-in rental property towards the purchase of new property, the lessor is making a taxable wholesale sale of the trade-in property to the dealer. This document is no longer needed because this issue is adequately addressed in WAC 458-20-247.

APPLICATION OF BUSINESS AND OCCUPATION TAX TO ROYALTY INCOME EARNED THROUGH GRANT OF PATENT PRIVILEGES - Cancelled effective 1/30/06 (Corrected ETB number 324.04.194.224)

BUSINESS TAX UPON SALE OR LEASE OF PATENTS Revised 2/2/09. See ETA 3142.2009

EXCHANGE AGREEMENTS INVOLVING INVENTORY- ETA cancelled 4/21/2003

TAXABLE TRANSFERS OF CAPITAL ASSETS Revised 2/2/09. See ETA 3070.2009

SALE OF TANGIBLE PERSONAL PROPERTY BY A JOINT VENTURER TO THE JOINT VENTURE Revised 2/2/09 See ETA 3009.2009

REIMBURSEMENT OF A VENTURER IN A JOINT VENTURE Revised 2/2/09. See ETA 3136.2009

RETAIL SALES TAX / USE TAX - TRANSFER OF CAPITAL ASSETS - ADJUSTMENT OF BENEFICIAL INTEREST IN BUSINESS - WHOLLY-OWNED SUBSIDIARIES. Neither retail sales tax nor use tax are due on value of vehicles (capital assets) which are transferred to a common holding company from its wholly-owned subsidiaries for insurance purposes.

RETAILING B&O TAX -- CASUAL OR ISOLATED SALE -- TYPE OF PROPERTY -- PROPERTY OF LIKE KIND -- MOTOR HOME SOLD BY USED CAR DEALER. Sale of a personal motor home independently from the taxpayer's business operation is not taxable. To be taxable, such property must be of the type of property (used cars and trucks) which the taxpayer holds himself out as selling. The sale of the motor home is a casual or isolated sale not subject to business and occupation (B&O) tax.

CONTRIBUTION OF CAPITAL - EXEMPTION -- ARTICLES OF INCORPORATION -- STOCK. Rule 106(2) does apply where the articles of incorporation specifically prohibit the issuance of stock.

MISCELLANEOUS: CONTRIBUTION OF CAPITAL -EXEMPTION- INTEREST EQUIVALENT TO STOCK - SUBSTANCE OVER FORM. The doctrine of substance over form is not generally available to a taxpayer to eliminate the tax consequences of the taxpayer's chosen form of the transaction.

RETAIL SALES TAX - MEMBERSHIP FEES AS CAPITAL ASSETS. Initial fees paid by each member applicant to non-profit corporations are capital assets within meaning of WAC 458-20-106 where bylaws provide all members furnish capital to corporation, all amounts exceeding costs and expenses are credited to each member's capital amount, capital rights are retired if corporation is dissolved or liquidated, and the capital account of each member is adjusted to reflect each year's experience.

CONSTITUTIONAL VALIDITY. Rule 106 is constitutional on its face, as it applies alike to all nonprofit corporations and creates a distinction that is based upon a reasonable basis.

RETAIL SALES TAX - TRANSFER OF CAPITAL ASSETS - ADJUSTMENT OF BENEFICIAL INTEREST IN BUSINESS -- BURDEN ON TAXPAYER. A transfer of capital assets to or by a business is deemed not taxable to the extent the transfer is accomplished through an adjustment of the beneficial interests in the business. The burden is on the taxpayer to establish the facts concerning the adjustment of the beneficial interest in the business when exemption is claimed.

RETAIL SALES TAX - TAXATION OF BENEFICIAL INTEREST - PREVENTION. Rule 106 attempts to prevent taxation of transfers of beneficial interest grounded upon a reasonable basis.

CONSTITUTIONAL VALIDITY - LACK OF NECESSITY TO RESOLVE. Contention that Rule 106 is constitutionally invalid need not be resolved where taxpayer qualifies under disputed portion of rule.

B&O TAXES -- CASUAL SALE -- SALE OF DIVISION -- INVENTORY. That portion of the sales price attributable to taxpayer's business inventory is not exempt from B&O taxes as a "casual or isolated" sale even though it is included as part of the bulk sale of taxpayer's entire division. Accord: 90-83, 9 WTD 149 (1990); 88-169, 5 WTD 257 (1988).

USE TAX--TRANSFERS OF ASSETS--NON-WHOLLY-OWNED SUBSIDIARIES. The use tax is due on all transfers of assets from one company to another where no sales tax has been paid on the transaction, unless an exemption applies. When an asset is transferred from a non-wholly owned subsidiary for consideration, no exemption applies.

RETAIL SALES TAX -- USE TAX -- SUBSIDIARIES -- EQUITY. Transfers of equipment between wholly-owned subsidiaries with only adjustments to the equity accounts are not subject to retail sales tax or use tax.

USE TAX -- DETERMINATION OF TRUE VALUE. Where the taxpayer purchases real and personal property in a single transaction, allocates the purchase price in an "arms length transaction," the value placed on the personal property is in excess of the assessed value for property tax purposes, and the value as determined by the Department's Revenue Officer was merely a projected estimate, the use tax will be imposed on the agreed purchase price. Partial Accord: Det. No. 90-298, 11 WTD 67 (1990).

RETAIL SALE. Where the taxpayer transfers title to tangible personal property to its sole shareholder in exchange for reduction in the debt owed to its shareholder, there has been a retail sale.

BENEFICIAL INTEREST -- LIEN PURPOSES. There is no requirement that the definition of the term "beneficial interest" for lien attachment purposes and for tax-free transfers be identical in all aspects. The Department's long held definition of "beneficial interest" for lien purposes will not be overturned without legislative or judicial authority to do so.

MERGER - GAAP REQUIREMENT FOR SUBSTITUTED BASIS OF ASSETS - NO REALIZATION OF GAIN. Among nontaxable asset transfers cited in Rule 106 are transfers "pursuant to a reorganization under 26 USC Section 368 of the Internal Revenue Code, when capital gain or ordinary income is not realized." Even though GAAP might require a substituted basis for assets acquired in merger, only the historical cost basis will be used to calculate gain/loss for B&O tax purposes when these assets are eventually sold. Partial Accord. Det. No. 87-212, 3 WTD 259, 264 (1987).

CASUAL AND ISOLATED SALE -- SOLE PROPRIETOR-SHIP -- INTEREST ON REAL ESTATE CONTRACT. When a sole proprietor sells property, the sale is subject to business and occupation taxation unless an exemption or exception applies. When the sale is casual or isolated, the interest income from a real estate contract is not subject to taxation. ACCORD: Det. No. 90-86, 9 WTD 165 (1990).

B&O TAX -- RETAIL SALES TAX -- USE TAX -- REORGANIZATION -- ASSUMPTION OF DEBT. The assumption of debt in an otherwise exempt Rule 106 transaction does not render that transaction taxable.

RETAIL SALES TAX -- USE TAX -- REORGANIZATION -- TAXES NOT PREVIOUSLY PAID. When retail sales/use tax was not previously paid on property by the transferor in a Rule 106 reorganization because the property was properly exempt, and when the property will also be otherwise exempt when owned by the transferee, retail sales tax will not be imposed under Rule 106. This will not bar the imposition of use tax in the future if the property should lose its exempt status.

RETAIL SALES TAX -- TRANSFER -- ADJUSTMENT OF BENEFICIAL INTEREST -- TRUCKS AND TRAILERS. A change in the "mere form of ownership" of property under Rule 106 is deemed not a "retail sale" as defined under RCW 82.04.050. When trucks and vehicles are transferred in exchange for stock under Rule 106, a "sale" has not taken place. The RCW 82.08.0262 requirements are therefore not required to further exempt the transfer from retail sales tax.

CASUAL AND ISOLATED SALE -- STEP TRANSACTION RULE. A taxpayer may not avail itself of the Kimbell-Diamond rule and claim that two separate transactions are merely steps of a single transaction for tax purposes. The Washington Supreme Court's ruling in Estep v. King County, 66 Wn.2d 76, 401 P.2d 332 (1965) explicitly rejects the step transaction doctrine in real estate excise tax situations and the reasoning of the court is equally applicable to other excise taxes.

CASUAL AND ISOLATED SALE -- RETAIL SALES TAX -- BUSINESS AND OCCUPATION TAX. Where a registered taxpayer sells its capital assets in a casual and isolated sale, there is no business and occupation due. However, the registered taxpayer is required to collect retail sales tax on the transaction. Further, the sale of inventory, even in bulk, cannot be a casual and isolated sale, therefore, business and occupation taxes apply to that sale.

CASUAL OR ISOLATED SALE -- RETAIL SALES TAX. If a seller of tangible personal property is registered or required to be registered with the Department it must collect and remit retail sales tax even if a sale of that property is casual or isolated.

SERVICE B&O TAX -- CASUAL AND ISOLATED SALES -- PROPRIETARY INFORMATION -- TRADE SECRETS -- KNOW-HOW -- LICENSE -- ROYALTIES. A product manufacturer that develops a process, the use of which is 'licensed to others, must pay service B&O tax on its royalty receipts from the licensee.

CONTRIBUTIONS TO CAPITAL VERSUS SALES. Where a parent corporation procures the services of third parties for the benefit of a subsidiary and treats the costs of those services as loans to the subsidiary, calculating interest thereon, the parent may not treat the cost of the services as contributions to capital, exempt from taxation under Rule 106. The transactions are sales from the parent to the subsidiary and subject to state excise taxes.

B&O TAX -- SERVICE -- INTEREST CASUAL SALE. The purchase of items for resale falls within the definition of a business activity, even if a taxpayer's primary business is not buying and selling inventory. Sales of items that were purchased for resale are not casual and isolated sales, and the interest earned from the sale of such items is subject to the Service business and occupation tax.

Business and Occupation Tax - Application - Real Estate Contract Sales - Casual or Isolated Sales. Contract sales of 150 moorage slips were not casual or isolated sales under RCW 82.04.040 and WAC 458-20-106. Even though the taxpayer was not primarily engaged in real estate sales, he did sell the moorage slips in order to finance an upgrade of his marina and realize a financial gain. Thus, the sales constituted a business activity subject to the business and occupation tax.

RETAIL SALES/USE TAX -- WHOLESALE/RESALE EXEMPTION -- CASUAL OR ISOLATED SALE -- REGULAR COURSE OF BUSINESS -- INTENT. Generally, tangible personal property acquired for resale is not subject to sales tax. Not so, however, where the property acquired and resold is not of the kind usually sold by a taxpayer and where the intent to resell was formed after acquisition.

USE TAX-- EXEMPTION NOT TRANSFERABLE -- PRIVATE MOTOR VEHICLE. The use tax exemption provided a husband and wife in RCW 82.12.0251 for their privately owned motor vehicle is not transferable to their closely-held corporation when the couple contributed the automobile to their corporation as a capital asset.

USE TAX -- EXEMPTION -- ADJUSTMENT OF BENEFICIAL INTEREST -- TAX NOT PREVIOUSLY PAID BY TRANSFEROR. Where there has been a transfer of the capital assets to or by a business, the use of such property is not deemed taxable to the extent the transfer was accomplished through an adjustment of the beneficial interest in the business, provided the transferor previously paid sales or use tax on the property transferred. In this case, the transferor had not previously paid sales or use tax. The transferor had used the property in Washington. The transferee used the property in Washington.

CORPORATIONS -- STOCK -- CONSIDERATION. A transfer of corporate assets to a stockholder in exchange for surrender of stock is not a "sale" for retail sales tax or use tax purposes.

B&O TAX -- RETAIL SALES TAX -- CORPORATIONS -- TANGIBLE PERSONAL PROPERTY -- TRANSFER -- ADJUSTMENT OF BENEFICIAL INTEREST. Retail sales tax does not apply to transfers of corporate assets accomplished through an adjustment of beneficial interest because Rule 106 recognizes that a mere change in the form of ownership is not a "sale." Since such transfers are not sales, then neither are they subject to B&O tax.

CORPORATIONS -- TRANSFERS -- STOCK -- CONSIDERATION -- STEP TRANSACTION -- KIMBELL-DIAMOND RULE. The Kimbell-Diamond Rule, which is applied in the field of federal income taxation, is not applicable for purposes of determining B&O, sales, or use tax liability. Compare Estep v. King City 66 Wn2d 76 (1965) holding the rule inapplicable to the real estate excise tax.

LEASE OR RENTAL -- PARTNER -- JOINT VENTURE -- DIVISION OF PROFITS. Reimbursement to a partner in a joint venture for equipment provided to the joint venture constitutes a nontaxable division of profits rather than taxable rent where payments are not absolute.

RULE 106; RCW 02.04.040: CASUAL AND ISOLATED SALE - AUCTION SALES - ABANDONED ITEMS - STORAGE UNITS. Items sold at auction by a moving company after its customers abandon those items by defaulting on their storage payments are taxable, because they are routinely and continuously sold by the moving company and the income derived from those sales are an integral part of the moving company’s business.

WAC 458-20-106: RETAIL SALES TAX - B&O TAX - CONTRIBUTIONS OF CAPITAL - MANDATORY CAPITAL ASSESSMENT - TENNIS CLUB. A tennis club that requires its members to pay a capital assessment may not deduct the assessment as a contribution of capital.

B&O TAX -- AFFILIATES -- CONSOLIDATED RETURNS -- CLAIMED JOINT VENTURE -- TRANSFER BETWEEN VENTURERS. When a joint venturer/member transfers a capital asset to a joint venture in exchange for an interest in that joint venture, the transfer will be deemed nontaxable. The law, however, makes no provision for filing of consolidated returns by affiliated corporations or for the elimination of intercompany transactions from the measure of tax.

B&O TAX -- INTEREST -- SALES IN LIQUIDATION OF BUSINESS -- PROPERTY HELD FOR LEASE -- CASUAL AND ISOLATED SALES. Interest from sales of quarry property and used equipment made as part of the liquidation of a taxpayer's business found subject to B&O tax. The sales were not casual and isolated sales as there were several sales involved over a period of time to more than one party; the taxpayer's business had included buying and selling property for quarry sites; and some of the sales included equipment that the taxpayer had leased.

B&O TAX -- SALE OR LEASE --TRANSFER OF PATENT RIGHTS. A transfer of patent rights constitutes a sale (assignment) instead of a lease, where the assignee received all substantial patent rights, has the right to assign and license the patent to others, and the right to sue for infringement of the patent. Neither the terms used in the agreement, the right of the assignee to terminate the agreement, nor the fact the agreement is not recorded is dispositive.

B&O TAX -- CASUAL OR ISOLATED SALE -- TYPE OF PROPERTY -- PATENT RIGHTS. One-time assignment (sale) of patent rights by a taxpayer-manufacturer to its subsidiary, when the taxpayer was not in the business of developing or selling patents, developing or selling patents, held to be a casual and isolated sale since the patent was not the "type of property" which the taxpayer held himself out as selling, and such sales were not "routine and continuous."

USE AND/OR DEFERRED SALES TAX -- VALUE OF ARTICLE USED -- RETAIL SELLING PRICE -- BLUE BOOK VALUATION. Previously untaxed capital assets transferred to the corporation from a partnership were found subject to use and/or deferred sales tax on the value of the article used. Value of article used was determined by retail selling price of similar products of like quality and character as listed in an auctioneer's blue book.

SALES TAX -- CASUAL SALE -- SELLER'S DUTY TO COLLECT. The casual sale of a motor vehicle by a registered taxpayer is subject to retail sales tax. It is the seller's responsibility to collect such tax. If he or she fails to do so, the Department may pursue the seller for the amount of the tax regardless of whether the seller can recover the tax from the buyer.

CASUAL OR ISOLATED -- LEASING ACTIVITY -- SOLE BUSINESS CONDUCTED. When a taxpayer's only activity is the leasing of capital assets, that activity is not "casual or isolated."

RETAIL SALES TAX -- EXEMPTION -- "ADJUSTMENT IN THE BENEFICIAL INTEREST" -- RELATED BUSINESS ENTITIES -- LEASE OF TANGIBLE PERSONAL PROPERTY. An outright lease of tangible personal property from one business entity to another related business entity is not a transfer of a capital asset under the "adjustment in the beneficial interest" provisions of WAC 458-20-106. There is no transfer of assets in return for an adjustment in the beneficial interest in a business.

B&O TAX -- CASUAL OR ISOLATED SALE -- SALE OF BUSINESS. The sale of unsold inventory as part of the liquidation of the entire business is not a casual or isolated sale and therefore subject to B&O taxes.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

CASUAL AND ISOLATED -- SALE OF BUSINESS ASSET -- ONE-TIME-ONLY SALE. When the sale of a business asset, not originally intended to be offered for sale, was an isolated transaction, the receipt of the interest income by taxpayer is exempt from the business and occupation tax because the sale is a casual or isolated sale.