WSR 99-04-014

PROPOSED RULES

DEPARTMENT OF REVENUE


[ Filed January 22, 1999, 3:00 p.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 98-11-083.

Title of Rule: WAC 458-20-216 Successors, quitting business.

Purpose: To explain the circumstances under which a person is considered a successor to a person quitting business. Successors are liable for the payment of any outstanding tax liability incurred by the person to whom the successor succeeds.

Statutory Authority for Adoption: RCW 82.32.300.

Statute Being Implemented: RCW 82.04.180 and 82.32.140.

Summary: The rule is being amended to reflect changes in the law since the last amendment in 1970. One change is the definition of successor. Another change is the elimination of the requirement to report bulk transfers to the Department of Revenue. The rule is also being amended to reflect the decision in a Court of Appeals case, Palmer v. Washington, 82 Wn. App. 367 (1996), regarding the successor liability of secured creditors who repossess property and then operate the business.

Reasons Supporting Proposal: To incorporate statutory changes and to reflect a Court of Appeals decision.

Name of Agency Personnel Responsible for Drafting: Greg Potegal, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 753-1971; Implementation: Claire Hesselholt, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 753-3446; and Enforcement: Russell Brubaker, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 586-0257.

Name of Proponent: Department of Revenue, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: The rule explains the tax liability of persons quitting business and successors to those persons. The law requires a taxpayer to remit any outstanding tax liability to the Department of Revenue within ten days of quitting business. If this tax is not paid by the taxpayer, any successor to the taxpayer becomes liable for the outstanding tax. This rule explains under what circumstances a person is considered a successor to a person quitting business. It explains the successor's responsibility for payment of an outstanding tax liability incurred by the person quitting business. The rule also provides examples illustrating when successorship does or does not apply.

Proposal Changes the Following Existing Rules: This is an amendment to WAC 458-20-216. The rule is being revised to reflect two statutory changes. One is the repeal of the bulk transfer provisions of the Uniform Commercial Code. Those provisions provided a means by which successors notified the Department of Revenue of their acquisition of the assets of a business. The revised rule eliminates reference to the bulk transfer provisions and provides another method for notification to the Department of Revenue. The other statutory change is a change to the definition of successor. The revised rule incorporates the current statutory definition. The revised rule also reflects a Court of Appeals decision concerning the liability of a secured creditor who repossesses assets from a debtor.

No small business economic impact statement has been prepared under chapter 19.85 RCW. No burden is imposed upon taxpayers that is not already imposed by statute.

The effect of the changes to the existing rule is to bring the rule into conformity with existing laws, to provide clarity, and to add definitions to assist taxpayers in understanding their legal obligation.

RCW 34.05.328 does not apply to this rule adoption. This is not a significant legislative rule. It is an interpretive rule that sets forth the Department of Revenue's interpretation of the statutes dealing with the liability of successors.

Hearing Location: Evergreen Plaza Building, 711 Capitol Way, Second Floor Conference Room, Olympia, WA, on March 10, 1999, at 10:00 a.m.

Assistance for Persons with Disabilities: Contact Virginia Sunde by March 1, 1999, TDD 1-800-451-7985 or (360) 586-8640.

Submit Written Comments to: Greg Potegal, Department of Revenue, P.O. Box 47467, Olympia, WA 98504-7467, fax (360) 664-0693, e-mail gregp@dor.wa.gov, by March 10, 1999.

Date of Intended Adoption: March 22, 1999.

January 22, 1999

Claire Hesselholt, Rules Manager

Legislation and Policy Division

OTS-2336.2


AMENDATORY SECTION(Amending Order ET 70-3, filed 5/29/70, effective 7/1/70)

WAC 458-20-216
Successors, quitting business.

(1) Introduction. RCW 82.32.140 requires a taxpayer to remit any outstanding tax liability to the department of revenue (department) within ten days of quitting business. If this tax is not paid by the taxpayer, any successor to the taxpayer becomes liable for the outstanding tax. This rule explains under what circumstances a person is considered a successor to a person quitting business. It explains the successor’s responsibility for payment of an outstanding tax liability incurred by the person quitting business. This rule also provides examples illustrating when successorship does or does not apply.

(2) "Successor" defined. For purposes of this rule, the term "successor" means:

(a) Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of the taxpayer's business, a major part of the materials, supplies, merchandise, inventory, fixtures, or equipment of the taxpayer. RCW 82.04.180. Persons acquiring only intangible assets such as copyrights and trademarks are not "successors."

(i) A person is a successor if he or she acquires a major part of the taxpayer’s materials, supplies, merchandise, inventory, fixtures, or equipment in bulk, whether he or she operates the business or not. A person acquires a "major part" of the materials, supplies, merchandise, inventory, fixtures, or equipment if he or she acquires more than fifty percent of the fair market value of any such property at the time of conveyance.

(ii) However, persons who acquire a major part of a taxpayer’s materials, supplies, merchandise, inventory, fixtures, or equipment through insolvency proceedings or regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement are not successors.

(b) Any person obligated to fulfill the terms of a contract as a guarantor of a defaulting contractor is deemed a successor to that contract. RCW 82.04.180.

(3) Responsibility for outstanding tax liability. Whenever ((any)) a taxpayer quits business, sells out, exchanges or otherwise disposes of his or her business ((or his stock of goods)), any tax ((payable hereunder)) administered by the department and which the taxpayer is liable for shall become immediately due and payable((, and such)). The taxpayer shall, within ten days ((thereafter, make a)) of quitting, selling out, exchanging, or otherwise disposing of the business, complete a tax return and pay the tax due.  ((Any person who becomes a successor to such business shall become liable for the full amount of the tax and)) RCW 82.32.140.

(a) A successor shall withhold from the purchase price a sum sufficient to pay any tax due from the taxpayer until ((such time as)) the taxpayer ((shall)) produces a ((receipt)) statement of tax status from the department ((of revenue)) showing either no tax is due or payment in full of any tax due ((or a certificate that no tax is due)).  If the tax is not paid by the taxpayer within ten days from the date of sale, exchange, or disposal of the business, the ((purchaser or)) successor shall become liable for the payment of the full amount of tax.  RCW 82.32.140.

(b) The payment ((thereof)) of the seller's tax liability by the ((purchaser or)) successor shall((, to the extent thereof,)) be deemed a payment upon the purchase price.  If ((such)) the sum of the payment to the department plus any payments made, directly or indirectly, to the seller is greater in amount than the purchase price, the amount of the difference shall become a debt due the ((purchaser or)) successor from the taxpayer. RCW 82.32.140.

((A successor shall not be liable for any tax due from the person from whom he has acquired a business or stock of goods, if he gives written notice to the department of such acquisition and no assessment is issued by the department within six months of receipt of such notice against the former operators of the business and a copy thereof mailed to such successors.

The word "successor" means any person who shall, through direct or mesne conveyance, purchase or succeed to the business, or portion thereof, or the whole or any part of the stock of goods, wares, merchandise or fixtures or any interest therein of a taxpayer quitting, selling out, exchanging or otherwise disposing of his business.  Any person obligated to fulfill the terms of a contract shall be deemed a successor to any contractor defaulting in the performance of any contract as to which such person is a surety or guarantor.

The work "successor" includes all persons who acquire the taxpayer's equipment or merchandise in bulk, whether they operate the business or not, unless the property is acquired through insolvency proceedings or regular legal proceedings to enforce a lien, security interest, judgment, or repossession under a security agreement.)) (c) A successor is not liable for any tax due from the taxpayer if:

(i) The successor provides written notice of the acquisition to the department; and

(ii) Within six months of receiving the written notice, the department has not issued a tax assessment against the taxpayer and mailed a copy of a notice of tax due to the successor. RCW 82.32.140.

(d) Written notice of the acquisition must be sent either to Department of Revenue, Taxpayer Account Administration, P.O. Box 47476, Olympia, Washington 98504-7476 or to one of the department's field offices. The six-month period begins upon the department's receipt of the written notice. The written notice must contain the following information:

(i) The taxpayer’s name, business name, address, and UBI number if known;

(ii) The date of the acquisition;

(iii) A statement that the successor acquired assets of the taxpayer who was quitting business; and

(iv) A description of the assets acquired.

(4) Examples.  The following factual situations illustrate the application of ((the foregoing:)) successorship. These factual situations should be used only as a general guide. The successorship status of each situation depends on all the facts and circumstances.

(((1))) (a) Taxpayer ((sells)) quits business and ((stock of goods)) sells all equipment, fixtures, and inventory to one purchaser. The taxpayer may be either solvent or insolvent at the time of sale.  The purchaser is ((the)) a successor.

(((2) Taxpayer sells stock of goods in bulk.  Purchaser is the successor, even though taxpayer continues in business through purchase of new stock.

(3))) (b) Taxpayer quits business, selling only intangible assets consisting of customer lists and a covenant not to compete. The purchaser is not a successor.

(c) Taxpayer sells business, including all fixtures((, good will, etc.,)) and equipment to ((one party)) Purchaser A, and ((his stock of goods)) all inventory to ((another)) Purchaser B.  Both purchasers are successors.

(((4) Taxpayer sells one branch of the business and stock of goods, and continues to carry on his business at other locations.  Purchaser is successor to the portion of the business purchased and liable for any tax incurred in the operation of that business.

(5))) (d) Taxpayer sells business, including all fixtures, equipment, and inventory in the following percentages of fair market value to three purchasers:


PURCHASER APURCHASER BPURCHASER C
55% of fixtures25% of fixtures20% of fixtures
30% of equipment30% of equipment40% of equipment
30% of inventory55% of inventory15% of inventory
Purchaser A is a successor because it has acquired a major part, 55% of the fair market value, of the fixtures of the taxpayer. Purchaser B is a successor because it has acquired a major part, 55% of the fair market value, of the inventory of the taxpayer. Purchaser C is not a successor because it has not acquired a major part of any of the categories of assets sold by the taxpayer.

(e) Taxpayer obtains a loan from a financial institution to purchase equipment, fixtures, and inventory. The financial institution secures the loan by taking a security interest in the equipment, fixtures, and inventory. Taxpayer quits business, leaving the equipment, fixtures, and inventory behind. The financial institution repossesses these items. The financial institution is not a successor.

(f) Taxpayer purchases all equipment and inventory under a line of credit extended by a bank and guaranteed by a third party. The third party perfects a security interest in the equipment and inventory. Taxpayer quits business, surrendering the equipment and inventory to the third party guarantor. The third party guarantor is not a successor.

(g) Taxpayer leaves business, including fixtures ((and stock of goods)), materials and inventory, which ((his)) the landlord holds for unpaid rent.  The landlord ((will be a successor unless he proceeds to foreclose his landlord's lien by posting notice and holding a sale by the sheriff.

(a) If the landlord, instead of foreclosing his lien, takes a bill of sale to all of the taxpayer's interest in the business or stock of goods in satisfaction of rent, he is a successor.

(b) If the landlord fails to foreclose his lien and sells the fixtures or stock of goods and the purchaser continues the business or a similar business, the purchaser is a successor.

(c) If the taxpayer does not leave any fixtures or stock of goods and the landlord engages in a like business in the same location or rents to a third person, neither the landlord nor the third person is a successor.

(6))) forecloses the landlord's lien using the summary foreclosure provisions of RCW 60.10.030, or holds a foreclosure sale by the sheriff, or accepts a bill of sale in satisfaction of the landlord's lien for rent created by RCW 60.72.010. The landlord is not a successor.

(h) Taxpayer purchases ((business,)) all equipment((, or stock of goods)) and inventory under a security agreement ((and)).

(i) If the property is repossessed by the vendor, the vendor is not a successor.

(((a) If the vendor sells to a third person who continues the business, the third persons is not a successor.

(b))) (ii) If the taxpayer sells his or her equity under the security agreement to a third person, the third person is a successor.

(((c))) (iii) If the ((property)) equipment and inventory is not repossessed and the vendor buys back the interest of the taxpayer without following the summary foreclosure provisions of RCW 60.10.030, the vendor is a successor((, and any third person who purchases the same from such vendor and continues the business is also a successor)).

(((7))) (i) Taxpayer dies or becomes bankrupt, goes into receivership, or makes an assignment for the benefit of creditors. (((a))) The executor, administrator, trustee, receiver, or assignee is not a successor but stands in the place of the taxpayer and is responsible for payment of tax out of the proceeds derived upon disposition of the assets. (((b))) A purchaser from the executor, administrator, trustee, receiver, or assignee is not a successor, unless under the terms of the purchase agreement ((he)) the purchaser assumes and agrees to pay taxes and/or lien claims.

(((8))) (j) Taxpayer is a contractor and is required to post a bond to insure completion of the contract.  Taxpayer defaults on the contract and the bonding company completes it.  The bonding company is a successor to the contractor to the extent of the contractor's liability for that particular contract and is also liable for taxes incurred in the completion of the contract.

((Bulk transfers.  Under chapter 62A.6 RCW persons whose principal business is the sale of merchandise from stock (including manufacturers) who transfer

(1) A major part of the materials, supplies, merchandise or other inventory of the business; or

(2) All or substantially all of the equipment of the business are required to furnish to the transferee a sworn list of all creditors, showing their names, addresses, and amounts owed.  The parties (both the transferor and transferee) are then required to prepare a schedule of property being transferred, the schedule to be sworn to by the transferor.  The list of creditors and schedule of property must be

(a) Preserved by the transferee for 6 months available for inspection and copying by any creditor,

(b) Filed by the transferee with the county auditor, and

(c) Served by the transferee on the department of revenue.

In addition to the foregoing, the transferee must, at least 10 days prior to taking possession of the goods or making payment for them, give notice of the transfer to

(1) All persons shown on the list of creditors,

(2) Any other persons known to hold or assert claims against the transferor, and

(3) The department of revenue.

The notice to creditors must also be filed with the county auditor and shall state

(1) That a bulk transfer is about to be made,

(2) Names and business addresses of the transferor and transferee,

(3) Whether debts of the transferor will be paid in full as they fall due and if so (a) the location and general description of the property to be transferred, (b) the estimated total of the transferor's debts, and (c) certain other information specified by RCW 62A.6-107.

Revised June 1, 1970.))

[Order ET 70-3, 458-20-216 (Rule 216), filed 5/29/70, effective 7/1/70.]

Washington State Code Reviser's Office