Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction.RCW 82.32.140
requires a taxpayer to remit any outstanding tax liability to the department of
revenue (department) within ten days of quitting business. If this tax is not
paid by the taxpayer, any successor to the taxpayer becomes liable for the
outstanding tax. This rule explains under what circumstances a person is
considered a successor to a person quitting business. It explains the
successor's responsibility for payment of an outstanding tax liability owed by
the taxpayer quitting business, whether that liability is known at the time of
purchase or not. This rule also provides examples illustrating when
successorship does or does not apply.
(2)
Who is a "successor"?
(a)
"Successor" on or after July 1,
2003.(i)RCW
82.04.180 provides that a "successor" is:
(A) Any person to whom a taxpayer quitting,
selling out, exchanging, or disposing of a business sells or otherwise conveys,
directly or indirectly, in bulk and not in the ordinary course of the
taxpayer's business, more than fifty percent of the fair market value of either
the (I) tangible assets or (II) intangible assets of the taxpayer;
(B) Any surviving corporation of a statutory
merger; or
(C) Any person obligated
to fulfill the terms of a contract as a surety or guarantor of a defaulting
contractor, in which case the person is deemed a successor only to tax
liability arising out of that contract.
(ii) A person, however, is not a "successor"
if the person acquires more than fifty percent of the fair market value of the
tangible or intangible assets of the taxpayer through insolvency proceedings,
regular legal proceedings to enforce a lien, security interest, or judgment, or
by repossession under a security agreement.
(b)
"Successor" prior to July 1,
2003.(i) For the periods prior to July
1, 2003, a "successor" is:
(A) Any person to
whom a taxpayer quitting, selling out, exchanging, or disposing of a business
sells or otherwise conveys, directly or indirectly, in bulk and not in the
ordinary course of business, a major part of the taxpayer's materials,
supplies, merchandise, inventory, fixtures, or equipment, whether he or she
operates the business or not.
RCW
82.04.180. A person acquires a "major part"
of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or
equipment if he or she acquired more than fifty percent of the fair market
value of such property at the time of the sale or conveyance;
(B) Any person obligated to fulfill the terms
of a contract as a surety or guarantor of a defaulting contractor, in which
case the person is deemed a successor only to tax liability arising out of that
contract.
(ii) A person,
however, is not a "successor" if the person acquires a major part of a
taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment
through insolvency proceedings, regular legal proceedings to enforce a lien,
security interest, or judgment, or by repossession under a security
agreement.
(c)
Surviving corporation of statutory merger taken effect prior to July 1,
2003. A surviving corporation of a statutory merger that takes effect
prior to July 1, 2003, is liable for the full tax liability of the nonsurviving
corporation, plus any interest or penalties due, under
RCW
23B.11.060 or similar laws in other
jurisdictions.
(3)
What are tangible and intangible assets for purposes of this rule?
(a)
Tangible assets. "Tangible
assets" include, but are not limited to, materials, supplies, merchandise,
inventory, equipment, or other tangible personal property.
(b)
Intangible assets.
"Intangible assets" include, but are not limited to, all moneys and credits
including mortgages, notes, accounts, certificates of deposit; tax
certificates; judgments; state, county and municipal bonds; bonds of the United
States and of foreign countries; bonds, stocks, or shares of private
corporations; personal service contracts; trademarks; trade names; brand names;
patents; copyrights; trade secrets; franchise agreements; licenses; permits;
core deposits of financial institutions; noncompete agreements; business name;
telephone numbers and internet addresses; customer or patient lists; favorable
contracts and financing agreements; reputation; exceptional management;
prestige; good name; integrity of a business; or other intangible personal
property.
(4)
What
are taxpayer's responsibilities
for outstanding tax
liability? Whenever a taxpayer quits business, or sells out, exchanges,
or otherwise disposes of more than fifty percent of the tangible or intangible
assets of the business, any tax administered by the department and for which
the taxpayer is liable is immediately due and payable. The taxpayer must,
within ten days, complete a tax return and pay the tax due.
RCW
82.32.140.
(5)
What are successor's
responsibilities for taxpayer's outstanding tax liability?
(a) Withholding tax or obtaining
documentation that no tax is due from taxpayer. A successor must withhold from
the purchase price a sum sufficient to pay any tax due from the taxpayer until
the taxpayer produces either a statement of tax status from the department
showing payment in full of any tax due or a certificate from the department
that no tax is due. If the tax is not paid by the taxpayer within ten days from
the date of sale, exchange, or disposal of the business, the successor will
become liable for the payment of the full amount of tax. A successor as defined
in RCW
82.04.180 is not liable for interest or
penalties associated with the taxpayer's tax liability.
RCW
82.32.140.
(b)
Payment of successor liability is
payment against purchase price. The payment of the taxpayer's tax
liability by the successor is deemed a payment upon the purchase price. If the
sum of the payment to the department plus any payments made, directly or
indirectly, to the taxpayer is greater in amount than the purchase price, the
amount of the difference becomes a debt due the successor from the taxpayer.
RCW
82.32.140.
(c)
Limitation on successor's
responsibility for taxpayer's outstanding tax liability. Effective July
1, 2003, if the fair market value of the assets acquired by a successor is less
than fifty thousand dollars, the successor's liability for payment of the
unpaid tax is limited to the fair market value of the assets acquired from the
taxpayer. The burden of establishing the fair market value of the assets
acquired is on the successor.
(6)
Can a successor avoid
responsibility for taxpayer's outstanding tax liability?
(a)
What must a successor do to avoid
responsibility for tax due by a taxpayer? A successor is not liable for
any tax due from the taxpayer if the successor provides written notice of the
acquisition to the department and within six months of receiving the written
notice, the department has not issued a tax assessment against the taxpayer and
mailed a copy of a notice of tax due to the successor.
RCW
82.32.140. The six-month period begins upon
the department's receipt of the written notice, or the date the person becomes
a successor, whichever is later.
If there are circumstances that prohibit an audit from being
completed within six months of the department receiving a proper written
notice, the successor and the department may execute a Liability of Successor
Waiver Agreement (Form Rev 31 0068) to extend the time in which the department
may issue a tax assessment, and the successor will remain liable for the taxes.
In lieu of executing such agreement, the department may issue a protective
assessment under
RCW
82.32.100 if the records cannot be made
available for examination in a timely manner.
(b)
How does a successor notify to the
department of the acquisition of a taxpayer? Written notice of the
acquisition must be made on a form prescribed by the department, or it must
contain substantially the same information. The written notice must be provided
by mailing to the Department of Revenue, Attn: Successorship Notices, P.O. Box
47476, Olympia, Washington 98504-7476. The written notice is available on the
department's internet web site at
www.dor.wa.gov under forms. The written notice
must contain the following information:
(i)
The (predecessor) taxpayer's name, business name, address, and UBI
number;
(ii) The successor's name,
business name, address, and UBI number;
(iii) The date of the acquisition;
(iv) Whether or not the successor acquired
more than fifty percent of the tangible or intangible assets of the
(predecessor) taxpayer;
(v) A
description of the assets acquired and their estimated fair market
value;
(vi) The total costs of
acquisition; and
(vii) How the
person became a successor (i.e., asset purchase, merger, guarantor of a
defaulting contractor, etc.).
(7)
Disclosure. The department
is not prohibited from disclosing to a person against whom the department has
asserted liability as a successor under
RCW
82.32.140 return or tax information
pertaining to the specific business of the taxpayer to which the person has
succeeded.
RCW
82.32.330. For example, a successor is liable
under RCW
82.32.140 for payment of an outstanding tax
liability of the predecessor taxpayer. The department is only authorized to
provide the successor return or tax information related to that outstanding tax
liability.
(8)
Tax deferrals
not terminated. A tax deferral granted to a (predecessor) taxpayer may
be transferred to the successor if the successor meets the eligibility
requirements for the remaining periods of the deferral and the parties agree in
writing that the successor will assume liability for the tax deferral.
RCW
82.60.060,
82.63.045, 82.68.050 and
82.69.050. If the deferral is transferred, the successor of the investment
project is liable for the full amount of any unpaid, deferred taxes under the
same terms and conditions as the original recipient of the deferral. If the
deferral is not transferred, the successor's liability for deferred tax is
limited to the deferred taxes due at the time of the transfer. Refer to WAC
458-20-24001 and
458-20-24001A (Sales and use tax
deferral -- Manufacturing and research/development activities in distressed
areas), 458-20-24002 (Sales and use tax deferral -- New manufacturing and
research/development facilities), and 458-20-24003 (Tax incentives for high
technology businesses) for further reference regarding successors of deferral
investment projects.
(9)
Examples. The following factual situations illustrate the
application of successorship. These factual situations should be used only as a
general guide. The successorship status of each situation depends on all the
facts and circumstances. Assume all the examples below occur on or after July
1, 2003.
(a)
Example 1. Taxpayer
quits business and sells all equipment and inventory to one purchaser. The
taxpayer may be either solvent or insolvent at the time of sale. The purchaser
is a successor.
(b)
Example
2. Taxpayer quits business, selling all of its intangible assets
consisting of customer lists and a covenant not to compete. The purchaser is a
successor.
(c)
Example
3. Taxpayer sells its entire business, including all equipment (60% of
its tangible assets) to Purchaser A, and all inventory (40% of its tangible
assets) to Purchaser B. Purchaser A is a successor. Purchaser B is not a
successor.
(d)
Example
4. Taxpayer sells its entire business, including all assets as follows
to three purchasers on January 1, 2004:
PURCHASER A
|
PURCHASER B
|
PURCHASER C
|
Inventory of $200,000
|
Equipment of $100,000
|
Receivable of $45,000
|
Purchaser A is a successor because it has acquired more than
50% of the fair market value, of the tangible assets of the taxpayer. Purchaser
B is not a successor because it has acquired less than 50% of the fair market
value of the tangible assets of the taxpayer. Purchaser C is a successor
because it has acquired more than 50% of the intangible assets of the taxpayer.
Purchaser C's tax liability is limited to $45,000 because the fair market value
of the assets acquired is less than $50,000.
(i) On February 1, 2004, Purchaser C provides
a proper written notice to the department regarding its purchase from the
taxpayer. Purchaser A does not provide any written notice to the department
regarding its purchase from the taxpayer. On September 30, 2004, the department
issues a tax assessment to the taxpayer for $100,000 in taxes owed, plus
penalties and interest. A copy of the tax assessment is also mailed to
Purchaser A as a successor to the taxpayer. Purchaser A is liable for the
$100,000 in taxes owed by the taxpayer since it did not provide a proper
written notice to the department. Purchaser C is not liable for the $100,000 in
taxes because it provided a proper written notice, and the department did not
issue an assessment within six months of receiving the notice.
(ii) Same facts as in the previous example
except the department issues its tax assessment on July 15, 2004, and mails a
copy of the tax assessment to both Purchasers A and C as successors. Both
Purchasers A and C are liable as successors for the taxes owed by the taxpayer.
However, Purchaser C's liability is limited to $45,000 in taxes since the fair
market value of the assets it acquired was less than $50,000.
(e)
Example 5.
Taxpayer obtains a loan from a financial institution to purchase equipment and
inventory. The financial institution secures the loan by taking a security
interest in the equipment and inventory. Taxpayer quits business, leaving the
equipment and inventory behind. The financial institution repossesses these
items. The financial institution is not a successor.
(f)
Example 6. Taxpayer
purchases all equipment and inventory under a line of credit extended by a bank
and guaranteed by a third party. The third party perfects a security interest
in the equipment and inventory. Taxpayer quits business, surrendering the
equipment and inventory to the third party guarantor. The third party guarantor
is not a successor.
(g)
Example 7. Taxpayer leaves business, including equipment,
materials, and inventory, which the landlord holds for unpaid rent. The
landlord forecloses the landlord's lien using the summary foreclosure
provisions of
RCW
60.10.030, or holds a foreclosure sale by the
sheriff, or accepts a bill of sale in satisfaction of the landlord's lien for
rent created by
RCW
60.72.010. The landlord is not a
successor.
(h)
Example
8. Taxpayer purchases all equipment and inventory under a security
agreement.
(i) If the property is repossessed
by the vendor, the vendor is not a successor.
(ii) If the taxpayer sells his or her equity
under the security agreement to a third person, the third person is a
successor.
(iii) If the equipment
and inventory is not repossessed and the vendor buys back the interest of the
taxpayer without following the summary foreclosure provisions of
RCW
60.10.030, the vendor is a
successor.
(i)
Example 9. Taxpayer dies or becomes bankrupt, goes into
receivership, or makes an assignment for the benefit of creditors. The
executor, administrator, trustee, receiver, or assignee is not a successor but
stands in the place of the taxpayer and is responsible for payment of tax out
of the proceeds derived upon disposition of the assets. A purchaser from the
executor, administrator, trustee, receiver, or assignee is not a successor,
unless under the terms of the purchase agreement the purchaser assumes and
agrees to pay taxes and/or lien claims.
(j)
Example 10. Taxpayer is a
contractor and is required to post a bond to insure completion of the contract.
Taxpayer defaults on the contract and the bonding company completes it. The
bonding company is a successor to the contractor to the extent of the
contractor's liability for that particular contract and is also liable for
taxes incurred in the completion of the contract.
Statutory Authority:
RCW
82.32.300 and
82.01.060(2).
05-14-107, § 458-20-216, filed 6/30/05, effective 7/31/05. Statutory
Authority:
RCW
82.32.300. 99-08-034, § 458-20-216,
filed 3/31/99, effective 5/1/99; Order ET 70-3, § 458-20-216 (Rule 216),
filed 5/29/70, effective 7/1/70.