- The Washington B&O Tax -- Can It Be Passed Through to Customers?
- June 1, 2007
- Law Firm: Perkins Coie LLP - Seattle Office
The Washington Supreme Court has affirmed the lower courts' decisions holding that a car dealership could not add business and occupation (B&O) tax as an additional cost after negotiating a final purchase price for an automobile with its customer. Nelson v. Appleway Chevrolet, Inc. (Wash. Apr. 26, 2007).
Mr. Nelson purchased a used car from Appleway. Appleway charged several fees and taxes in addition to the agreed upon sales price. These additional charges included: 1) a $79.23 charge for B&O tax, and 2) sales tax measured by the agreed upon sales price and the B&O tax charge. Nelson filed a class action claim requesting declaratory relief that Appleway's collection of B&O tax violated RCW 82.04.500.
RCW 82.04.500 provides:
It is not the intention of this chapter that the taxes herein levied upon persons engaging in business be construed as taxes upon the purchasers or customers, but that such taxes be levied upon, and collectible from, the person engaging in the business activities herein designated and that such taxes shall constitute a part of the operating overhead of such persons.
While the earlier opinion of the Washington Court of Appeals appeared unclear on whether a business could pass on the B&O tax under any circumstances, the Washington State Supreme Court helped by making a clarifying factual statement – "after negotiating a final purchase price, Appleway added $79.23 for business and occupation (B&O) tax." Thus, the simple holding of the case is that, when parties to a transaction have agreed upon a final price, a seller cannot thereafter add on B&O tax. The decision should give sellers comfort in some respect. However, it raises questions about when a "final purchase price" is agreed upon.
The Court of Appeals had noted that the B&O tax was disclosed in Appleway's advertising and signage, which referred to "B&O Overhead." Presumably, these disclosures took place before any oral agreement on the price of the automobile was negotiated. Thereafter, an oral agreement was reached that the price for the auto would be $16,822. This, according to the Washington Supreme Court, was the "final purchase price." There was apparently no reference at this point to an additional charge for B&O tax. The parties then entered into a written contract that disclosed the additional B&O tax in four places. Ms. Nelson initialed a line on the acknowledgment of the written terms and conditions form that read: "I understand that the dealership is passing through the B&O tax overhead."
The State Supreme Court does not explain why the "final purchase price" was the oral price and not the one agreed to in writing, which expressly included the B&O tax. It is possible that the court felt that the writing should have only memorialized that which was agreed to orally and that the buyer, in an inferior bargaining position, was somehow disadvantaged. Alternatively, the court may have concluded that the final purchase price was orally set and never modified by the writing (e.g., while the writing added other terms, it did not modify the "purchase price"). Appleway may have undermined its own position with its disclosures in the written agreement. Appleway's form stated that "Business and Occupation taxes (B&O tax) have been assessed on the negotiated sales amount." (Emphasis added.) Thus, the court might have been thinking that the written agreement, by its reference to the "negotiated sales amount" was referring to the oral agreement. If that is the case, then the factual conclusion that the "final purchase price" was the oral one is consistent, and the ultimate conclusion is not troubling.
As a result of Appleway, sellers should be able to add B&O tax to the selling price of goods, so long as it is clearly part of the purchase price negotiations. ("[I]t is lawful for Appleway to disclose a B&O charge to Nelson during the course of negotiating a purchase price or later identify any claimed element of overhead. However, Appleway may not add a B&O charge as one of several fees and taxes after Appleway and Nelson negotiated and agreed upon a final purchase price.")
Sellers must scrupulously avoid agreeing to a final purchase price and then adding the B&O tax on top. However, sellers desiring to pass on B&O taxes to their customers should be very cautious because the factual uncertainty about negotiated "final purchase prices" is likely to give class action lawsuits continued viability for plaintiffs' lawyers in some cases. Persons who advertise a base price, particularly to individuals, and hope to add B&O tax thereafter, should tread lightly and consult Washington state and local tax counsel.
While the Court’s decision provides a more clear direction to sellers trying to pass through a B&O tax, it also provides some comfort to utilities. Regulated utilities appear to still be safer in passing through some taxes. The court noted that there is no statute like RCW 82.04.500 "prohibiting a pass through of utility taxes." This raises several questions, however. Is it because of an absence of such a statute that all utility taxes can be passed through, or would it still be equally true that any seller that agreed to (or advertised) a final purchase price could still be contractually prohibited from passing on a utility tax? Is it that regulated utilities, because of rate making, would simply have a better defined final price which might be a fixed dollar amount plus applicable taxes? What about a company that is not regulated, but is subject to a "utility" tax? It would seem that this case has little to do with the statute, and more to do with how the price is set -- whether by agreement or regulatory rate making. However, if state law expressly allows the addition of a tax, such as sales taxes, or maybe taxes authorized by a utility commission in rate making, these are more likely allowed to be passed on.