Washington – Sales Tax Paid by Lessee Results in Audit Adjustment

SALT Report 2688 – The Washington Department of Revenue issued a ruling regarding a sales tax assessment against a Taxpayer who rented cranes in Texas for use in Washington State. The Taxpayer in this case, rented the cranes from a Texas affiliate who, under the terms of the lease agreement, was responsible for shipping the cranes to Washington for use by the Taxpayer’s employees and a subcontractor.

In 2010, the Department of Revenue audited the Taxpayer’s books and records and issued an assessment for retail sales tax and use tax in addition to delinquent penalties and interest on the amounts associated with the crane rentals and subcontractor charges.  The Taxpayer filed an appeal against the entire assessment.

Upon review of the case, the Appeals Judge stated that there were two issues in this case.  One was the retail sales tax that the Taxpayer failed to collect from the subcontractor when it provided the cranes and operators, as this service falls within the definition of a retail sale under WAC 458-20-211.  The other issue was whether the Taxpayer is entitled to a credit for the retail sales tax that it paid in Texas as provided in RCW 82.12.035.

The Appeals Judge determined that the Taxpayer’s charges to the subcontractor for crane rentals with operators qualified as a taxable retail sale.  However, the subcontractor was able to provide documentation verifying that it had paid use tax for these rentals to the Department of Revenue. Therefore, the Judge ruled that the audit assessment be adjusted to account for the use tax that the subcontractor paid.  Further, the Appeals Judge stated that under Washington law, the Department can issue an assessment against either the buyer or the seller for unpaid sales tax, however it may only collect the tax once.

Additionally, the Judge found that the Taxpayer was owed a use tax credit for the retail sales tax it properly paid in Texas.  The Judge noted that under Texas law the retail sales tax was properly imposed on the crane rentals because the Taxpayer took delivery of the cranes in Texas before moving them to Washington for use. Specifically, the Judge noted that because the lease was signed while the cranes were in Texas, delivery was in Texas and therefore the transaction was subject to Texas sales tax.  As a result, the Taxpayer was entitled to a credit for the sales tax paid and the case was remanded to the Audit Division for an adjustment.

For Further Information

Washington Department of Revenue – Tax Determination No. 11-0363