SCOW: When Is an Overhead Tax Not an Overhead Tax?

The Washington business and occupation (B&O) tax is a slippery little devil. RCW 82.04.500 makes clear that the tax is a tax on the business itself — not a tax on purchasers or customers. Accordingly, the statute provides that the tax “shall constitute part of the operating overhead of” the business. In other words, it’s not a sales tax, which is paid by the customers but which is collected by the business.

In a previous opinion, Nelson v. Appleway Chevrolet, Inc., 160 Wn.2d 173 (2007), the Supreme Court held that a business was “not permitted to pass the tax through as an added charge to the final purchase price.” Apparently, however, there has been some question about the scope of Nelson‘s holding. How much does disclosure matter? What about negotiation with the customer? Well, the Ninth Circuit Court of Appeals had some questions as well, so they certified a question to the Washington Supreme Court in Peck v. AT&T Mobility (Wash., April 26, 2012):

Under RCW 82.04.500, may a seller recoup its business and occupation taxes where, prior to the sale of a monthly service contract, the seller discloses that in addition to the monthly service fee, it collects a surcharge to cover gross receipts taxes?

The Supreme Court held that, regardless of disclosure, RCW 82.04.500 “prevents a business from recouping the B&O tax as an added charge to its sales price.”

Here’s what happened: The plaintiff, James Bowden, bought a few cell phones and wireless plans from his local Cingular dealer. Prior to the sale, Cingular disclosed the surcharge as part of his bill; Bowden accepted the surcharge without objection or any attempt to negotiate or adjust the price plan. He just signed the contract. And then when he got his monthly bills, there were charges listed as “State B and O Surcharge” that amounted to $0.05 to $0.44 each month on top of the contract price.

So was that surcharge proper under Nelson? The Supreme Court concluded it was not. The statute declares that the tax shall be treated as overhead. Therefore, “like any overhead, such as rent, insurance, and other office expenses, RCW 82.04.500 permits businesses to pass the B&O tax through to its customers as overhead, but prevents businesses from directly imposing the tax on its customers.” In other words, the Court explained that the tax can be part of the sale price (like all overhead) but cannot be added on to the sale price as a tax or a fee.

For some reason, after explaining this result, the Supreme Court bent over backwards to distinguish a Court of Appeals opinion that might be at odds with the Court’s reasoning. In Johnson v. Camp Automotive, Inc., 148 Wn. App. 181 (2009), the Court of Appeals held that the business acted properly in itemizing the B&O tax because in that instance, the ultimate price was negotiated between the parties prior to the sale. The parties’ discussions of the B&O tax were merely a part of those negotiations. According to the Supreme Court, it was “implicit” in the Court of Appeals’s conclusion in Johnson that the B&O tax was “factored into the sales price”; the lower court’s holding was therefore consistent with Nelson. (I have no idea why the Supreme Court didn’t just set out its holding and reasoning and then drop a footnote along the lines of “to the extent Johnson is inconsistent with this opinion, it is overruled” or perhaps it could have just explicitly adopted the parts of Johnson that it liked. I dunno, the discussion of Johnson seemed very defensive for a Supreme Court opinion dealing with a lower court opinion.)

After a prolonged discussion of why Nelson and Johnson actually meant what the Court said they meant, the Court explained its holding as follows: “Put simply, whether disclosed or not, the seller could properly pass the B&O tax through as an overhead line itemization, but not as an added charge.”

That seems weird. Is the rule just a matter of where on the receipt a business decides to sum up various costs? If you have things like “materials,” “labor,” “profit margin,” and “B&O tax” at the top, before you sum them up to the sale price, then you’re fine because that’s all just itemized overhead. But if you sum up the other overhead items first to get the sale price, and then list “B&O tax” with sales tax or surcharges after the sale price, then that’s a violation of the law because you are passing the cost through to the customer. In both cases, there would be disclosure, but the Court made clear that the statute had nothing to do with disclosure.

In closing, the Court explained:

If businesses were allowed to add the tax (here, the tax was described as a “surcharge”) onto a sales price, consumers would effectively be taxed twice, making the B&O levy on businesses illusory and rendering RCW 82.04.500 meaningless.

Now, I’ll admit that I don’t really understand this line drawing by the Supreme Court. The difference between an itemized part of overhead and an itemized surcharge/tax seems quite ephemeral. But in the end, I think I side with the Court’s decision. Why? Well, I was convinced by the dissent of Chief Judge Madsen.

The dissent argued that the majority’s line drawing was nonsensical. (Okay, I’m with you so far.) But the dissent’s alternative solution was the following:

All of the facts and circumstances should be considered in order to determine whether a business has impermissibly imposed the tax on or collected it from the buyer, rather than treating it as overhead cost that can be recovered from the buyer through pricing goods or services.

In other words, instead of arbitrary line drawing, the dissent advocated for a case-by-case exhaustive inquiry into whether a given charge was really a tax or was really overhead — as if the consideration of all facts and circumstances could come to a “right” answer on that issue.

In the end, it seems to me that the legislature started this problem with the somewhat arbitrary and nonsensical line drawing. The legislature, not the Court, said businesses had to treat the tax as overhead and not as a pass-through. That’s tough, since money is fungible and hard to classify. But if the legislature has demanded a slippery classification, then I think the Court gets it right: just draw a line as best you can and stick with it. That has to be better than fact-intensive case-by-case judicial inquiries every time someone buys a cell phone.


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