Wholesale Reporting | Tax Lawyer Martin Silver, PS

It is the position of the Department of Revenue that a taxpayer must have taken a Washington State reseller permit (or, before January 1, 2010, a resale certificate) from its customer to qualify its reporting for B & O as wholesale. Rule 102 provides that: The seller has the burden of proving that the buyer had a reseller permit at the time of sale. A seller may meet its burden by taking from the buyer, at the time of sale or within one hundred twenty days after the sale, a copy of a reseller permit issued to the buyer by the department under RCW 82.32.780 or 82.32.783. This is a particularly difficult rule where an out of state vendor may make wholesales in Washington to another out of state business which is not registered in Washington, and cannot give a reseller permit. This may happen, for example, where an out of state business performs services in Washington as a subcontractor for an unregistered out of state business. Even where the sub has in good faith reported its income as wholesale its sales will be reclassified to retail and sales tax will be imposed if it does not produce resller permits on audit. The B & O wholesale and retail rates are minimally different, but the imposition of sales tax usually presents not only an unexpected, but a very large financial burden.

But there is another way. The DOR’s own reseller permit rule, Rule 102(7)(h), states that:

Seller must provide documentation or information. If the seller has not obtained a reseller permit or the documentation described in (a), (b), (d), or (f) of this subsection, the seller is liable for the tax due unless it can sustain the burden of proving that a sale is a wholesale sale by demonstrating facts and circumstances that show the sale was properly made at wholesale. The department will consider all evidence presented by the seller, including the circumstances of the sales transaction itself, when determining whether the seller has met its burden of proof. It is the seller’s responsibility to provide the information necessary to evaluate the facts and circumstances of all sales transactions for which reseller permits are not obtained. Facts and circumstances that should be considered include, but are not necessarily limited to, the following:

• The nature of the buyer’s business. The items being purchased at wholesale must be consistent with the buyer’s business. For example, a buyer having a business name of “Ace Used Cars” would generally not be expected to be in the business of selling furniture;

• The nature of the items sold. The items sold must be of a type that would normally be purchased at wholesale by the buyer; and

• Additional documentation. Other available documents, such as purchase orders and shipping instructions, should be considered in determining whether they support a finding that the sales are sales at wholesale.

This may be a hard burden of proof to meet because a business may need to prove it with respect to each sale in an audit. But where there is a demonstrable pattern and uniformity among sales it may be less difficult than it seems. Moreover, it might be the only option to avoid a big sales tax bill. For example, where a business (S) performs wholesale services in Washington State for an out of state customer (C) who is not registered in this state S is obviously not going to be able to obtain a reseller permit for any services it renderered to C. But if the facts and circumstances show clearly that S was a subcontractor to C who in turn was performing services for an end user, then S should be treated as a wholesaler.

The problem for S in the above example is that it is unlikely to know of the Rule 102(7)(h) exception, especially if S itself is a foreign corporation and knows zero about Washington tax law. And neither the Department’s website nor the audit division is likely to tell S of the Rule and invite submission of documents which might establish wholesales. In other words, the DOR wants to see reseller permits, and the taxpayer is on its own to find out about possible alternative methods of proof. In, fact, the DOR’s website appears to go out of its way to obscure the law, and to say that the only possible way to establish wholesales is by having taken reseller permits. For example, buried deep in the Department’s website is a page entitled “cleanup services on foreclosed properties.” That page, which is difficult to find on the site to begin with, discusses exactly the situation that we described above, without mentioning the alternate means of proof. The example states that:

Limited circumstances under which a wholesale sale may occur

Instead of being hired by the property owner (e.g., bank, realtor, or investor), a business (Business S) performing foreclosure cleanup services may act as a subcontractor to a business (Business C) that was hired by the property owner. In such a situation, Business C hired by the property owner will collect and remit sales tax. Business S acting as a subcontractor would report its income under the wholesaling B&O tax classification, but only if it has received a reseller permit from Business C.

The statement that S can get the wholesale treatment it deserves “only if it has received a reseller permit from Business C” pretty much sums up DOR’s official position as of this writing. However, we recently appealed and won a case on exactly the pattern set out above. Our client called us and we appealed the reclassification of all sales from wholesale to retail. After assembling documents associated with the transaction we had little difficulty convincing the Appeals Division that our client was engaged exclusively in providing wholesale activities in Washington.

It is understandable that DOR would not want to publicize the possible entitlement to wholesale treatment in the absence of a reseller permit: but it is not even-handed enforcement of the law for the DOR’s own website to state that reseller permits are the only avenue to wholesale treatment. Nor is it even-handed and fair application of the law for the audit division to studiously avoid inviting documentation from the taxpayer which might establish the full facts and circumstances of the sales.

If you get caught in this situation, you are well advised to discuss the matter with competent state tax law counsel.