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August 27, 2015
That Silly Washington Court of Appeals … There’s No Income Tax In Washington!
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In November 2014, Division I of the Washington Court of Appeals decided the case of Steven Klein v. Dep’t of Revenue, 184 Wn. App. 344, 336 P.3d 663 (2014).  The dispute revolved around a manufacturer’s dealer cash programs.  Essentially, under specific terms and conditions, if a dealer sold certain Honda models, Honda would pay the dealer additional cash.  Klein argued that payments were cash discounts on the purchased inventory; the state argued that it was service income under the “catch-all” provision of service classification.  The court ruled that it was service income because the dealer had to “perform” to earn the additional cash.  (Query, does getting a 10% discount on an item constitute income to the payer if such discount is pursuant to paying the invoice early, paying with cash instead of credit or paying with a debit card instead of a credit card?)  Of particular consternation to the taxpayer and the taxpaying public was a statement in the court’s ruling:

"Therefore, contrary to Klein Honda's argument, the B & O tax is not a tax on only specific enumerated business activities, but rather on 'the gross revenues received in the course of doing business.'"

Steven Klein, Inc. v. State, Dep't of Revenue, 184 Wash. App. 344, 353, 336 P.3d 663, 667 (2014) (underlining supplied).   Let’s parse that out:  "…the B&O tax is [also a tax] on 'the gross revenues received in the course of doing business.'"  Whoa!  That sounds like an income tax, not an excise tax that applies to discrete activities that occur in the state measured by income.  The B&O tax is a tax on income. 

Klein thought so too.  So, it appealed to the Washington State Supreme Court.  Apparently, that is what the appellate court said, but that is not what the appellate court meant.  In an opinion released this morning, the Supreme Court characterizes Klein’s interpretation as a mischaracterization of the appellate court’s decision.[1]  Maybe it was, maybe it wasn’t, but anytime a court even hints that an income tax is valid is going to get the attention of taxpayers.  Here is how the court defuses the issue:

"Klein Honda argues the Court of Appeals' statement conflicts with this court's precedent, State ex rei. Stiner v. Yelle, 174 Wash. 402, 407, 25 P.2d 91 (1933), in which this court "upheld the B&O tax because it was a tax on business activity and not income."  Suppl. Br. Of Pet'r at 8. Although the Court of Appeals' reference to the B&O tax as a tax "on" gross income appears imprecise when taken out of context, the Court of Appeals' opinion, when read as a whole, correctly lays out the B&O tax scheme. The court correctly concluded that Klein Honda's participation in the dealer cash program "was a discrete business activity" taxable under the catchall provision." Steven Klein, Inc., 184 Wn. App. at 353-54.

That breeze you felt this morning was not caused by the weather; it was from the aggregate of taxpayers breathing again.

[1] "However, Klein Honda is factually incorrect and mischaracterizes the Court of Appeals' opinion."  Klein Honda v. Dep’t of Revenue, http://www.courts.wa.gov/opinions/pdf/910723.pdf, page 12.

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