Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This rule provides an overview of the administrative
collection remedies and procedures available to the department of revenue
(department) to collect unpaid and overdue tax liabilities. It discusses tax
liens and the liens that apply to probate, insolvency, assignments for the
benefit of creditors, bankruptcy and public improvement contracts. The rule
also explains the personal liability of persons in control of collected but
unpaid sales tax, spirits taxes, and heavy equipment rental tax. Although the
department may use judicial remedies to collect unpaid tax, most of the
department's collection actions are enforced through the administrative
collection remedies discussed in this rule.
(2)
Tax liens. The department is
not required to obtain a judgment in court to have a tax lien. A tax lien is
created when a warrant issued under
RCW
82.32.210 is filed with a superior court
clerk who enters it into the judgment docket. A copy of the warrant may be
filed in any county in this state in which the department believes the taxpayer
has real and/or personal property. The department is not required to give a
taxpayer notice prior to filing a tax warrant. Peters v
Sjoholm, 95 Wn.2d 871, 877, 631 P.2d 937 (1981) appeal
dismissed, cert. denied455 U.S. 914 (1982). The tax lien is an
encumbrance on property. The department may enforce a tax lien by
administrative levy, seizure or through judicial collection remedies.
(a)
Attachment of lien. The
filed warrant becomes a specific lien upon all personal property used in the
conduct of the business and a general lien against all other real and personal
property owned by the taxpayer against whom the warrant was issued.
(i) The specific lien attaches to all goods,
wares, merchandise, fixtures, equipment or other personal property used in the
conduct of the business of the taxpayer. Other personal property includes both
tangible and intangible property. For example, the specific lien attaches to
business assets such as accounts receivable, chattel paper, royalties, licenses
and franchises. The specific lien also attaches to property used in the
business which is owned by persons other than the taxpayer who have a
beneficial interest, direct or indirect, in the operation of the business. (See
subsection (3) of this rule for what constitutes a beneficial interest.) The
lien is perfected on the date it is filed with the superior court clerk. The
lien does not attach to property used in the business that was transferred
prior to the filing of the warrant. It does attach to all property existing at
the time the warrant is filed as well as property acquired after the filing of
the warrant. No sale or transfer of such personal property affects the
lien.
(ii) The general lien
attaches to all real and personal nonbusiness property such as the taxpayer's
home and nonexempt personal vehicles.
(b)
Lien priorities. The
department does not need to levy or seize property to perfect its lien. The
lien is perfected when the warrant is filed. The tax lien is superior to liens
that vest after the warrant is filed.
(i) The
lien for taxes is superior to bona fide interests of third persons that vested
prior to the filing of the warrant if such persons have a beneficial interest
in the business.
(ii) The lien for
taxes is also superior to any interest of third persons that vested prior to
the warrant if the interest is a mortgage of real or personal property or any
other credit transaction that results in the mortgagee or the holder of the
security acting as the trustee for unsecured creditors of the taxpayer
mentioned in the warrant.
(iii) In
most cases, to have a vested or perfected security interest in personal
property, the secured party must file a UCC financing statement indicating its
security interest. RCW 62A.9-301. See RCW 62A.9-302 for the exceptions to this
general rule. The financing statement must be filed prior to the filing of the
tax warrant for the lien to be superior to the department's lien.
(c)
Period of lien. A
filed tax warrant creates a lien that is enforceable for the same period as a
judgment in a civil case that is docketed with the clerk of the superior court.
RCW
82.32.210(4). A judgment
lien expires 10 years from the date of filing. RCW 4.56.310. The department may
extend the lien for an additional 10 years by filing a petition for an order
extending the judgment with the clerk of the superior court. The petition must
be filed within 90 days of the expiration of the original 10-year period.
RCW
6.17.020.
(3)
Persons who have a beneficial
interest in a business. A third party who receives part of the profit, a
benefit, or an advantage resulting from a contract or lease with the business
has a beneficial interest in the operation of the business. A party whose only
interest in the business is securing the payment of debt or receiving regular
rental payments on equipment does not have a beneficial interest. Also, the
mere loaning of money by a financial institution to a business and securing
that debt with a UCC filing does not constitute a beneficial interest in the
business. Rather, a party who owns property used by a delinquent taxpayer must
also have a beneficial interest in the operation of that business before the
lien will attach to the party's property. The definition of the term
"beneficial interest" for purposes of determining lien priorities is not the
same as the definition used for tax free transfers described in WAC
458-20-106.
(a)
Third party. A third party
is simply a party other than the taxpayer. For example, if the taxpayer is a
corporation, an officer or shareholder of that corporation is a "third party"
with a beneficial interest in the operation of the business. If the corporate
insider has a security interest in property used by the business, the tax lien
will be superior even if the corporate insider's lien was filed before the
department's lien.
(b)
Beneficial interest of lessor. In some cases a lessor or
franchisor will have a beneficial interest in the leased or franchised
business. For example, an oil company that leases a gas station and other
equipment to an operator and requires the operator to sell its products is a
third party with a beneficial interest in the business. Factors which support a
finding of a beneficial interest in a business include the following:
(i) The business operator is required to pay
the lessor or franchisor a percentage of gross receipts as rent;
(ii) The lessor or franchisor requires the
business operator to use its trade name and restricts the type of business that
may be operated on the premises;
(iii) The lease places restrictions on
advertising and hours of operation; and/or
(iv) The lease requires the operator to sell
the lessor's products.
(c) A third party who has a beneficial
interest in a business with a filed lien is not personally liable for the
amounts owing. Instead, the amount of tax, interest and penalties as reflected
in the warrant becomes a specific lien upon the third party's property that is
used in the business.
(4)
Notice and order to withhold and deliver. A tax lien is sufficient
to support the issuance of a writ of garnishment authorized by chapter 6.27
RCW.
RCW
82.32.210(4). A tax lien
also allows the department to issue a notice and order to withhold and deliver.
A notice and order to withhold and deliver (order) is an administrative
garnishment used by the department to obtain property of a taxpayer from a
third party such as a bank or employer. See
RCW
82.32.235. The department may issue an order
when it has reason to believe that a party is in the possession of property
that is or shall become due, owing or belonging to any taxpayer against whom a
warrant has been filed.
(a)
Service of
order. The department may serve an order to withhold and deliver to any
person, or to any political subdivision or department of the state. The order
may be served by the sheriff or deputy sheriff of the county where service is
made, by any authorized representative of the department, or by certified
mail.
(b)
Requirement to
answer order. A person upon whom service has been made is required to
answer the order in writing within 20 days of service of the order. The date of
mailing or date of personal service is not included when calculating the due
date of the answer. All answers must be true and made under oath. If an answer
states that it cannot presently be ascertained whether any property is or shall
become due, owing, or belonging to such taxpayer, the person served must answer
when such fact can be ascertained.
RCW
82.32.235.
(i) If the person served with an order
possesses property of the taxpayer subject to the claim of the department, the
party must deliver the property to the department or its duly authorized
representative upon demand. If the indebtedness involved has not been finally
determined, the department will hold the property in trust to apply to the
indebtedness involved or for return without interest in accordance with the
final determination of liability or nonliability. In the alternative, the
department must be furnished a satisfactory bond conditioned upon final
determination of liability.
RCW
82.32.235.
(ii) If the party upon whom service has been
made fails to answer an order to withhold and deliver within the time
prescribed, the court may enter a default judgment against the party for the
full amount claimed owing in the order plus costs.
RCW
82.32.235.
(c)
Continuing levy. A notice
and order to withhold and deliver constitutes a continuing levy until released
by the department.
RCW
82.32.237.
(d)
Assets that may be attached.
Both tangible assets, as a vehicle, and intangible assets may be attached.
Examples of intangible assets that may be attached by an order to withhold and
deliver include, but are not limited to, checking or savings accounts; accounts
receivable; refunds or deposits; contract payments; wages and commissions,
including bonuses; liquor license deposits; rental income; dealer reserve
accounts held by service stations or auto dealers; and funds held in escrow
pending sale of a business. Certain insurance proceeds are subject to
attachment such as the cash surrender value of a policy. The department may
attach funds in a joint account that are owned by the delinquent taxpayer.
Funds in a joint account with the right of survivorship are owned by the
depositors in proportion to the amount deposited by each. RCW 30.22.090. The
joint tenants have the burden to prove the separate ownership.
(e)
Assets exempt from
attachment. Examples of assets which are not attachable include Social
Security, railroad retirement, welfare, and unemployment benefits payable by
the federal or state government.
(5)
Levy upon real and/or personal
property. The department may issue an order of execution, pursuant to a
filed warrant, directing the sheriff of the county in which the warrant was
filed to levy upon and sell the real and/or personal property of the taxpayer
in that county.
RCW
82.32.220. If the department has reason to
believe that a taxpayer has personal property in the taxpayer's possession that
is not otherwise exempt from process or execution, the department may obtain a
warrant to search for and seize the property. A search warrant is obtained from
a superior or district court judge in the county in which the property is
located. See
RCW
82.32.245.
(6)
Probate, insolvency, assignment for
the benefit of creditors or bankruptcy. In all of these cases or
conditions, the claim of the state for unpaid taxes and increases and penalties
thereon, is a lien upon all real and personal property of the taxpayer.
RCW
82.32.240. All administrators, executors,
guardians, receivers, trustees in bankruptcy, or assignees for the benefit of
creditors are required to notify the department of such administration,
receivership, or assignment within 60 days from the date of their appointment
and qualification. In cases of insolvency, this includes the duty of the person
who is winding down the business to notify the department.
(a) The state does not have to take any
action to perfect its lien. The lien attaches the date of the assignment for
the benefit of creditors or of the initiation of the probate or bankruptcy. In
cases of insolvency, the lien attaches at the time the business becomes
insolvent. The lien, however, does not affect the validity or priority of any
earlier lien that may have attached in favor of the state under any other
provision of the Revenue Act.
(b)
Any administrator, executor, guardian, receiver, or assignee for the benefit of
creditors who does not notify the department as provided above is personally
liable for payment of the taxes and all increases and penalties thereon. The
personal liability is limited to the value of the property subject to
administration that otherwise would have been available to pay the unpaid
liability.
(c) In probate cases in
which a surviving spouse or surviving domestic partner is separately liable for
unpaid taxes and increases and penalties thereon, the department does not need
to file a probate claim to protect the state's interest against the surviving
spouse or surviving domestic partner. The department may collect from the
separate property of the surviving spouse or surviving domestic partner and any
assets formerly community property or property of the domestic partnership
which become the property of the surviving spouse or the surviving domestic
partner. If the deceased spouse or deceased domestic partner and/or the
community or domestic partnership also was liable for the tax debt, the claim
also could be asserted in the administration of the estate of the deceased
spouse or deceased domestic partner.
(7)
Lien on retained percentage of
public improvement contracts. Every public entity engaging a contractor
under a public improvement project of $35,000 or more, shall retain five
percent of the total contract price, including all change orders,
modifications, etc. This retainage is a trust fund held for the benefit of the
department and other statutory claimants. In lieu of contract retainage, the
public entity may require a bond. All taxes, increases, and penalties due or to
become due under Title 82 RCW from a contractor or the contractor's successors
or assignees with respect to a public improvement contract of $35,000 or more
shall be a lien upon the amount of the retained percentage withheld by the
disbursing officer under such contract.
RCW
60.28.040.
(a)
Priorities. The employees of
a contractor or the contractor's successors or assignees who have not been paid
the prevailing wage under the public improvement contract have a first priority
lien against the bond or retainage. The department's lien for taxes, increases,
and penalties due or to become due under such contract is prior to all other
liens. The amount of all other taxes, increases and penalties due from the
contractor is a lien upon the balance of the retained percentage after all
other statutory lien claims have been paid.
RCW
60.28.040.
(b)
Release of funds. Upon final
acceptance by the public entity or completion of the contract, the disbursing
officer shall contact the department for its consent to release the funds. The
officer cannot make any payment from the retained percentage until the
department has certified that all taxes, increases, and penalties due have been
paid or are readily collectible without recourse to the state's lien on the
retained percentage. RCW 60.28.050 and
60.28.051.
(8)
Personal liability for unpaid trust
funds. The retail sales tax, all spirits taxes under
RCW
82.08.150, and the heavy equipment rental tax
under chapter 82.51 RCW are to be held in trust.
RCW
82.08.050 and 82.51.010. As a trust fund, the
retail sales tax, spirits taxes, and the heavy equipment rental tax are not to
be used to pay other corporate or personal debts.
Whenever the department has issued a warrant under
RCW
82.32.210 for the collection of unpaid retail
sales tax funds, spirits taxes funds, or heavy equipment rental tax funds
collected and held in trust under
RCW
82.08.050 from a limited liability business
entity and that entity is terminated, dissolved, abandoned, or insolvent,
RCW
82.32.145 authorizes the department to impose
personal liability against any or all of the responsible individuals. For a
responsible individual who is the current or a former chief executive or chief
financial officer, personal liability may be imposed regardless of fault or
whether the individual was or should have been aware of the unpaid retail sales
tax, spirits taxes, or heavy equipment rental tax liability. Collection
authority and procedures prescribed in chapter 82.32 RCW apply to the
collection of personal liability assessments.
(a)
Responsible individual.
(i) A responsible individual includes any
current or former officer, manager, member, partner, or trustee of a limited
liability business entity with an unpaid tax warrant issued by the department.
(A) "Officer" means any officer or assistant
officer of a corporation, including the president, vice president, secretary,
and treasurer.
(B) "Manager" has
the same meaning as in RCW 25.15.005.
(C) "Member" has the same meaning as in RCW
25.15.005, except that the term only includes members of member-managed limited
liability companies.
(ii)
"Responsible individual" also includes any current or former employee or other
individual, but only if the individual had the responsibility or duty to remit
payment of the limited liability business entity's unpaid trust fund tax
liability reflected in a tax warrant issued by the department.
(A) A responsible individual may have
"control and supervision" of collected retail sales tax, spirits taxes, or
heavy equipment rental tax, or the responsibility to report the tax under
corporate bylaws, job description, or other proper delegation of authority. The
delegation of authority may be established by written documentation or by
conduct.
(B) Except for the current
or a former chief executive or chief financial officer of a limited liability
business entity, a responsible individual must have significant but not
necessarily exclusive control or supervision of the trust funds. Neither a
sales clerk who only collects the tax from the customer nor an employee who
only deposits the funds in the bank has significant supervision or control of
the retail sales tax, spirits taxes, or heavy equipment rental tax. An employee
who has the responsibility to collect, account for, and deposit trust funds
does have significant supervision or control of the tax.
(C) A person is not required to be a
corporate officer or have a proprietary interest in the business to be a
responsible individual.
(D) A
member of the board of directors, a shareholder, or an officer may have trust
fund liability if that person has the authority and discretion to determine
which corporate debts should be paid and approves the payment of corporate
debts out of the collected retail sales tax, spirits taxes, or heavy equipment
rental tax trust funds.
(E) More
than one person may have personal liability for the trust funds if the
requirements for liability are present for each person.
(iii) Whenever a limited liability business
entity with an unpaid tax warrant issued against it by the department has one
or more limited liability business entities as a member, manager, or partner,
"responsible individual" also includes any current and former officers,
members, or managers of the limited liability business entity or entities or of
any other limited liability business entity involved directly in the management
of the limited liability business entity with an unpaid tax warrant issued
against it by the department.
(b)
Chief executive or chief financial
officer.(i) For a responsible
individual who is the current or a former chief executive or chief financial
officer of a limited liability business entity, liability under this rule
applies regardless of fault or whether the individual was or should have been
aware of the unpaid retail sales tax, spirits taxes, or heavy equipment rental
tax liability of the limited liability business entity. There is no "willfully
fails to pay" requirement for chief executive officers and chief financial
officers.
(ii) A responsible
individual who is the current or a former chief executive or chief financial
officer is liable under this rule only for retail sales tax, spirits taxes, or
heavy equipment rental tax liability accrued during the period that he or she
was the chief executive or chief financial officer. However, if the responsible
individual had the responsibility or duty to remit payment of the limited
liability business entity's retail sales tax, spirits taxes, or heavy equipment
rental tax to the department during any period of time that the person was not
the chief executive or chief financial officer, that individual is also liable
for retail sales tax, spirits taxes, or heavy equipment rental tax liability
that became due during the period that he or she had the duty to remit payment
of the limited liability business entity's taxes to the department but was not
the chief executive or chief financial officer.
(iii) "Chief executive" means: The president
of a corporation; or for other entities or organizations other than
corporations or if a corporation does not have a president as one of its
officers, the highest ranking executive manager or administrator in charge of
the management of the company or organization.
(iv) "Chief financial officer" means: The
treasurer of a corporation; or for entities or organizations other than
corporations or if a corporation does not have a treasurer as one of its
officers, the highest senior manager who is responsible for overseeing the
financial activities of the entire company or organization.
(c)
Other responsible
individuals.(i) For any other
responsible individual, liability under this rule applies only if he or she
willfully fails to pay or to cause to be paid to the department the retail
sales tax, spirits taxes, or the heavy equipment rental tax due from the
limited liability business entity.
(A)
"Willfully fails to pay or to cause to be paid" means that the failure was the
result of an intentional, conscious, and voluntary course of action. Intent to
defraud or bad motive is not required. For example, using collected retail
sales tax, spirits taxes, or heavy equipment rental tax to pay other corporate
obligations is a willful failure to pay the trust funds to the state.
(B) Depositing retail sales tax, spirits
taxes, or heavy equipment rental tax funds in a bank account knowing that the
bank might use the funds to off-set amounts owing to it is engaging in a
voluntary course of action. It is a willful failure to pay if the bank
exercises its right of set-off which results in insufficient funds to pay the
corporate retail sales tax, spirits taxes, or heavy equipment rental tax that
were collected and deposited in the account. To avoid personal liability in
such a case, the responsible individual can set aside the collected retail
sales tax, spirits taxes, or heavy equipment rental tax and not commingle it
with other funds that are subject to attachment or set-off.
(C) If the failure to pay the trust funds to
the state was due to reasons beyond an individual's control, the failure to pay
is not willful. For example, if evidence is provided that the trust funds were
unknowingly stolen or embezzled by another employee, the failure to pay is not
considered willful. To find that a failure to pay the trust funds to the state
was due to reasons beyond an individual's control, the facts must show both
that the circumstances caused the failure to pay the tax and that the
circumstances were beyond the individual's control.
(D) If a responsible individual instructs an
employee or hires a third party to remit the collected retail sales tax,
spirits taxes, or heavy equipment rental tax, the responsible individual is not
relieved of personal liability for the tax if the tax is not paid.
(ii) Responsible individuals other
than a current or former chief executive or chief financial officer of the
limited liability business entity are liable under this rule only for retail
sales tax, spirits taxes, or heavy equipment rental tax liability that became
due during the period he or she had the responsibility or duty to remit payment
of the limited liability business entity's taxes to the department.
(d)
Limited liability
business entity.(i) A "limited
liability business entity" is a type of business entity that generally shields
its owners from personal liability for the debts, obligations, and liabilities
of the entity, or a business entity that is managed or owned in whole or in
part by an entity that generally shields its owners from personal liability for
the debts, obligations, and liabilities of the entity. Limited liability
business entities include corporations, limited liability companies, limited
liability partnerships, trusts, general partnerships and joint ventures in
which one or more of the partners or parties are also limited liability
business entities, and limited partnerships in which one or more of the general
partners are also limited liability business entities.
(ii) Whenever the department has issued a
warrant under
RCW
82.32.210 for the collection of unpaid retail
sales tax, spirits taxes, or heavy equipment rental tax funds collected and
held in trust under
RCW
82.08.050 from a limited liability business
entity and that business entity has been terminated, dissolved, or abandoned,
or is insolvent, the department may pursue collection of the entity's unpaid
trust fund taxes, including penalties and interest on those taxes, against any
or all of the responsible individuals.
(e)
Requirements for liability.
In order for a responsible individual to be held personally liable for
collected and unpaid retail sales tax, spirits taxes, or heavy equipment rental
tax:
(i) The tax must be the liability of a
limited liability business entity.
(ii) The limited liability business entity
must be terminated, dissolved, abandoned, or insolvent. Insolvent means the
condition that results when the sum of the entity's debts exceeds the fair
market value of its assets. The department may presume that an entity is
insolvent if the entity refuses to disclose to the department the nature of its
assets and liabilities.
(f)
Extent of liability. Trust
fund liability includes the collected but unpaid retail sales tax, spirits
taxes, or heavy equipment rental tax, as well as the interest and penalties due
on the tax.
(g) Except for the
current or a former chief executive or chief financial officer of a limited
liability business entity, an individual is only liable for trust funds
collected during the period he or she had the requisite control, supervision,
responsibility, or duty to remit the tax, plus interest and penalties on those
taxes.
(h)
Review of personal
liability assessment. Any person who receives a personal liability
assessment is encouraged to request a supervisory conference if the person
disagrees with the assessment. The request for the conference should be made to
the department representative that issued the assessment or the
representative's supervisor at the department's field office. A supervisory
conference provides an opportunity to resolve issues with the assessment
without further action. If unable to resolve the issue, the person receiving
the assessment is entitled to administrative and judicial appeal procedures.
RCW
82.32.145(4). See also
RCW
82.32.160,
82.32.170,
82.32.180,
82.32.190,
and
82.32.200.
While encouraged to request a supervisory conference, any
person receiving a personal liability assessment may elect to forego the
supervisory conference and proceed directly with an administrative review of
the assessment. Refer to WAC
458-20-100
for information about the department's informal administrative reviews,
including how to timely file a petition for review.
(9)
Notice of lien. Under
RCW
82.32.212, the department may issue a notice
of lien to secure payment of a tax warrant issued under
RCW
82.32.210. The notice of lien is an
alternative to filing a lien under
RCW
82.32.210. The notice of lien is against any
real property in which the taxpayer has an ownership interest.
(a) To file a notice of lien the amount of
the tax warrant at issue must exceed $25,000. The department must determine
that issuing the notice of tax lien would best protect the state's interest in
collecting the amount due on the warrant.
(b) The notice of tax lien is recorded with a
county auditor in lieu of filing a warrant with the clerk of a county superior
court. A general lien authorized in
RCW
82.32.210 can be filed (or refiled) if the
department determines that filing or refiling the warrant is in the best
interest of collecting the amount due on the tax warrant, or the warrant
remains unpaid six months after the notice of lien is issued.
Statutory Authority:
RCW
82.32.300 and
82.01.060(2).
08-16-073, § 458-20-217, filed 7/31/08, effective 8/31/08. Statutory
Authority:
RCW
82.32.300. 02-15-158, § 458-20-217,
filed 7/23/02, effective 8/23/02; 00-16-016, § 458-20-217, filed 7/21/00,
effective 8/21/00; 88-01-050 (Order 87-9), § 458-20-217, filed 12/15/87;
Order ET 71-1, § 458-20-217, filed 7/22/71; Order ET 70-3, §
458-20-217 (Rule 217), filed 5/29/70, effective
7/1/70.