Washington Taxpayer Penalized for Improper Use of Reseller Permit
- Aug 25, 2015 | Gail Cole
Mistakes happen, particularly when it comes to sales tax compliance. Unfortunately, such errors can cause costly penalties. A recent case in Washington State provides a cautionary tale.
The case involves a Taxpayer who manufactures, sells and installs marine dock systems. In 2011, the Taxpayer acted as a subcontractor on a federal government dock building contract and installed a dock at a naval base, connecting it to existing pilings. When purchasing supplies and materials for the project, the Taxpayer “did as it always did as a subcontractor:" issued its reseller permit and paid no sales or use tax.
During a subsequent audit, the Washington Department of Revenue found the Taxpayer liable for retail sales tax on materials purchased for the Allied Industries Navy contract. Under RCW 82.04.190(6) and WAC 458-20-17001:
“[G]overnment contractors and subcontractors are treated as the consumers of the materials they use in performing the work, and as such, should pay retail sales tax when making purchases.”
In addition to the unpaid sales tax, the Taxpayer was held liable for interest on the unpaid tax and a 50% penalty for misusing the reseller permit.
Ignorance isn’t bliss
The Taxpayer paid a portion of the assessment and then appealed the 50% reseller payment misuse penalty, “asserting that it was unaware that it should have paid sales tax on materials in the case where it acted as a subcontractor on a government contract.”
Although that may be true, ignorance does not relieve the Taxpayer of liability. Under RCW 82.32.291:
- “[I]f any buyer improperly uses a reseller permit number, reseller permit, or other documentation … to purchase items or services at retail without payment of sales tax that was legally due on the purchase, the department “must assess against that buyer a penalty of fifty percent of the tax due, in addition to all other taxes, penalties, and interest due, on the improperly purchased item or service” [emphasis added]. In other words, “the penalty cannot be waved.”
- However, “The department must waive the penalty… if it finds that the use of the reseller permit number, reseller permit, or other documentation … was due to due to circumstances beyond the taxpayer’s control” [emphasis added].
In the case at hand, the Department does not dispute the Taxpayer’s claim “that it was acting in good faith when it made the error of using its reseller permit when it should not have.” However, good faith is not the same as “circumstances beyond the taxpayer’s control” and therefore does not relieve the Taxpayer from the penalty. Read Determination 14-0404 for more details.
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