Washington – Court Rules that the Department Cannot Assess Additional Tax on Tax-Included Sales

SALT Report 1786 – The Washington Court of Appeals ruled that the Department of Revenue cannot assess additional sales tax based on the gross amount paid by a Taxpayer’s customers. The Taxpayer operates a chain of retail stores in Washington and advertises that their prices include all applicable sales taxes or that the Taxpayer will absorb the sales tax.

For accounting purposes, the Taxpayer calculates the sales tax based on the amount paid by the customer and remits that amount to the Department of Revenue.  To calculate the tax owed to the Department, the Taxpayer deducts an amount for tax from the gross sales rather than adding tax to the sales price paid by the customer.

During an audit, the Department examined the Taxpayer’s sales invoices and found that some of the receipts did not separate the retail sales tax from the selling price. Because the Taxpayer paid taxes based on the backing-out method, the Department determined that the Taxpayer had underpaid their taxes.  The Department concluded that the Taxpayer was obligated to pay taxes on the gross amount received from its customers and assessed additional taxes.

The Taxpayer appealed the assessment based on the former RCW 82.08.050 which states that, “for purposes of determining the tax due from the buyer to the seller and from the seller to the department it shall be conclusively presumed that the selling price quoted in any price list, sales document, contract or other agreement between the parties does not include the tax imposed by this chapter, but if the seller advertises the price as including the tax or that the seller is paying the tax, the advertised price shall not be considered the selling price.”

The Department argued that they based their assessment on the additional language of the statute which provides that if a Taxpayer fails to list the sales tax as a separate charge on the invoice or billing document the Department has the authority to compute the tax based on the gross amount received even if it includes all taxes due.

However, the Court determined that the penalty portion of the rule conflicts with the plain language of the statute in two ways.  First, it links the “separately stated” section with the “selling price” section when there is no clear link between the two sections other than being in the same subsection.  Second, it contradicts the mandate that when determining the tax due from an advertised tax-included sale, “the advertised price shall not be considered the selling price.”

Therefore, the Court ruled that because there is confusion between the mandate and the penalty sections, which results in a greater tax liability than is authorized by the Legislature, the penalty section of the rule cannot be enforced.  As a result the assessment against the Taxpayer was dismissed.

For Further Information:

The Court of Appeals of Washington Division Two – Case Number 42050-3-II