United States

Washington: Hearing Officer Addresses Various Tax Issues Stemming From Retailing Arrangement

Oct 09, 2017
From KPMG TaxWatch

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A Tax Hearing Officer for the Washington Department of Revenue recently addressed whether payments received for the use of retail space were subject to Washington B&O tax.  The determination also addressed the tax consequences of the parties’ retail arrangement. The taxpayers, retail store operators, contracted with a third-party to occupy space within their retail stores where the third-party made sales of shoes. The third-party paid an annual license charge for the use of the space within the retail stores.  If the “annual license” was for a lease or rental of real property, there was no B&O tax liability. However, if it merely granted a right to use real estate, B&O tax would be owed by the retail stores. Under Washington law, a license to use real estate merely grants a right to use the real property of another, but does not confer exclusive control over the same. Thus, they key issue was whether the third-party shoe retailer had “exclusive control” over the space. The Hearing Officer concluded that it did not. Therefore, the taxpayers were subject to B&O on the annual license fees. Notably, the third-party had no keys to the stores, its designated space could be changed or moved by the taxpayers at any time, and it had no control over such things as “lighting, heating, cleaning, repairing, and opening and closing the premises.”

The next issue was whether the taxpayers were “consignees” of the merchandise owned by the third-party shoe retailer so that the taxpayers owed retailing B&O tax on the proceeds from the shoe sales. Although the taxpayers did not own the shoes, they would be considered consignees if they had actual or constructive possession of the merchandise (shoes) and certain other elements were met. Constructive possession exists when a party has power to pass title to the tangible personal property of others. The Hearing Officer determined that this condition was met, as customers paid for merchandise using the taxpayers’ cashiers, the taxpayers’ store names were on the receipts, and the funds were deposited in the taxpayers’ accounts.  Furthermore, there was no agency relationship between the parties that would allow the taxpayers to avoid B&O liability. Accordingly, the Department concluded that the taxpayers were subject to retailing B&O tax on the receipts from the sales of the third-party’s merchandise. Finally, the Hearing Officer rejected the taxpayers’ challenges to the requirement that in the future it collect and remit to the Department sales tax on sales of the third-party’s merchandise. However, the taxpayers could avoid having to collect and remit sales and use tax if the records of the sales—the receipts—identified the third-party shoe retailer as the owner of the merchandise. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 16-0243, 36 WTD 467 (September 29, 2017).


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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.