In an earlier article we discussed how our office persuaded the Washington Department of Revenue Appeals Division that our client had correctly reported its B & O tax as a wholesaler, and had no obligation to collect sales tax, even though it had not been able to obtain reseller permits from the out of state customers for whom it performed services. Taking a Washington State Reseller Permit not the Only Way to Qualify for Wholesale Reporting, October 6, 2014. That appeal has, after an additional reconsideration by Appeals which covered virtually every transaction disallowed by audit, resulted in reduction of a $215,000 assessment for uncollected sales tax to $750, a 99.65% reduction in the assessment.
Our client, an out of state business whose principal we have never met in person, was naturally pleased (“Absolutely tremendous!!! Very well done, Marty!!!”). There is , however, an irony in such praise, because the result was achieved not by clever legal analysis on our part, but by a simple and straightforward application of the published law to the facts. The problem was that while the audit division freely tells taxpayers they need reseller permits, auditors do not routinely tell taxpayers of an alternative method to prove that sales were wholesales. Moreover, as we discussed in the October 6 blog, because the rule is not adequately disclosed on the Department of Revenue website (in fact it actually seems the intent of the website to conceal the existence of the rule), a small business is unlikely to know of it because such a business does not have instant access to competent counsel or an in-house tax staff.
True, an online audit process Q & A states that “Audits are a learning opportunity for correct excise tax reporting,” and the Department of Revenue wants to encourage the use of reseller permits, but the same Q & A also explains the purpose of an audit being “to determine whether state excise taxes were reported and paid correctly.” Yet, as we showed on appeal, the client in the case we have discussed did “report and pay correctly” as a wholesaler, but had to hire our office to appeal and prove that point and had to wait months on an appeals calendar, during which time it was uncertain of whether it would suffer a large tax liability. To be fair to the audit division, they did not deny that taxpayer could prove its case on appeal, saying only that they had “not seen” the proof offered on appeal.
Audit’s failure to evaluate the nature of a taxpayer’s business in light of all of the rules which fairly apply often leaves a business with a wrong result that can be remedied only by appeal. If you are facing an audit by Washington’s Department of Revenue it is almost always worthwhile to seek competent counsel before the audit, where an hour or two consultation may help you get the right result on audit, and avoid the need for an expensive and lengthy appeals process.