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Palmer v. Washington State Department of Revenue

filed: June 21, 1996.


Superior Court of Thurston County. Superior Court Docket No. 91-2-02402-0. Date Filed In Superior Court: February 4, 1994. Superior Court Judge Signing: Wm. McPhee.

Written By: Haberly, Jpt, Concurred In By: Houghton, Acj, Fleisher, Jpt

Author: Haberly

HABERLY, J.*fn* -- Dale Palmer appeals the decision of the trial court that he was not exempt from successor tax liability to the Department of Revenue, upon his repossession of collateral pursuant to a security agreement. We reverse and remand.


In July 1986, Robert Kolstad d/b/a/ Top Water Sports (Kolstad) obtained secured financing for his business from Borg-Warner Acceptance Corporation (Borg-Warner). On July 25, 1986, Borg-Warner perfected its security interest in Kolstad's business property, including boats and trailers, by filing a Uniform Commercial Code financing statement with the Department of Licensing. On November 3, 1986, Kolstad and Dale Palmer (Palmer) entered into an agreement, wherein Palmer guaranteed the line of credit from Borg-Warner for inventory financing for Kolstad. The agreement provided, among other things, that in the event Palmer's guaranty was called on by Borg-Warner, Palmer would have the right to be subrogated to the secured creditor position of Borg-Warner for any of Kolstad's liabilities satisfied by Palmer. On November 13, 1986, Palmer executed a guaranty of Kolstad's debt in favor of Borg-Warner.

The agreement discussed the consideration for Palmer's guaranty. It provided that Palmer would advance to Kolstad 10 percent (10%) of the total purchase price of any boat financed through Borg-Warner. This advancement would meet Borg-Warner's financing requirements. From the purchase price of each boat subsequently sold, Kolstad would repay both Borg-Warner and Palmer. In addition, Kolstad would pay Palmer 12 percent annual interest on the money Palmer advanced, plus a lump sum of either $500, $750, or $1,000, depending upon the type of boat sold. The payments received by Palmer upon the sale of a boat were consideration for his advancement of 10 percent of the total purchase price and the guarantee to Borg-Warner and were not a share of the profit or a return of a beneficial interest. Neither Kolstad nor Palmer, by entering into the agreement, intended to create a partnership interest in Kolstad's business.

In October 1987, Kolstad defaulted on his obligation to Borg-Warner. Borg-Warner called on Palmer to pay Kolstad's debt. After a meeting, Borg-Warner and Palmer agreed that Palmer would pay Borg-Warner approximately $43,000 and that Palmer would receive from Kolstad the inventory consisting of four boats and trailers, in which Borg-Warner had a perfected security interest. Palmer paid Borg-Warner $43,407.72 and assumed the Manufacturer's Statement of Origin (MSO) certificates for the boats. The MSO is the only document of title to the boats prior to a sale to a customer.

Pursuant to the agreement between Kolstad and Palmer, Palmer was subrogated to all of Borg-Warner's rights as a secured creditor. Palmer did not assert any additional or different rights, such as claiming a secured interest in other inventory of Kolstad's business. Palmer peacefully repossessed four boats and trailers as a secured party, under the provisions of RCW 62A.9-503.

At the time of Palmer's repossession, Kolstad was quitting business; thus, the transfer of these boats, which comprised Kolstad's entire inventory of boats, was not in the ordinary course of business.

Neither Kolstad nor Palmer notified the Department of Revenue (DOR) of the transfer of the boats. The DOR determined that Palmer owed taxes as a "successor" pursuant to RCW 82.32.140 and as defined in RCW 82.04.180 and WAC 458-20-216, and assessed Palmer's liability at the amount of $10,750. This determination was affirmed by the DOR and Palmer paid the assessment. Palmer instituted this action to obtain a refund of the tax paid.


The trial court determined that the transfer of the inventory of boats to Palmer was a sale or conveyance pursuant to RCW 82.04.180. All other elements of this statute were met and, therefore, Palmer was not exempt from tax liability as a successor.

The business and occupation tax promulgated in Ch: 82.04 RCW is extensive and is intended to impose this tax upon virtually all business activities carried on in the State. See Impecoven v. Department of Revenue, 120 Wash. 2d 357, 363, 841 P.2d 752 (1992). RCW 82.32.140 imposes tax liability on a successor to a business under certain circumstances. This statute provides in part as follows:

Whenever any taxpayer quits business, or sells out, exchanges, or otherwise disposes of his business or his stock of goods, any tax payable hereunder shall become immediately due and payable, and such taxpayer shall, within ten days thereafter, make a return and pay the tax due; and any person who becomes a successor shall become liable for the full amount ...

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