May 30, 2016
From KPMG TaxWatch
The Washington Board of Tax Appeals recently addressed the scope of the so-called “trade-in exclusion.” Under Washington law, retail sales tax is imposed on the sale of tangible personal property, measured by the sales price of the property. The statutory definition of “sales price” includes everything of value received in payment “except separately stated trade-in property of like kind.” Under a departmental rule, the delivery of the trade-in and the purchase must be components of a single transaction. The taxpayer at issue was a retailer of video-gaming hardware (consoles, controllers, and accessories) and software (video games). As part of its business, the taxpayer purchased used video game hardware and software from its customers, either for cash or a more generous amount of in-store credit. Customers could use the trade-in credit for an immediate purchase, or have the credit loaded onto a stored-value card for later use. The taxpayer remitted Washington sales tax based on the sales price of merchandise less any trade-in credit applied to retail purchases. On audit, the Department asserted that the taxpayer should have collected sales tax on the full sales price of the merchandise sold (without any exclusion for trade-in credits). The taxpayer appealed the assessment to the Board of Tax Appeals.
The issue before the Board was whether the value of the customers’ video-game hardware and software was appropriately considered separately-stated, trade-in property of like kind. The Board first concluded that the “separately stated” requirement was met because the taxpayer’s sales receipts and transaction records separately identified the consideration derived from trade-in property. Next, the Board considered whether the video game hardware and software was “property of a like kind.” An example in the Department’s rule indicated that the trade-in exclusion does not encompass a trade of computer hardware for computer software. Thus, it appeared that the Department tried to assert that videogame hardware and software were not property of a like kind. However, the Board concluded that videogame hardware and software fell within the general category of “gaming equipment” and were property of a like kind. Finally, the Board addressed the situation when a customer traded in videogame equipment and received a trade-in credit on a stored value card that was applied to a later purchase. It appeared the Department was asserting that in that situation, the trade-in and the subsequent purchase were not components of a single transaction as required under the Department’s rule. The Board concluded that the single-transaction requirement does not necessitate the simultaneous transfer of property being traded in and property being purchased. To conclude otherwise would add to the rule a requirement not found in the plain language of the statute itself. Rather, the Board concluded that the single-transaction requirement would not be met if the trade-in transaction was contingent upon a separate transaction, such as a consignment sale. Because the taxpayer did not make its offer of trade-in value contingent on an intermediate transaction (e.g., the successful sale of the traded-in videogame equipment to another customer), the single-transaction requirement was met. The Board concluded that the trade-in exclusion applied to all transactions at issue. For more information on Gamestop Inc. v. Dep’t of Revenue, please contact Michele Baisler at 206-913-4117.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.