This is an UPDATE to the article I posted October 16, 2014, entitled “Taking a Washington State Reseller Permit not the Only Way to Qualify for Wholesale Reporting.” In that article I discussed that the DOR’s published rule, WAC 458-20-102, provides an alternative method for a seller to prove to DOR that sales were wholesale, and not retail, even without the seller having taken a reseller permit from its buyer. This is no small item considering that that the biggest money maker for Washington is sales tax, that auditors always look for instances where sales tax has not been paid on retail sales, and that one of the easiest methods for an auditor to assess sales tax is by faulting a taxpayer for not having taken a reseller permit from the buyer. I stated in the 2014 article:
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.
At the time I wrote the article I did not find any DOR appeals determinations, or court decisions, discussing the existence and validity of Rule 102. I did discuss in the earlier blog the successful result I had recently had with an appeal, eliminating over $125,000 in sales tax assessed by audit. I did not give you a reference to the decision because it was not published by DOR. I am not surprised that the decision was not published because DOR generally disfavors the publication of taxpayer-favorable decisions. I was, therefore, surprised, but very pleased, to find a recently published DOR appeals determination affirming for a taxpayer the obvious fact that Rule 102 means what it says. Here, in brief, is the story.
In Determination 19-0011, a distributor of restaurant supplies, Chinese medicines, foods and other imported products, was audited. The auditor discovered several transactions with a customer that taxpayer had reported as wholesale, but for which it could not produce a reseller permit (until after the 120 day period allowed by law). Following standard practice audit rejected the late proof of reseller permits and the wholesales were reclassified to retail and sales tax was imposed. Taxpayer appealed.
In an unusually short review opinion, from a division of DOR that is know for its long-winded and boiler plate opinions reciting well established law, ARHD (appeals review and hearings division) bowed to the law, and even published its decision. I won’t recite the proof that showed how obvious it was that the taxpayer’s sales to its customer were wholesales. In my view the publication of the decision was not only correct but also very much overdue. It also cost the taxpayer time and money to appeal an obviously wrong audit result.
It would be gracious to say that the department has finally published a decision taxpayers have a right to know, and that the review office has in essence rebuked audit’s stubborn refusal to consider alternative methods of proof. But I am not so gracious because I have seen the effects of audit results that were beyond appeal (because my client had missed the deadline to appeal) that cost innocent wholesalers substantial sums of money, and jeopardized the business’s future because it did not know about the alternative methods of proof, or learned about them too late, or simply did not understand how to present the case clearly to the auditor. Worse, because many of the tax debts I have encountered have not been paid in full a refund action was not possible. I cannot be gracious under the circumstance where auditors know the law and haven’t given taxpayers an opportunity to fully show why their challenged sales were in fact sales at wholesale.
The case decision referred to above likely involved a small amount. But there are many cases I have had where the tax debt was large, especially in building contractor cases. The need for openness and honesty on the DOR’s part is needed in construction cases because numerous builders who act as subs have correctly reported their income as wholesales but cannot produce reseller permits. Yet, viewed reasonably, it is easily demonstrated that the work performed and the material provided were not sold directly to a property owner, but were sold to a up-stream contractor who may no longer be in existence or whose reseller permit was not timely obtained. Subcontractors should be be able to demonstrate facts and circumstances which establish that their jobs were indeed wholesale. And the DOR should explain this to them before or during an audit at the latest.
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