Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This section
explains the B&O and public utility taxation of finance charges, carrying
charges, interest and/or penalties received by taxpayers in the regular course
of business. This section also explains when these amounts are not part of the
selling price for retail sales tax purposes.
(2)
Business and occupation tax.
Persons who receive finance charges, carrying charges, service charges,
penalties and interest are taxable under the service and other business
activities classification on the receipt of amounts from these sources.
(a) Amounts received from these sources
include but are not limited to:
(i) Interest
received by persons engaged in public utility activities; and
(ii) Interest received by persons regularly
engaged in the business of selling real estate.
(b) Persons engaged in financial business
activities should refer to WAC
458-20-146.
(c) Amounts categorized as "interest" in a
lease payment are generally taxable in the retailing classification as part of
the total lease payment and part of the selling price for retail sales tax
purposes. See WAC
458-20-211.
(d) Interest or finance charges received from
an installment sale are taxable under the service classification.
(3)
Retail sales tax.
Retail sales tax applies as follows.
(a) Finance charges, carrying charges,
service charges, penalties and/or interest from installment sales are not
considered a part of the selling price of such property and are not subject to
the retail sales tax, when:
(i) The amount of
such finance charges, carrying charges, service charges, penalty, or interest
is in addition to the usual or established cash selling price; and
(ii) The amount is segregated on the
taxpayers' accounts; and
(iii) The
amount is billed separately to customers.
(b) Amounts designated as finance charges,
carrying charges, service charges or interest in a lease of tangible personal
property must be included in the measure of retail sales tax regardless of the
fact that such charges may be billed separately to customers. However, a
penalty or interest charge for failure of the customer to make a timely lease
payment is taxable under the service and other business activities
classification and not subject to retail sales tax.
(4)
Examples. The following
examples identify a number of facts and then state a conclusion as to whether
the situation results in taxable interest or finance charges. These examples
should be used only as a general guide. The tax status of each situation must
be determined after a review of all of the facts and circumstances.
(a) ABC Electric Company, who sells
electricity to consumers, receives $9,000.00 in late charges in the month of
November. These fees are taxable under the service and other classification of
the business and occupation tax. The public utility tax would not apply to this
income.
(b) XYZ Furniture Company
sells furniture and allows its customers to pay for the furniture over a
twelve-month period. The seller charges interest at twelve percent per annum
for allowing the customer to defer immediate payment. The interest charged the
customer is a separate activity from the sale of the furniture and is taxable
under the service and other business activities classification.
(c) Jane Doe is leasing a car from ABC
Leasing, Inc. The lease contract provides that if the customer is more than
fifteen days late in making the lease payment, a five percent penalty will be
charged. Jane Doe was more than fifteen days late in making her March payment
and was required to pay the five percent penalty. The penalty amount received
by ABC Leasing is a separate activity from the lease of the vehicle and is
taxable under the service and other activity business and occupation tax.
Retail sales tax does not apply to this amount.
(d) John Doe sold his personal residence on
contract. He receives monthly interest and principal payments. The interest is
received in exchange for the seller's deferring receipt of immediate payment.
The sale of the residence was not related to any other business activities and
John Doe has sold no other real estate. The interest is not taxable under the
B&O tax since the transaction was a casual and isolated sale.
(e) Judy Smith is engaged in business as a
real estate broker and regularly sells real estate for others. Judy Smith sold
her personal residence on contract. She receives monthly interest and principal
payments. She receives no other interest from real estate contracts. The sale
of her own residence can be distinguished from the sale of real estate for
others. Since this was a single sale of her own residence, it is a casual and
isolated sale and the interest is not subject to B&O tax.
(f) James Smith sold on contract seventeen of
twenty-three apartment complexes which he owned during a four-year period. He
receives payment of principal and interest every month from these sales. The
only other income he receives is from the rental of apartment units to
nontransients. The income which James Smith receives as interest from the sale
of the real estate is subject to the service and other B&O tax. The rental
of the apartment units is not taxable for the B&O tax. The courts have held
that the selling and financing of sales of capital assets by means of real
estate contracts does not constitute an investment within the meaning of
RCW
82.04.4281. James Smith is engaged in a
taxable business activity. A deduction is provided to sellers who are engaged
in banking, loan, security, or other financial businesses if the sale is
primarily secured by a first mortgage or trust deed on nontransient residential
property. However, James Smith is not engaged in these types of business, nor
was the loan secured in this manner. Persons in a financial business should
refer to WAC
458-20-146.
(g) David Roe acquired four pieces of real
property over a period of several years. This property has been held for
residential rental to nontransients. David Roe sold all of the real estate in
1991 and is receiving payments of principal and interest pursuant to sales
contracts. The determination of whether the interest received is subject to the
business and occupation tax depends on all facts and circumstances and cannot
be made based on the limited facts set forth in this example. Additional facts
and circumstances would include, but not be limited to, the extent to which
David Roe has purchased and sold real property in the past, the number of other
sales contracts held by David Roe aside from the ones mentioned here, whether
the property may have been acquired by inheritance, and the type of business in
which David Roe regularly engages.
Statutory Authority:
RCW
82.32.300. 91-23-038, § 458-20-109,
filed 11/13/91, effective 1/1/92; Order ET 70-3, § 458-20-109 (Rule 109),
filed 5/29/70, effective 7/1/70.