Appeal from Thurston Superior Court. Docket No: 12-2-01380-0. Judge signing: Honorable Christine Schaller. Judgment or order under review. Date filed: 07/19/2013.
Michele G. Radosevich (of Davis Wright Tremaine LLP ), for appellant.
Robert W. Ferguson, Attorney General, and Heidi A. Irvin and Andrew J. Krawczyk, Assistants, for respondent.
Authored by Marlin Appelwick. Concurring: Michael J. Trickey. Dissenting: Mary Kay Becker.
Marlin Appelwick, J.
[184 Wn.App. 346] [¶1] Klein Honda is a car dealership in Washington. Dealer cash is an incentive payment that Klein Honda receives from the manufacturer for selling specified vehicle models during specified periods of time. The sole issue on appeal is whether dealer cash is subject to Washington's B& O tax. We hold that it is and affirm the decision of the Board of Tax Appeals.
[¶2] Steven Klein Inc., doing business as Klein Honda, operates an automobile dealership in Everett, Washington. Klein Honda is an independent franchisee of American Honda Motor Company Inc. Klein Honda purchases vehicles at wholesale from American Honda and sells them to customers at retail. It also sells used vehicles, provides maintenance and repair services, and sells parts and accessories.
[¶3] When Klein Honda sells a new vehicle to a customer, it communicates the sale to American Honda through an electronic form. The form includes the vehicle identification number, the names of Klein Honda personnel associated with the sale, the name and address of the customer, and information about the type of financing. According to Klein [184 Wn.App. 347] Honda's general manager, " This is how American Honda knows who bought what product and also starts the warranty clock."
[¶4] American Honda also makes regular payments and credits to Klein Honda, which are reflected in a monthly balance forward statement. These payments include a marketing allowance credit for Klein Honda's advertising, as well as a fuel charge credit for Klein Honda providing a full tank of gas to customers when they purchase a vehicle. They also include holdbacks, which are a percentage of the manufacturer's suggested retail price that American Honda credits Klein Honda in the month following the wholesale purchase. These payments are reflected in the vehicle invoice and are automatic: Klein Honda does not have to do anything to receive the payments other than purchase the vehicle from American Honda.
[¶5] American Honda also periodically offers an incentive program called " dealer cash" to its dealers, including Klein Honda. Under the dealer cash program, American Honda offers dealers a specified amount of cash for each sale they make of a particular Honda model during a specified period of time. American Honda issues marketing bulletins to dealers to announce the dealer cash incentive programs. For example, a marketing bulletin from 2003 offered $1,000 in dealer cash for each sale of 2003 Honda Insight models from April 1, 2003 to June 2, 2003.
[¶6] The marketing bulletins provide substantial detail about which vehicles and which vehicle sales qualify for the incentive payment. The bulletins also specify the records dealers must keep and actions they must take to receive the incentive payment. For instance, dealers must conduct a self-audit at the conclusion of each dealer cash program and verify by signed affidavit that all listed vehicle sales meet the eligibility requirements for the program.
[¶7] The owner, Steven Klein, stressed the need for dealers to comply with each requirement set forth in the marketing bulletin in order to be eligible for dealer cash: " And basically [184 Wn.App. 348] what you want to do is you read these backwards and forwards, because this is our contract with the factory to get our money, and if we don't do everything to the letter of these bulletins they can say, we're not going to give you the dealer cash." Klein Honda's general manager also described the marketing bulletin as a " conditional offer." At times, Klein Honda made sales of specified models during specified periods, but did not meet the requirements of the marketing bulletin, and therefore did not receive dealer cash for those sales.
[¶8] The dealer cash program is designed to stimulate sales of the specified models. The number of dealer cash programs that American Honda offers is not guaranteed, but rather depends on market climate. If the market becomes challenged or a competitive product is viewed as comparable, American Honda will offer more dealer cash programs to keep the product selling. American Honda compensates Klein Honda for making qualified dealer cash sales by issuing a credit to Klein Honda's monthly balance forward statement.
[¶9] On October 11, 2007, the Washington State Department of Revenue (Department) Audit Division assessed Klein Honda $16,963 in business and occupation (B& O) tax for the audit period January 1, 2003 through December 31, 2006. During that time, Klein Honda received $1,037,450 in dealer cash from American Honda.
[¶10] Klein Honda paid the assessment but petitioned the Department's Appeals Division for a refund. Klein Honda argued that dealer cash represents a discount or reduction in its cost of purchasing the vehicles from American Honda. Thus, Klein Honda asserted, dealer cash is not income derived from business activities. The Appeals Division disagreed and upheld the assessment in a final determination issued on August 19, 2010. It explained that dealer cash " is a payment to the Dealer for certain action: the sale of a particular car model within a specific timeframe. This award was not part of the negotiated price; in other words, [184 Wn.App. 349] it was not contemplated at the time the Dealer purchased the vehicle from the manufacturer."
[¶11] Klein Honda sought review from the Board of Tax Appeals (Board). The Board entered an initial decision affirming the Department's tax assessment. It concluded that a " taxpayer engaged in any business activity not specifically set forth in chapter 82.04 RCW shall be taxed at a rate of 1.5 percent. There is no separate B& O tax." The Board further concluded that under the statutory definition of gross income of business, a " taxpayer can have taxable income from business activity without providing any specific services." Therefore, " Klein Honda is liable under the statutes of the state to pay B& O tax on amounts received during the audit period from the manufacturer denominated as dealer cash." Klein Honda did not petition the Board for further review, and so the initial decision became final after 20 days. WAC 456-09-930.
[¶12] Klein Honda then petitioned Thurston County Superior Court for review. The superior court affirmed the Board's decision on July 19, 2013. Klein Honda appealed.
[¶13] The issue on appeal is whether dealer cash is subject to the B& O tax. Klein Honda characterizes the issue as " whether dealer cash is a rebate that reduces the dealer's vehicle cost, in which case it is not taxable, or whether dealer cash is a payment for service." We address this argument in two parts. First, we consider Klein Honda's argument that dealer cash is not taxable, because it is simply a payment and not a business activity or extra service apart from selling vehicles. Second, we address Klein Honda's alternative argument that ...