Are charges for dog waste disposal subject to sales tax in Washington? The scoop on poop - Wacky Tax Wednesday
Is the collection and disposal of dog waste a retail activity subject to sales tax and retailing business and occupations (B&O) tax in Washington state? Or is it a service activity subject to the service and other activities B&O tax but exempt from retail sales tax? As a Washington resident and sales tax nerd with a dear old dog, I had to know.
The issue was brought before the Administrative Review and Hearings Division of the Washington Department of Revenue by a taxpayer who operates a dog waste disposal service. When I heard about it, I assumed the service entailed picking up piles of neglected waste from yards, or perhaps trailing a person who couldn’t or wouldn’t pick up droppings while walking a dog. (My kids would probably pay someone to do that for them.)
In fact, the service is quite different. The taxpayer business owner provides his customers with a waterproof tray containing grass sod, where dogs do their business. On a regularly scheduled basis (biweekly, weekly, or monthly), the taxpayer then replaces the soiled sod with a fresh patch.
The taxpayer opened this innovative business in 2009 and reported income under “service and other activities,” not “retailing.” Since he didn’t think he was making retail sales, he didn’t collect retail sales tax on the charges. But about five years later, in November 2014, he asked the Department of Revenue’s Taxpayer Information & Education (TI&E) division to determine the proper tax classification of his services.
Services subject to sales tax in Washington
As in most states, some services are subject to sales tax in Washington while others aren’t. Thus, the first step in determining whether a service is taxable is to determine what kind of service it is. It’s not always apparent, especially when the service is unique (like the provision of sod for pet waste disposal).
In making its decision, TI&E looked at whether the service best met the definition of a cleaning service or a janitorial service:
- “Installing, cleaning, repairing or otherwise altering or improving personal property of consumers” is a taxable service in Washington classified under the retailing classification of the B&O tax.
- “Janitorial services” (e.g., cleaning carpets, floors, and windows, and disposing of trash) are exempt from sales tax and classified under “service and other activities” for B&O tax.
Neither option is the perfect fit for the provision of a clean patch of sod and the removal of soiled sod. Still, a decision had to be made, and in December 2014, TI&E ruled the service was a “specialized cleaning service” that “falls outside routine janitorial services.” As such, it belongs under the “retailing classification” of the B&O tax and is subject to retail sales tax.
The taxpayer disagreed with the ruling and requested a reconsideration, but also began paying retailing B&O tax on gross income and charging customers sales tax. Then, in September 2015, the taxpayer received an assessment for past sales tax, along with penalties and interest charges, from the department’s Taxpayer Account Administration (TAA) Division.
This time, the taxpayer filed a petition to correct the assessment with the Administrative Review and Hearings Division, arguing that 1) he had reported tax under the service and other activities B&O tax classification until the new reporting instructions were received; and 2) the department’s actions were excessive. He didn’t argue his services shouldn’t be taxable — but that’s what was ultimately decided.
In making the final determination, the Administrative Review and Hearings Division found the question of whether the taxpayer’s services qualified as a “routine janitorial service” to be “irrelevant” because the activity “is not a ‘retail sale.’” It explained, “Because Taxpayer’s business activity is not taxed explicitly … Taxpayer is subject to the catch-all Service & Other Activities B&O tax classification.” Therefore, his services are not subject to the retailing B&O tax or retail sales tax.
The taxpayer was told to stop paying retailing B&O tax and collecting retail sales tax from customers as of the date of the decision. Furthermore, he’s not liable for additional service and other activities B&O tax for periods during which he complied with the department’s instructions to pay retailing B&O tax.
Finally, the taxpayer isn’t required to refund the retail sales tax he collected from customers for a time. However, he may refund it and apply for a refund of the taxes remitted to the Washington Department of Revenue.
Good guys finish last? Or, a good deed is never lost?
I feel there’s a moral in this story.
The taxpayer could have saved himself a good deal of stress and effort by not reaching out to the Department of Revenue to find out whether he was properly classifying his sales. His business may never have been audited. He could have lived happily ever after.
Instead, he chose to tell the truth. He suffered for it, initially; he had to calculate and collect sales tax, file returns, and remit the tax.
He was rewarded in the end, perhaps in part because of his responsible behavior. Both the Administrative Review and Hearings Division and the TAA noted the taxpayer had paid retailing B&O tax on gross income and collected retail sales tax on services when instructed to do so, despite disagreeing with the determination. I like to think that earned him some good will.
I tip my hat to Scott Peterson, who found and shared Tax Determination No 16-0234 with me. And a reminder: This tax determination applies to a specific business at a specific time. It shouldn’t be considered tax advice for other disposers of pet waste.
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