Washington State installment interest

[jimenright]

Hey all you Washington State tax preparers. Did you know that interest on installment sales is subject to the Washington B&O Tax? I discovered this yesterday while researching another matter. I have a client who retired a few years ago after selling his business with an installment agreement. He has been retired for three years now with no business involvement.. I now have to tell him he owes back B&O Tax to the state. OUCH! I was not his preparer in the year of the sale and do not normally file B&O Tax returns since I am a seasonal preparer. This "gotcha" could also impact clients who are selling a home and carrying the contract.

Someone please tell me I am wrong about this.

[Maribeth]

You are wrong about selling a personal residence and receiving interest on it. This is not subject to B&O taxes.

Regarding the interest on the installment sale: if your client was receiving the interest in his normal course of business, then, yes, the interest is taxable for B&O purposes.

Regarding the interest that he is now receiving on the installment sale . . . . . my first impression is that it is not taxable for B&O purposes. When he sold his business, any sales taxes and the related B&O taxes would have been paid upon the transfer of the assets. If he sold his stock, then that is considered a sale of investment property, a casual and non-reoccuring event, and it would not be subject to B&O.

I have never, ever in 30 years of working in Washington State as a CPA ever, ever reported installment interest from a non-business source on the B&O return. Now, that does not make it correct, if indeed it should have been reported, but I have never seen it and have not done it.

See WAC 458-20-109 for some examples dealing specifically with real estate and utilities.

hth,

Maribeth

[jimenright]

Reply to Maribeth

I hope you are correct. My question was in response to the following quote from the DOR website tax topics (Interest from the sale of business assets).

"RCW 82.04.140 defines the term “business” to include “all activities engaged in with the object of gain, benefit, or advantage to the taxpayer …directly or indirectly.” Even though the taxpayer did not originally intend to sell the property, it did so and thereby accrued gain, benefit, or advantage in the form of interest income.

While one minor sale of assets by a business not normally engaged in selling such assets might be considered a casual or isolated sale, a significant sale of assets, even though done only once, cannot be so considered.

Therefore, interest income resulting from the installment sale of business assets is subject to the B&O tax under the “service and other activities” classification."

[jimenright]

reply to Maribeth

I forgot to thank you for your reply -- it got me on the right track, thanks.

Although the law seems ambiguous to me, I have decided that since WAC 458-20-109 states that the B&O Tax concerning interest recieved applies to interest in "the regular course of business" and that since my client is not required to have a business license, the tax does not apply to him.

I have sent an email to the DOR for clarification, but I have my decision Thanks again.

[Maribeth]

I agree with you. Since your client is not in a trade or business, no B&O tax is due. Again, I do not know if it is correct but I have not heard of it before, in your client's situation. Please let me know what kind of response you get from the DOR.

Thanks,

Maribeth

[veritas]

Sell a business in Portland on contract

and the City and County will tax the principal payments.

[sea-tax]

I have never seen B&O Tax charged on the installment sale of a business, home or any other asset. Not saying for 100% it is not the case. Logically B&O tax is paid by a operating business for the privelage of doing business in washington state.
Your client sounds to me like he is not operating a business but rather collecting income from the sale of an asset in this case a promisory note.
Interesting question though and I would love to find the answer, please post it when you get your response back from DOR.

[jimenright]

Marybeth and Sea-tax

I sent an email to the WA DOR to ask why they have not answered my question since they claim that inquiries are answered within 10 days. They replied that the request is still under review. It worries me a little that they were not able to reply directly. Maybe they think they have found a new source of revenue for our economically challenged state.

[Snaggletooth]

10 day sunset rule

I sent an email to the WA DOR to ask why they have not answered my question since they claim that inquiries are answered within 10 days. They replied that the request is still under review. It worries me a little that they were not able to reply directly. Maybe they think they have found a new source of revenue for our economically challenged state.

Should be that if they don't answer within 10 days, you get to do whatever you want.

By the way, I went to Pullyallup once. (Never mind the spelling, I'm from the educationally challenged rural south). I noticed everyone there had very muscular arms from all the pulling. Locals told me the high school consistently won the Washington State tug-of-war for several years...