Sales tax assessed on gross amount of tax-included sales was improper

In Department of Revenue v. Bi-Mor, Inc., Division 2 of the Court of Appeals of Washington determined that the Board of Tax Appeals acted properly in dismissing a tax assessment imposed by the State of Washington Department of Revenue against a taxpayer for additional retail sales taxes where it was based on the gross amount paid by patrons on tax-included sales.

Under Washington law, taxpayers offering merchandise on a tax-included sales basis must clearly state that the price includes the tax and follow certain statutory requirements when advertising tax-included sales.

Background and procedural history

The taxpayer, an operator of several Washington retail stores, conducts itself under a tax-included sales business model. The taxpayer advertises an "Always No Tax" store policy, emphasizing that the price of goods included all applicable sales taxes, or that the store was absorbing the sales tax. Instead of adding sales tax to the amount tendered by the buyer, the taxpayer manually calculated the taxes based on the tender paid by the customer by deducting an amount for the tax from the gross sale price using a method known as "backing out" the sales tax.

The Department conducted an audit of the taxpayer and assessed additional taxes for certain sales transactions where the invoice did not separate out the retail sales tax from the selling price. The assessment was affirmed in an appeal to the Department's Appeals Division.

In a subsequent appeal to the Board of Tax Appeals, the Board reversed the ruling and dismissed the tax assessment. The Board determined that under the plain language of the sales tax statute, an assessment for additional retail taxes based on gross sales receipts was not permitted.

The Department appealed the Board's ruling to the Thurston Superior Court, but the Board's dismissal order was upheld.

The Department filed a further appeal of the Superior Court's decision in Division 2 of the Court of Appeals.

The decision by the appeals court

The appeals court upheld the dismissal of the tax assessment. The appellate panel said that the wording of the tax statute unambiguously barred the Department from calculating the retail sales tax owed from a tax-included sale based on gross receipts. The appeals court determined that, since the seller advertised the price as including the sales tax, the taxpayer could back out the sales tax and the advertised price could not be considered the selling price.

The Supreme Court of Washington subsequently denied the Department's request for further review of the case.

Contact an attorney

Individuals and businesses desiring assistance in the tax matters should consult with an experienced attorney or other tax professional that is current in this field in order to ensure that it is done correctly.