WAC 458-20-216
Successors, quitting business. (1)
Introduction. RCW 82.32.140 requires a taxpayer to remit any
outstanding tax liability to the department of revenue
(department) within ten days of quitting business. If this
tax is not paid by the taxpayer, any successor to the taxpayer
becomes liable for the outstanding tax. This rule explains
under what circumstances a person is considered a successor to
a person quitting business. It explains the successor's
responsibility for payment of an outstanding tax liability
owed by the taxpayer quitting business, whether that liability
is known at the time of purchase or not. This rule also
provides examples illustrating when successorship does or does
not apply.
(2) Who is a "successor"?
(a) "Successor" on or after July 1, 2003.
(i) RCW 82.04.180 provides that a "successor" is:
(A) Any person to whom a taxpayer quitting, selling out,
exchanging, or disposing of a business sells or otherwise
conveys, directly or indirectly, in bulk and not in the
ordinary course of the taxpayer's business, more than fifty
percent of the fair market value of either the (I) tangible
assets or (II) intangible assets of the taxpayer;
(B) Any surviving corporation of a statutory merger; or
(C) Any person obligated to fulfill the terms of a
contract as a surety or guarantor of a defaulting contractor,
in which case the person is deemed a successor only to tax
liability arising out of that contract.
(ii) A person, however, is not a "successor" if the
person acquires more than fifty percent of the fair market
value of the tangible or intangible assets of the taxpayer
through insolvency proceedings, regular legal proceedings to
enforce a lien, security interest, or judgment, or by
repossession under a security agreement.
(b) "Successor" prior to July 1, 2003.
(i) For the periods prior to July 1, 2003, a "successor"
is:
(A) Any person to whom a taxpayer quitting, selling out,
exchanging, or disposing of a business sells or otherwise
conveys, directly or indirectly, in bulk and not in the
ordinary course of business, a major part of the taxpayer's
materials, supplies, merchandise, inventory, fixtures, or
equipment, whether he or she operates the business or not.
RCW 82.04.180. A person acquires a "major part" of the
taxpayer's materials, supplies, merchandise, inventory,
fixtures, or equipment if he or she acquired more than fifty
percent of the fair market value of such property at the time
of the sale or conveyance;
(B) Any person obligated to fulfill the terms of a
contract as a surety or guarantor of a defaulting contractor,
in which case the person is deemed a successor only to tax
liability arising out of that contract.
(ii) A person, however, is not a "successor" if the
person acquires a major part of a taxpayer's materials,
supplies, merchandise, inventory, fixtures, or equipment
through insolvency proceedings, regular legal proceedings to
enforce a lien, security interest, or judgment, or by
repossession under a security agreement.
(c) Surviving corporation of statutory merger taken
effect prior to July 1, 2003. A surviving corporation of a
statutory merger that takes effect prior to July 1, 2003, is
liable for the full tax liability of the nonsurviving
corporation, plus any interest or penalties due, under RCW 23B.11.060 or similar laws in other jurisdictions.
(3) What are tangible and intangible assets for purposes
of this rule?
(a) Tangible assets. "Tangible assets" include, but are
not limited to, materials, supplies, merchandise, inventory,
equipment, or other tangible personal property.
(b) Intangible assets. "Intangible assets" include, but
are not limited to, all moneys and credits including
mortgages, notes, accounts, certificates of deposit; tax
certificates; judgments; state, county and municipal bonds;
bonds of the United States and of foreign countries; bonds,
stocks, or shares of private corporations; personal service
contracts; trademarks; trade names; brand names; patents;
copyrights; trade secrets; franchise agreements; licenses;
permits; core deposits of financial institutions; noncompete
agreements; business name; telephone numbers and internet
addresses; customer or patient lists; favorable contracts and
financing agreements; reputation; exceptional management;
prestige; good name; integrity of a business; or other
intangible personal property.
(4) What are taxpayer's responsibilities for outstanding
tax liability? Whenever a taxpayer quits business, or sells
out, exchanges, or otherwise disposes of more than fifty
percent of the tangible or intangible assets of the business,
any tax administered by the department and for which the
taxpayer is liable is immediately due and payable. The
taxpayer must, within ten days, complete a tax return and pay
the tax due. RCW 82.32.140.
(5) What are successor's responsibilities for taxpayer's
outstanding tax liability?
(a) Withholding tax or obtaining documentation that no
tax is due from taxpayer. A successor must withhold from the
purchase price a sum sufficient to pay any tax due from the
taxpayer until the taxpayer produces either a statement of tax
status from the department showing payment in full of any tax
due or a certificate from the department that no tax is due. If the tax is not paid by the taxpayer within ten days from
the date of sale, exchange, or disposal of the business, the
successor will become liable for the payment of the full
amount of tax. A successor as defined in RCW 82.04.180 is not
liable for interest or penalties associated with the
taxpayer's tax liability. RCW 82.32.140.
(b) Payment of successor liability is payment against
purchase price. The payment of the taxpayer's tax liability
by the successor is deemed a payment upon the purchase price. If the sum of the payment to the department plus any payments
made, directly or indirectly, to the taxpayer is greater in
amount than the purchase price, the amount of the difference
becomes a debt due the successor from the taxpayer. RCW 82.32.140.
(c) Limitation on successor's responsibility for
taxpayer's outstanding tax liability. Effective July 1, 2003,
if the fair market value of the assets acquired by a successor
is less than fifty thousand dollars, the successor's liability
for payment of the unpaid tax is limited to the fair market
value of the assets acquired from the taxpayer. The burden of
establishing the fair market value of the assets acquired is
on the successor.
(6) Can a successor avoid responsibility for taxpayer's
outstanding tax liability?
(a) What must a successor do to avoid responsibility for
tax due by a taxpayer? A successor is not liable for any tax
due from the taxpayer if the successor provides written notice
of the acquisition to the department and within six months of
receiving the written notice, the department has not issued a
tax assessment against the taxpayer and mailed a copy of a
notice of tax due to the successor. RCW 82.32.140. The
six-month period begins upon the department's receipt of the
written notice, or the date the person becomes a successor,
whichever is later.
If there are circumstances that prohibit an audit from
being completed within six months of the department receiving
a proper written notice, the successor and the department may
execute a Liability of Successor Waiver Agreement (Form Rev 31
0068) to extend the time in which the department may issue a
tax assessment, and the successor will remain liable for the
taxes. In lieu of executing such agreement, the department
may issue a protective assessment under RCW 82.32.100 if the
records cannot be made available for examination in a timely
manner.
(b) How does a successor notify to the department of the
acquisition of a taxpayer? Written notice of the acquisition
must be made on a form prescribed by the department, or it
must contain substantially the same information. The written
notice must be provided by mailing to the Department of
Revenue, Attn: Successorship Notices, P.O. Box 47476,
Olympia, Washington 98504-7476. The written notice is
available on the department's internet web site at
www.dor.wa.gov under forms. The written notice must contain
the following information:
(i) The (predecessor) taxpayer's name, business name,
address, and UBI number;
(ii) The successor's name, business name, address, and
UBI number;
(iii) The date of the acquisition;
(iv) Whether or not the successor acquired more than
fifty percent of the tangible or intangible assets of the
(predecessor) taxpayer;
(v) A description of the assets acquired and their
estimated fair market value;
(vi) The total costs of acquisition; and
(vii) How the person became a successor (i.e., asset
purchase, merger, guarantor of a defaulting contractor, etc.).
(7) Disclosure. The department is not prohibited from
disclosing to a person against whom the department has
asserted liability as a successor under RCW 82.32.140 return
or tax information pertaining to the specific business of the
taxpayer to which the person has succeeded. RCW 82.32.330.
For example, a successor is liable under RCW 82.32.140 for
payment of an outstanding tax liability of the predecessor
taxpayer. The department is only authorized to provide the
successor return or tax information related to that
outstanding tax liability.
(8) Tax deferrals not terminated. A tax deferral granted
to a (predecessor) taxpayer may be transferred to the
successor if the successor meets the eligibility requirements
for the remaining periods of the deferral and the parties
agree in writing that the successor will assume liability for
the tax deferral. RCW 82.60.060, 82.63.045, 82.68.050 and 82.69.050. If the deferral is transferred, the successor of
the investment project is liable for the full amount of any
unpaid, deferred taxes under the same terms and conditions as
the original recipient of the deferral. If the deferral is
not transferred, the successor's liability for deferred tax is
limited to the deferred taxes due at the time of the transfer.
Refer to WAC 458-20-24001 and 458-20-24001A (Sales and use tax
deferral -- Manufacturing and research/development activities in
distressed areas), 458-20-24002 (Sales and use tax
deferral -- New manufacturing and research/development
facilities), and 458-20-24003 (Tax incentives for high
technology businesses) for further reference regarding
successors of deferral investment projects.
(9) Examples. The following factual situations
illustrate the application of successorship. These factual
situations should be used only as a general guide. The
successorship status of each situation depends on all the
facts and circumstances. Assume all the examples below occur
on or after July 1, 2003.
(a) Example 1. Taxpayer quits business and sells all
equipment and inventory to one purchaser. The taxpayer may be
either solvent or insolvent at the time of sale. The
purchaser is a successor.
(b) Example 2. Taxpayer quits business, selling all of
its intangible assets consisting of customer lists and a
covenant not to compete. The purchaser is a successor.
(c) Example 3. Taxpayer sells its entire business,
including all equipment (60% of its tangible assets) to
Purchaser A, and all inventory (40% of its tangible assets) to
Purchaser B. Purchaser A is a successor. Purchaser B is not
a successor.
(d) Example 4. Taxpayer sells its entire business,
including all assets as follows to three purchasers on January
1, 2004:
| PURCHASER A |
PURCHASER B |
PURCHASER C |
Inventory of
$200,000 |
Equipment of
$100,000 |
Receivable of
$45,000 |
Purchaser A is a successor because it has acquired more
than 50% of the fair market value, of the tangible assets of
the taxpayer. Purchaser B is not a successor because it has
acquired less than 50% of the fair market value of the
tangible assets of the taxpayer. Purchaser C is a successor
because it has acquired more than 50% of the intangible assets
of the taxpayer. Purchaser C's tax liability is limited to
$45,000 because the fair market value of the assets acquired
is less than $50,000.
(i) On February 1, 2004, Purchaser C provides a proper
written notice to the department regarding its purchase from
the taxpayer. Purchaser A does not provide any written notice
to the department regarding its purchase from the taxpayer.
On September 30, 2004, the department issues a tax assessment
to the taxpayer for $100,000 in taxes owed, plus penalties and
interest. A copy of the tax assessment is also mailed to
Purchaser A as a successor to the taxpayer. Purchaser A is
liable for the $100,000 in taxes owed by the taxpayer since it
did not provide a proper written notice to the department.
Purchaser C is not liable for the $100,000 in taxes because it
provided a proper written notice, and the department did not
issue an assessment within six months of receiving the notice.
(ii) Same facts as in the previous example except the
department issues its tax assessment on July 15, 2004, and
mails a copy of the tax assessment to both Purchasers A and C
as successors. Both Purchasers A and C are liable as
successors for the taxes owed by the taxpayer. However,
Purchaser C's liability is limited to $45,000 in taxes since
the fair market value of the assets it acquired was less than
$50,000.
(e) Example 5. Taxpayer obtains a loan from a financial
institution to purchase equipment and inventory. The
financial institution secures the loan by taking a security
interest in the equipment and inventory. Taxpayer quits
business, leaving the equipment and inventory behind. The
financial institution repossesses these items. The financial
institution is not a successor.
(f) Example 6. Taxpayer purchases all equipment and
inventory under a line of credit extended by a bank and
guaranteed by a third party. The third party perfects a
security interest in the equipment and inventory. Taxpayer
quits business, surrendering the equipment and inventory to
the third party guarantor. The third party guarantor is not a
successor.
(g) Example 7. Taxpayer leaves business, including
equipment, materials, and inventory, which the landlord holds
for unpaid rent. The landlord forecloses the landlord's lien
using the summary foreclosure provisions of RCW 60.10.030, or
holds a foreclosure sale by the sheriff, or accepts a bill of
sale in satisfaction of the landlord's lien for rent created
by RCW 60.72.010. The landlord is not a successor.
(h) Example 8. Taxpayer purchases all equipment and
inventory under a security agreement.
(i) If the property is repossessed by the vendor, the
vendor is not a successor.
(ii) If the taxpayer sells his or her equity under the
security agreement to a third person, the third person is a
successor.
(iii) If the equipment and inventory is not repossessed
and the vendor buys back the interest of the taxpayer without
following the summary foreclosure provisions of RCW 60.10.030,
the vendor is a successor.
(i) Example 9. Taxpayer dies or becomes bankrupt, goes
into receivership, or makes an assignment for the benefit of
creditors. The executor, administrator, trustee, receiver, or
assignee is not a successor but stands in the place of the
taxpayer and is responsible for payment of tax out of the
proceeds derived upon disposition of the assets. A purchaser
from the executor, administrator, trustee, receiver, or
assignee is not a successor, unless under the terms of the
purchase agreement the purchaser assumes and agrees to pay
taxes and/or lien claims.
(j) Example 10. Taxpayer is a contractor and is required
to post a bond to insure completion of the contract. Taxpayer
defaults on the contract and the bonding company completes it.
The bonding company is a successor to the contractor to the
extent of the contractor's liability for that particular
contract and is also liable for taxes incurred in the
completion of the contract.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). 05-14-107, § 458-20-216, filed 6/30/05, effective 7/31/05. Statutory Authority: RCW 82.32.300. 99-08-034, § 458-20-216,
filed 3/31/99, effective 5/1/99; Order ET 70-3, § 458-20-216
(Rule 216), filed 5/29/70, effective 7/1/70.]