United States

Washington: Adding Accessories to Imported Vehicles Caused Loss of Import Transportation Exemption

Jun 12, 2017
From KPMG TaxWatch

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An Administrative Law Judge (ALJ) for the Washington State Department of Revenue recently addressed whether a taxpayer owed wholesaling B&O tax on imported vehicles later delivered to Washington dealers. The taxpayer at issue imported motor vehicles, as well as parts and accessories, from Asia. The imported vehicles, which arrived via ports outside Washington State, were subsequently delivered to dealers all over the U.S. While at the ports, the vehicles were unloaded, inspected for damage, washed and fueled, and affixed with required labels. The cars were also outfitted with various parts and accessories called “port installed options” or “PIOs.” These included “throw-ins” such as floor mats, cargo nets, and iPod cables, plus attachments such as guards, roof rack cross rails, and rear spoilers. On audit, the Department assessed the taxpayer for wholesaling B&O tax on its receipts from sales of vehicles to Washington dealers. The taxpayer appealed the assessment.    

Under Washington law, an exemption from B&O tax applies to tangible personal property in import or export commerce. Pursuant to this exemption, the taxpayer would not be subject to B&O tax on its sales if they remained in “import transportation” until receipt by the Washington dealers. Import transportation is considered interrupted when property is “processed, handled, or otherwise stopped in transit for a business purpose other than shipping needs” within the United States. The issue before the ALJ was whether adding PIOs to the vehicles effectively stopped the importation process so that Washington State could tax the taxpayer’s receipts from sales of cars that were ultimately delivered to Washington dealers. The taxpayer argued that adding the PIOs did not stop the import process, but was part of the shipping consolidation process because at this point the taxpayer was combining goods for shipping that had already been ordered (the vehicles and the PIOs). The exemption statute, the taxpayer noted, also provided that the “processing” of products may occur in the United States if it is for the importer’s “shipping needs.” The taxpayer argued that installation of PIOs was for its shipping needs. However, the ALJ disagreed with taxpayer’s broad interpretation of what constitutes a shipping need. Instead, in the ALJ’s view, a “shipping need” is something necessary for shipping or something one is obliged to do in order to ship an item. The taxpayer’s processing activities at the port of debarkation were not just an incidental interruption arising from transportation needs, or a temporary interruption that furthered the transportation. Instead, these were activities that physically modified and changed the vehicles. Accordingly, the ALJ concluded that the activities were undertaken for a business purpose other than shipping needs and therefore they interrupted import transportation. For more information on Det. No. 16-0011, 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.