The Washington Court of Appeals reversed the decision of the Washington Superior Court granting summary judgment to the Department of Revenue and remanded the matter for the superior court to grant summary judgment in favor of the taxpayer.
The taxpayer, a seller of vehicle extended warranties (VSCs), had challenged the Department’s determination that transactions in which vehicle dealers sold the taxpayer’s VSCs to vehicle buyers constituted retail sales by the taxpayer to the vehicle buyers rather than wholesale sales to the dealers.
Department of Revenue’s Argument
The Department contended that the taxpayer was engaged in retail sales of the VSCs to the dealers’ customers and that the dealers were acting as the taxpayer’s sales agents. The Department assessed business and occupation (B&O) taxes on the full retail price of the VSCs rather than just on the amount of the net dealer cost payments that the taxpayer received, and required the taxpayer to pay an estimated amount of sales taxes on the retail sales that dealers had not collected.
Regulatory Guidance
Wash. Admin. Code § 458-20-257(4)(b) provides that sales of agreements can be made at wholesale when the buyer will be reselling the agreement without intervening use. Here, the dealers clearly sold the VSCs to their customers without intervening use.
Moreover, the facts in this matter are nearly identical to a regulatory example, in which the transaction constituted a wholesale sale.
Reseller Permit Argument
As for the argument that a seller can only be deemed a wholesaler if that seller receives a reseller permit from the buyer, this premise can be overcome by demonstrating facts and circumstances, according to rules adopted by the Department, that the sale was at wholesale. Here, the facts were identical to the example in the relevant regulatory provision, which described a wholesale sale even without a reseller permit.
As such, the court concluded that the taxpayer was making wholesale sales of the VSCs to the dealers.
Rejection of Agency Argument
Although the Department contended that the dealers were acting as agents of the taxpayer and selling the VSCs in exchange for a commission, the court found this argument inconsistent with the actual relationship between the taxpayer and the dealers.
The court noted that a crucial factor for determining agency is the control over the manner of performance. Here, the taxpayer had almost no control over how the dealers marketed the VSCs.
Conclusion on Retail Price Obligation
Lastly, the court determined that the customer owed the retail sales price to the dealer rather than to the taxpayer, the same as in the regulatory example.
Case Reference:
Protective Administrative Services, Inc. v. Wash. Dept. Rev., Wash. Ct. App., Dkt. No. 56093-3-II, 11/08/2022.
Frequently Asked Questions
What was the central issue in the case between the taxpayer and the Washington Department of Revenue?
The key issue was whether sales of vehicle service contracts (VSCs) by dealers to consumers should be considered retail sales by the taxpayer or wholesale sales to the dealers. The court ultimately ruled in favor of the taxpayer, recognizing the sales as wholesale.
Why did the Department of Revenue consider the sales to be retail?
The Department argued that the dealers acted as the taxpayer’s agents and sold the VSCs on its behalf to consumers, making the taxpayer liable for retail business and occupation (B&O) and sales taxes on the full price of the VSCs.
What regulatory provision supported the taxpayer’s position?
Wash. Admin. Code § 458-20-257(4)(b) indicates that a sale can be considered wholesale when the buyer (the dealer) resells the product without any intervening use. The court found the sales aligned with this provision and with a matching example provided in the regulation.
Did the lack of a reseller permit from the dealers disqualify the transactions from being wholesale?
No, the court held that a reseller permit is not the sole determining factor. The nature of the transaction, including facts and circumstances, can establish a wholesale sale even without a reseller permit.
How did the court view the agency argument put forth by the Department?
The court rejected the Department’s claim that the dealers were agents of the taxpayer. It emphasized that the taxpayer did not control how the dealers marketed the VSCs, an essential component for establishing an agency relationship.