WSR 00-12-038

PROPOSED RULES

DEPARTMENT OF REVENUE


[ Filed May 31, 2000, 2:38 p.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 00-05-073.

Title of Rule: WAC 458-20-217 Lien for taxes.

Purpose: To explain the department's administrative collection remedies and procedures for delinquent liabilities.

Statutory Authority for Adoption: RCW 82.32.300.

Statute Being Implemented: RCW 82.32.210, 82.32.220, 82.32.235, 82.32.237, 82.32.145, and 60.28.040.

Summary: This rule explains the administrative collection remedies and procedures available to the Department of Revenue to collect unpaid and overdue tax liabilities. It discusses tax liens and their effects. The rule also explains the personal liability of persons in control of collected but unpaid sales tax.

Reasons Supporting Proposal: To incorporate the statutory changes reflected in section 2, chapter 318, Laws of 1995, to clarify how a warrant is executed, and to explain lien priorities as they apply to public improvement contracts.

Name of Agency Personnel Responsible for Drafting: Anne Gernhardt, 1025 Union Avenue, Room 500, Olympia, WA, (360) 570-6044; Implementation: Claire Hesselholt, 1025 Union Avenue, Room 400, Olympia, WA, (360) 570-6124; and Enforcement: Russell Brubaker, 1025 Union Avenue, Room 400, Olympia, WA, (360) 570-6131.

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: This rule explains the administrative collection remedies and procedures available to the Department of Revenue to collect unpaid and overdue tax liabilities. It discusses tax liens and liens that apply to probate, insolvency, assignments for the benefit of creditors, bankruptcy, and public improvement contracts. The rule also explains the personal liability of persons in control of collected but unpaid sales tax.

The rule provides important information regarding collection remedies authorized by several different statutes. Some of these remedies require certain actions by a person who is not the taxpayer (e.g. the recipient of a "Notice and order to withhold and deliver"). The information in this rule reduces the need for a person to research multiple documents to determine his or her responsibilities and the effect of the department's administrative collection remedies.

Proposal Changes the Following Existing Rules: The department is proposing a revision to WAC 458-20-217 in part to incorporate the statutory changes reflected in section 2, chapter 318, Laws of 1995. This legislation revised RCW 82.32.145 to impose a personal liability on persons in control of sales taxes collected by a limited liability company. The rule is also being revised to clarify how a tax lien (warrant) is executed, and to explain the lien priorities for taxes due on public improvement contracts.

No small business economic impact statement has been prepared under chapter 19.85 RCW. A small business economic impact statement is not required because the rule and the proposed amendments do not impose any requirements or burdens upon small businesses that are not already required by statute.

RCW 34.05.328 does not apply to this rule adoption. The proposed rule is an interpretive rule as defined in RCW 34.05.328.

Hearing Location: Capitol Plaza Building, 4th Floor, Large Conference Room, 1025 Union Avenue, Olympia, WA, on July 12, 2000, at 9:30 a.m.

Assistance for Persons with Disabilities: Contact Ginny Dale no later than ten days before the hearing date, TDD 1-800-451-7985, or (360) 586-0721.

Submit Written Comments to: Anne Gernhardt, Department of Revenue, P.O. Box 47467, Olympia, WA 98504-7467, fax (360) 664-0693, e-mail anneg@dor.wa.gov, by July 12, 2000.

Date of Intended Adoption: July 19, 2000.

May 31, 2000

Claire Hesselholt

Rules Manager

Legislation and Policy Division

OTS-3976.2


AMENDATORY SECTION(Amending Order 87-9, filed 12/15/87)

WAC 458-20-217
Lien for taxes.

(1) ((Any tax due and unpaid, and all increases and penalties thereon, constitute a debt to the state and may be collected by court proceedings in the same manner as any other debt, which remedy is in addition to any and all other remedies.

(2) Tax warrants.      When a warrant issued under RCW 82.32.210 and 82.32.220 has been filed with the clerk of the superior court and entered in the judgment docket, the warrant becomes a specific lien upon all goods, wares, merchandise, fixtures, equipment or other personal property used in the conduct of the business of the taxpayer, including property owned by third persons who have a beneficial interest, direct or indirect in the operation thereof, and no sale or transfer of such personal property in any way affects the lien.      However, the lien is not superior to bona fide interests of third persons which had vested prior to the filing of the warrant when such third persons do not have a beneficial interest, direct or indirect, in the operation of the business, other than securing the payment of a debt or the receiving of a regular rental on equipment; provided that "bona fide interest of third persons" shall not include any mortgage of real or personal property or any other credit transaction that results in the mortgagee or the holder of the security acting as the trustee for unsecured creditors of the taxpayer mentioned in the warrant who executed such chattel or real property mortgage or the document evidencing such credit transaction.

(a) Thus, where an oil company leases a filling station and other equipment to an operator under conditions whereby the operator is required to sell, or does sell, the products of the lessor, the lien will attach to the personal property leased by the oil company.      Likewise, where the owner of a tavern grants to another a concession to operate the lunch counter therein, the lien for unpaid taxes, increases, and penalties with respect to the operation of the lunch counter will attach to any equipment, fixtures, or other personal property owned by the tavern keeper but used by the concessionaire in the conduct of the business.      Similarly, the lien attaches to a stock of merchandise supplied to a dealer by a distributor, manufacturer, bank or finance company whether on consignment or under a security agreement where it appears that the distributor, manufacturer, bank or finance company has financed the dealer by means of capital loans or has in any other way aided or assisted in maintaining the dealer in business.      The amount of the warrant also becomes a lien upon the title to and interest in all other real and personal property of the taxpayer against whom it is issued and is the same as a judgment in a civil case docketed in the office of the clerk.

(b) Warrants so docketed are sufficient to support the issuance of writs of garnishment in favor of the state, provided the taxpayer has not been denied an opportunity to be heard regarding the assessment.

(3) Withhold and deliver.      The department of revenue is authorized to issue to any person, or to any political subdivision or department of the state, a notice and order to withhold and deliver property of any kind whatsoever when there is reason to believe that there is in the possession of such person, political subdivision or department, property which is or shall become due, owing or belonging to any taxpayer against whom a warrant has been filed.      The notice and order to withhold and deliver shall constitute a continuing levy on such property until the department shall issue its release of such levy.

(a) The notice and order to withhold and deliver may be served by the sheriff of the county wherein service is made, or by his deputy, or by any authorized representative of the department of revenue.      The notice and order to withhold and deliver may also be served by certified mail, return receipt requested, by the sheriff, deputy, or authorized representative of the department.      Persons upon whom service has been made are required to answer the notice within twenty days exclusive of the day of service.      The answer must be under oath and in writing.      If such answer states that it cannot be presently ascertained whether, in fact, any property is or shall become due, owing, or belonging to such taxpayer, the persons served herein are required to further answer when such fact can be ascertained with reasonable certainty.

(b) Property which may be subject to the claim of the department must be delivered forthwith to the department or its duly authorized representative upon demand, to be held in trust by the department for application on the indebtedness involved, or for return, without interest, in accordance with final determination of liability.      In the alternative, there must be furnished a good and sufficient bond satisfactory to the department conditioned upon final determination of liability.

(c) Failure of any person to make answer to an order to withhold and deliver within the prescribed time permits the court to render a judgment by default for the full amount claimed by the department in the notice to withhold and deliver, together with costs.

(4) Probate, insolvency, assignment for the benefit of creditors, or bankruptcy.      In all of these cases the claim of the state for unpaid taxes and increases and penalties thereon is a lien upon all real and personal property of the taxpayer, and the mere existence of such cases or conditions is sufficient to create the lien without any prior or subsequent action by the state, and in all such cases it is the duty of all administrators, executors, guardians, receivers, trustees in bankruptcy or assignees for the benefit of creditors, to notify the department of the existence thereof within thirty days from the date of their appointment and qualification.      In the event such notice is not timely given, such persons become personally liable for the payment of the taxes and all increases and penalties.

The lien attaches as of the date of assignment or of the initiation of court proceedings, but shall not affect the validity or priority of any earlier lien that may have attached previously in favor of the state under any other provision of the Revenue Act.

(5) Public improvement contracts.      The amount of all taxes, increases and penalties due or to become due under any chapter of the Revenue Act from a contractor or his successors or assignees with respect to a public improvement contract wherein the contract price is $20,000 or more is a lien prior to all other liens upon the amount of the retained percentage withheld by the disbursing officers, and the amount of all other taxes, increases and penalties due and owing from the contractor is a lien upon the balance of such retained percentage after all other statutory lien claims have been paid.

Any state, county or municipal officer charged with the duty of disbursing or authorizing the payment of public funds, before making final payment of the retained percentage to any person performing any such contract, or to his successors or assignees, must require the person to secure from the department a certificate that all taxes, increases and penalties due from such person, and all taxes to become due with respect to such contract have been paid in full or that they are, in the department's opinion, readily collectible without recourse to the lien and that said lien is therefore released.

(6) Trust fund accountability for retail sales tax.

(a) Background: This rule is promulgated pursuant to RCW 82.32.300 which directs that the department of revenue has the authority to implement the provisions of RCW 82.32.237, effective May 1, 1987.

(b) Generally: This rule implements legislation which is intended to enforce the timely remittance of retail sales tax to the department of revenue.      The statute accomplishes that intent by imposing personal liability for retail sales tax collected by the retail seller upon those persons who (i) control or supervise the collection of retail sales tax and hold the same in trust pursuant to RCW 82.08.050 or (ii) are charged with the responsibility for the filing of returns or the payment to the state of retail sales tax held in trust.

(c) Definitions:

(i) Person: Person means "person" as defined in RCW 82.04.030.      The use of the term person in the singular may mean persons or vice versa where appropriate in the circumstances or where the content requires the same.

(ii) Collected: The term "collected" shall mean actually and physically controlled.      A corporation shall be deemed to have actual and physical control if possession shall be in an agent of the corporation.

(iii) Termination: The term "termination" means revocation of the corporation's certificate of registration, the first act of liquidation or distribution of corporate assets with the intent to cease any further business activity after liquidation or distribution, the filing of a petition in bankruptcy court for complete liquidation or any other act evidencing the intent to quit business or close business activity.

(iv) Abandonment: The term "abandonment" means the officers, directors, and shareholders have relinquished all dominion and control of the corporate affairs and there is no one who acknowledges authority to act for or on behalf of the corporation.

(v) Dissolution: The term "dissolution" means statutory dissolution pursuant to chapter 23A.28 RCW.

(d) Requirements for assessment: Before the department may assess trust fund accountability for retail sales tax held in trust, the statute requires that the underlying retail sales tax liability be that of a corporation.      Second, there must also be a termination, dissolution or abandonment of the corporation.      Third, the person against whom personal liability is sought willfully failed to pay or to cause to be paid retail sales tax collected and held in trust.      Fourth, the person against whom personal liability is sought is a person who has control or supervision over the trust funds or is responsible for reporting or remitting the retail sales tax.      Finally, there must be no reasonable means to collect the tax directly from the corporation.

(e) Persons liable: Any person who controls or supervises the collection of retail sales tax or is charged with the responsibility for the filing of returns or the payment of retail sales tax collected and held in trust, may be personally liable to the state for the retail sales tax which was collected, held in trust, pursuant to RCW 82.08.050 and not paid over to the state.      There may be more than one person liable under this statute if the requirements as to each are present.

(i) "Control or supervision of the collection of retail sales tax" shall mean the person who has the power and responsibility under corporate bylaws, job description or other proper delegation of authority (as established by written documentation or through a course of conduct) to collect, account and deposit the corporate revenue and to make payment of the retail sales tax to the department of revenue.      The term means significant rather than exclusive control or supervision.      Thus, the term shall not mean the sales clerk who actually collects the funds from the customer or the person whose only responsibility is to take control of the funds and deposit the same into the bank, but it shall include the treasurer of the corporation if it is that person's responsibility to assure that the revenue is collected from the cash registers, tills or similar collection devices and that the amounts are deposited into the corporate account.      It may also include the bookkeeper if the bookkeeper has the responsibility to collect, account and deposit the corporate revenue.      In both examples, it is the treasurer or bookkeeper who have the significant control or supervision.

(ii) "Responsibility for the filing of returns or the payment of the retail sales tax collected and held in trust" shall mean the person who has the authority and discretion to file state excise tax returns and to determine which corporate debts should be paid.      The person who signs the state excise tax returns or signs checks on behalf of or for the corporation may be a responsible party if that person also has the authority and discretion to determine which corporate debts should be paid.      If the corporate account requires the signature of more than one person, then all such signatories may be a responsible party for trust fund accountability purposes.      A member of the board of directors, a shareholder or an officer may also become a responsible party if the director, shareholder or officer actually approves the payment of corporate debts whereby the result of such approval is to pay the trust funds to someone other than the department of revenue.

(f) Extent of personal liability: If a person is found personally liable for the retail sales tax held in trust, such person shall be liable for any retail sales tax held in trust including interest and penalties which have accrued or may be accruing on such taxes.      The liability of such person shall be limited to only the retail sales tax held in trust (and the interest and penalties accruing thereon) for the time that the person had control or supervision over the retail sales tax collected or had responsibility for the filing of returns or the payment to the state of the retail sales tax held in trust.

(i) The amount of liability assessable against a person for trust fund accountability shall be the amount of the retail sales tax actually collected and held in trust (during the period for which personal liability is sought) plus any penalties and interest accruing on said amount.      For corporations who report state excise taxes on the accrual basis or corporations who report retail sales tax in accordance with "method three" of WAC 458-20-199, the amount of the personal liability shall be reduced by payments of retail sales tax actually remitted to the state but not yet collected from the customer.

(ii) If the department has determined that there is no reasonable means of collection of the tax directly from the corporation and the corporation holds property which has a readily ascertainable value, then the department shall reduce the amount of assessable personal liability by an amount that represents the fair market value of such corporate property.      The fair market value determined by the department shall be rebuttable by a preponderance of the evidence through persons who are competent and otherwise qualified to give testimony as to value.      The term "fair market value" shall have its usual and customary meaning less reasonable costs of liquidation, if applicable.

(g) Willfully fails to pay or to cause to be paid: The statute defines the term "willfully fails to pay or to cause to be paid" as an intentional, conscious and voluntary course of action.      The failure to pay over such tax must be the result of a willful failure to pay or to cause to be paid to the state any retail sales tax collected on retail sales by the corporation as opposed to retail sales tax due on the corporation's consumable items.

For example, if the treasurer knows that the retail sales tax must be remitted to the state on the twenty-fifth day of the following month, but rather than holding the funds for payment on the twenty-fifth, uses such funds to pay for any other obligation such as the payroll or additional inventory, such act is an intentional, conscious and voluntary course of action.      If there are insufficient funds on the twenty-fifth day of the following month to pay over to the state, the treasurer will have willfully failed to pay or to cause to be paid retail sales tax held in trust.

(h) Circumstances beyond the control: Any person, who shall otherwise meet the requirements for personal liability, shall not be personally liable if the failure to pay or to cause to be paid is the result of circumstances beyond the control of such person and that person has exercised good faith in collecting and attempting to hold the funds in trust.      The following examples are provided for illustrative purposes only and they do not, in any way, limit the scope of the circumstances which may be beyond the control of the person against whom liability is sought.      Each case will be determined in accordance with its particular facts and circumstances.

(i) Immediately prior to timely payment of the retail sales tax, unknown to the person against whom personal liability is sought, the Internal Revenue Service levies and seizes the money.      Such occurrence is beyond the control of the person against whom personal liability is sought.

(ii) Immediately prior to timely payment of the retail sales tax, unknown to the person against whom personal liability is sought, the person learns that the business is the victim of an embezzler, the criminal act of which has been reported and duly documented by the local law enforcement authority.      Such occurrence is beyond the control of the person against whom personal liability is sought.

(iii) Immediately prior to timely payment of the retail sales tax, unknown to the person against whom personal liability is sought, the bank in which the retail sales tax has been deposited exercises a right of offset and removes the money from the taxpayer's control.      Such occurrence is beyond the control of the person against whom personal liability is sought.

(iv) Prior to the date for timely payment of the retail sales tax, the person against whom personal liability is sought agrees to a judgment against the corporation and allows the judgment creditor to garnish the funds held in trust and become a preferred creditor over the state.      Such occurrence lacks good faith and is not beyond the control of the person against whom personal liability is sought.

(i) No reasonable means of collection: Before the department is authorized to pursue personal liability for retail sales tax under the trust fund theory, the department must find that there is no reasonable means of collecting the retail sales tax directly from the corporation.

"No reasonable means of collection" shall mean that the burden to pursue the corporation's assets may outweigh the benefits to be achieved.      Inconvenience of collection alone is insufficient to establish the absence of a reasonable means of collection.      This standard, however, does not require that the department liquidate all assets of the corporation before it can pursue recourse under the theory of trust fund accountability.      A lack of a reasonable means of collection is illustrated by the following examples.      (These examples are used for illustration only and they shall not be considered the only circumstances under which the meaning of the phrase shall apply.)

(i) Assume that the corporation owned real estate upon which there were first and second mortgages.      The value of the property may satisfy the first and second lien holders, but it is doubtful that, after costs of sale, there would be sufficient value remaining to satisfy all or a part of the trust fund liability.      A reasonable means of collection is not present, because the cost to pursue the corporation's real property may produce no value with which to satisfy any or all of the liability.

(ii) Assume that the corporation owned miscellaneous office furniture and equipment.      The value of the property is negligible.      A reasonable means of collecting the tax is not present, because the burden to liquidate all assets in order to recover a negligible value outweighs the benefit of a few dollars to be recovered.

(j) Notice of personal liability: The department shall give the person against whom personal liability is sought notice in accordance with RCW 82.32.130.      The notice shall include the taxpayer's name as well as registration, tax assessment and tax warrant numbers, if any, of the corporation; the name of the person against whom the personal liability is sought; a statement that there is no reasonable means of collection and the reasons for such conclusion; and the capacity (control/supervision or responsible person) upon which the department seeks to base the personal liability.

(k) Appeal of trust fund accountability assessment: Any person who has received an assessment under the authority of RCW 82.32.237, and this section shall have the right to proceed under WAC 458-20-100 and any other remedy found in RCW 82.32.160, 82.32.170, 82.32.180, 82.32.190, and 82.32.200.)) Introduction. This rule provides an overview of the administrative collection remedies and procedures available to the department of revenue (department) to collect unpaid and overdue tax liabilities. It discusses tax liens and the liens that apply to probate, insolvency, assignments for the benefit of creditors, bankruptcy and public improvement contracts. The rule also explains the personal liability of persons in control of collected but unpaid sales tax. Although the department may use judicial remedies to collect unpaid tax, most of the department's collection actions are enforced through the administrative collection remedies discussed in this rule.

(2) Tax liens. The department is not required to obtain a judgment in court to have a tax lien. A tax lien is created when a warrant issued under RCW 82.32.210 is filed with a superior court clerk who enters it into the judgment docket. A copy of the warrant may be filed in any county in this state in which the department believes the taxpayer has real and/or tangible personal property. The department is not required to give a taxpayer notice prior to filing a tax warrant. Peters v Sjoholm, 95 Wn.2d 871, 877, 631 P.2d 937 (1981) appeal dismissed, cert. denied 455 U.S. 914 (1982). The tax lien is an encumbrance on property. The department may enforce a tax lien by administrative levy, seizure or through judicial collection remedies.

(a) Attachment of lien. The filed warrant becomes a specific lien upon all personal property used in the conduct of the business and a general lien against all other real and personal property owned by the taxpayer against whom the warrant was issued.

(i) The specific lien attaches to all goods, wares, merchandise, fixtures, equipment or other personal property used in the conduct of the business of the taxpayer. Other personal property includes both tangible and intangible property. For example, the specific lien attaches to business assets such as accounts receivable, chattel paper, royalties, licenses and franchises. The specific lien also attaches to property used in the business which is owned by persons other than the taxpayer who have a beneficial interest, direct or indirect, in the operation of the business. (See subsection (3) below for what constitutes a beneficial interest.) The lien is perfected on the date it is filed with the superior court clerk. The lien does not attach to property used in the business that was transferred prior to the filing of the warrant. It does attach to all property existing at the time the warrant is filed as well as property acquired after the filing of the warrant. No sale or transfer of such personal property affects the lien.

(ii) The general lien attaches to all real and personal nonbusiness property such as the taxpayer's home and nonexempt personal vehicles.

(b) Lien priorities. The department does not need to levy or seize property to perfect its lien. The lien is perfected when the warrant is filed. The tax lien is superior to liens that vest after the warrant is filed.

(i) The lien for taxes is superior to bona fide interests of third persons that vested prior to the filing of the warrant if such persons have a beneficial interest in the business.

(ii) The lien for taxes is also superior to any interest of third persons that vested prior to the warrant if the interest is a mortgage of real or personal property or any other credit transaction that results in the mortgagee or the holder of the security acting as the trustee for unsecured creditors of the taxpayer mentioned in the warrant.

(iii) In most cases, to have a vested or perfected security interest in personal property, the secured party must file a UCC financing statement indicating its security interest. RCW 62A.9-301. See RCW 62A.9-302 for the exceptions to this general rule. The financing statement must be filed prior to the filing of the tax warrant for the lien to be superior to the department's lien.

(c) Period of lien. A filed tax warrant creates a lien that is enforceable for the same period as a judgment in a civil case that is docketed with the clerk of the superior court. RCW 82.32.210(4). A judgment lien expires ten years from the date of filing. RCW 4.56.310. The department may extend the lien for an additional ten years by filing a petition for an order extending the judgment with the clerk of the superior court. The petition must be filed within ninety days of the expiration of the original ten-year period. RCW 6.17.020.

(3) Persons who have a beneficial interest in a business. A third party who receives part of the profit, a benefit, or an advantage resulting from a contract or lease with the business has a beneficial interest in the operation of the business. A party whose only interest in the business is securing the payment of debt or receiving regular rental payments on equipment does not have a beneficial interest. Also, the mere loaning of money by a financial institution to a business and securing that debt with a UCC filing does not constitute a beneficial interest in the business. Rather, a party who owns property used by a delinquent taxpayer must also have a beneficial interest in the operation of that business before the lien will attach to the party's property. The definition of the term "beneficial interest" for purposes of determining lien priorities is not the same as the definition used for tax free transfers described in WAC 458-20-106.

(a) Third party. A third party is simply a party other than the taxpayer. For example, if the taxpayer is a corporation, an officer or shareholder of that corporation is a "third party" with a beneficial interest in the operation of the business. If the corporate insider has a security interest in property used by the business, the tax lien will be superior even if the corporate insider's lien was filed before the department's lien.

(b) Beneficial interest of lessor. In some cases a lessor or franchisor will have a beneficial interest in the leased or franchised business. For example, an oil company that leases a gas station and other equipment to an operator and requires the operator to sell its products is a third party with a beneficial interest in the business. Factors which support a finding of a beneficial interest in a business include the following:

(i) The business operator is required to pay the lessor or franchisor a percentage of gross receipts as rent;

(ii) The lessor or franchisor requires the business operator to use its trade name and restricts the type of business that may be operated on the premises;

(iii) The lease places restrictions on advertising and hours of operation; and/or

(iv) The lease requires the operator to sell the lessor's products.

(c) A third party who has a beneficial interest in a business with a filed lien is not personally liable for the amounts owing. Instead, the amount of tax, interest and penalties as reflected in the warrant becomes a specific lien upon the third party's property that is used in the business.

(4) Notice and order to withhold and deliver. A tax lien is sufficient to support the issuance of a writ of garnishment authorized by chapter 6.27 RCW. RCW 82.32.210(4). A tax lien also allows the department to issue a notice and order to withhold and deliver. A notice and order to withhold and deliver (order) is an administrative garnishment used by the department to obtain property of a taxpayer from a third party such as a bank or employer. See RCW 82.32.235. The department may issue an order when it has reason to believe that a party is in the possession of property that is or shall become due, owing or belonging to any taxpayer against whom a warrant has been filed.

(a) Service of order. The department may serve an order to withhold and deliver to any person, or to any political subdivision or department of the state. The order may be served by the sheriff or deputy sheriff of the county where service is made, by any authorized representative of the department, or by certified mail.

(b) Requirement to answer order. A person upon whom service has been made is required to answer the order in writing within twenty days of service of the order. The date of mailing or date of personal service is not included when calculating the due date of the answer. All answers must be true and made under oath. If an answer states that it cannot presently be ascertained whether any property is or shall become due, owing, or belonging to such taxpayer, the person served must answer when such fact can be ascertained. RCW 82.32.235.

(i) If the person served with an order possesses property of the taxpayer subject to the claim of the department, the party must deliver the property to the department or its duly authorized representative upon demand. If the indebtedness involved has not been finally determined, the department will hold the property in trust to apply to the indebtedness involved or for return without interest in accordance with the final determination of liability or nonliability. In the alternative, the department must be furnished a satisfactory bond conditioned upon final determination of liability. RCW 82.32.235.

(ii) If the party upon whom service has been made fails to answer an order to withhold and deliver within the time prescribed, the court may enter a default judgment against the party for the full amount claimed owing in the order plus costs. RCW 82.32.235.

(c) Continuing levy. A notice and order to withhold and deliver constitutes a continuing levy until released by the department. RCW 82.32.237.

(d) Assets that may be attached. Both tangible assets, as a vehicle, and intangible assets may be attached. Examples of intangible assets that may be attached by an order to withhold and deliver include, but are not limited to, checking or savings accounts; accounts receivable; refunds or deposits; contract payments; wages and commissions, including bonuses; liquor license deposits; rental income; dealer reserve accounts held by service stations or auto dealers; and funds held in escrow pending sale of a business. Certain insurance proceeds are subject to attachment such as the cash surrender value of a policy. The department may attach funds in a joint account that are owned by the delinquent taxpayer. Funds in a joint account with the right of survivorship are owned by the depositors in proportion to the amount deposited by each. RCW 30.22.090. The joint tenants have the burden to prove the separate ownership.

(e) Assets exempt from attachment. Examples of assets which are not attachable include Social Security, railroad retirement, welfare, and unemployment benefits payable by the federal or state government.

(5) Levy upon real and/or personal property. The department may issue an order of execution, pursuant to a filed warrant, directing the sheriff of the county in which the warrant was filed to levy upon and sell the real and/or personal property of the taxpayer in that county. RCW 82.32.220. If the department has reason to believe that a taxpayer has personal property in the taxpayer's possession that is not otherwise exempt from process or execution, the department may obtain a warrant to search for and seize the property. A search warrant is obtained from a superior or district court judge in the county in which the property is located. See RCW 82.32.245.

(6) Probate, insolvency, assignment for the benefit of creditors or bankruptcy. In all of these cases or conditions, the claim of the state for unpaid taxes and increases and penalties thereon, is a lien upon all real and personal property of the taxpayer. RCW 82.32.240. All administrators, executors, guardians, receivers, trustees in bankruptcy, or assignees for the benefit of creditors are required to notify the department of such administration, receivership, or assignment within sixty days from the date of their appointment and qualification. In cases of insolvency, this includes the duty of the person who is winding down the business to notify the department.

(a) The state does not have to take any action to perfect its lien. The lien attaches the date of the assignment for the benefit of creditors or of the initiation of the probate or bankruptcy. In cases of insolvency, the lien attaches at the time the business becomes insolvent. The lien, however, does not affect the validity or priority of any earlier lien that may have attached in favor of the state under any other provision of the Revenue Act.

(b) Any administrator, executor, guardian, receiver, or assignee for the benefit of creditors who does not notify the department as provided above is personally liable for payment of the taxes and all increases and penalties thereon. The personal liability is limited to the value of the property subject to administration that otherwise would have been available to pay the unpaid liability.

(c) In probate cases in which a surviving spouse is separately liable for unpaid taxes and increases and penalties thereon, the department does not need to file a probate claim to protect the state's interest against the surviving spouse. The department may collect from the surviving spouse's separate property and any assets formerly community property which become the surviving spouse's property. If the deceased spouse and/or the community also was liable for the tax debt, the claim also could be asserted in the administration of the deceased spouse's estate.

(7) Lien on retained percentage of public improvement contracts. Every public entity engaging a contractor under a public improvement project of twenty thousand dollars or more, shall retain five percent of the total contract price, including all change orders, modifications, etc. This retainage is a trust fund held for the benefit of the department and other statutory claimants. In lieu of contract retainage, the public entity may require a bond. All taxes, increases, and penalties due or to become due under Title 82 RCW from a contractor or the contractor's successors or assignees with respect to a public improvement contract of twenty thousand dollars or more shall be a lien upon the amount of the retained percentage withheld by the disbursing officer under such contract. RCW 60.28.040.

(a) Priorities. The employees of a contractor or the contractor's successors or assignees who have not been paid the prevailing wage under the public improvement contract have a first priority lien against the bond or retainage. The department's lien for taxes, increases, and penalties due or to become due under such contract is prior to all other liens. The amount of all other taxes, increases and penalties due from the contractor is a lien upon the balance of the retained percentage after all other statutory lien claims have been paid. RCW 60.28.040.

(b) Release of funds. Upon final acceptance by the public entity or completion of the contract, the disbursing officer shall contact the department for its consent to release the funds. The officer cannot make any payment from the retained percentage until the department has certified that all taxes, increases, and penalties due have been paid or are readily collectible without recourse to the state's lien on the retained percentage. RCW 60.28.050 and 60.28.051.

(8) Personal liability for unpaid trust funds. The retail sales tax is to be held in trust. RCW 82.08.050. As a trust fund, the retail sales tax is not to be used to pay other corporate or personal debts. RCW 82.32.145 imposes personal liability on any responsible person who willfully fails to pay or cause to be paid any collected but unpaid retail sales tax. Collection authority and procedures prescribed in chapter 82.32 RCW apply to the collection of trust fund liability assessments.

(a) Responsible person. A responsible person is any officer, member, manager, or other person having control or supervision of retail sales tax funds collected and held in trust or who has the responsibility for filing returns or paying the collected retail sales tax.

(i) A responsible person may have "control and supervision" of collected retail sales tax or the responsibility to report the tax under corporate bylaws, job description, or other proper delegation of authority. The delegation of authority may be established by written documentation or by conduct.

(ii) A responsible person must have significant but not necessarily exclusive control or supervision of the trust funds. Neither a sales clerk who only collects the tax from the customer nor an employee who only deposits the funds in the bank has significant supervision or control of the retail sales tax. An employee who has the responsibility to collect, account for, and deposit trust funds does have significant supervision or control of the tax.

(iii) A person is not required to be a corporate officer or have a proprietary interest in the business to be a responsible person.

(iv) A member of the board of directors, a shareholder, or an officer may have trust fund liability if that person has the authority and discretion to determine which corporate debts should be paid and approves the payment of corporate debts out of the collected retail sales trust funds.

(v) More than one person may have personal liability for the trust funds if the requirements for liability are present for each person.

(b) Requirements for liability. In order for a responsible person to be held personally liable for collected and unpaid retail sales tax:

(i) The tax must be the liability of a corporate or limited liability business;

(ii) The corporation must be terminated, dissolved, or abandoned;

(iii) The failure to pay must be willful; and

(iv) The department must not have a reasonable means of collecting the tax from the corporation.

(c) Willful failure to pay. A willful failure to pay means that the failure was an intentional, conscious, and voluntary course of action. An intent to defraud or a bad motive is not required. For example, using collected retail sales tax to pay other corporate obligations is a willful failure to pay the trust funds to the state.

(i) A responsible person depositing retail sales tax funds in a bank account knowing that the bank might use the funds to off-set amounts owing to it is engaging in a voluntary course of action. It is a willful failure to pay if the bank does exercise its right of set off which results in insufficient funds to pay the corporate retail sales tax that was collected and deposited in the account. To avoid personal liability in such a case, the responsible party can set aside the collected retail sales tax and not commingle it with other funds that are subject to attachment or set off.

(ii) If the failure to pay the trust funds to the state was due to reasons beyond that person's control, the failure to pay is not willful. For example, if the person responsible for remitting the tax provides evidence that the trust funds were unknowingly stolen or embezzled by another employee, the failure to pay is not considered willful. To find that a failure to pay the trust funds to the state was due to reasons beyond that person's control, the facts must show both that the circumstances caused the failure to pay the tax and that the circumstances were beyond the person's control.

(iii) If a responsible person instructs an employee or hires a third party to remit the collected sales tax, the responsible person is not relieved of personal liability for the tax if the tax is not paid.

(d) Extent of liability. Trust fund liability includes the collected but unpaid retail sales tax as well as the interest and penalties due on the tax.

(i) An individual is only liable for trust funds collected during the period he or she had the requisite control, supervision, responsibility, or duty to remit the tax, plus interest and penalties on those taxes. RCW 82.32.145(2).

(ii) Any retail sales taxes that were paid to the department but not collected may be deducted from the retail sales taxes collected but not paid.

(e) No reasonable means of collection. The department has "no reasonable means of collection" if the costs of collection would be more than the amount that could be collected; if the amount that might be recovered through a levy, foreclosure or other collection action would be negligible; or if the only means of collection is against a successor corporation.

(f) Appeal of personal liability assessment. Persons who receive a notice of a personal liability assessment under RCW 82.32.145 are encouraged to contact the department's local field office that issued the assessment and request a supervisory conference if they dispute the assessment. If they are unable to reach agreement, any person who receives a personal liability assessment is entitled to the administrative and judicial appeal procedures provided by Title 32 RCW. RCW 82.32.145(4).

[Statutory Authority: RCW 82.32.300.      88-01-050 (Order 87-9), § 458-20-217, filed 12/15/87; Order ET 71-1, § 458-20-217, filed 7/22/71; Order ET 70-3, § 458-20-217 (Rule 217), filed 5/29/70, effective 7/1/70.]

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