WAC 458-20-247
Trade-ins, selling price, sellers' tax
measures. (1) Introduction. The value of "trade-in property of
like kind" is excluded from the definitions of "selling price" in
RCW 82.08.010 and the definition of "value of the article used"
in RCW 82.12.010. This rule explains how and when the retail
sales or use tax exclusions apply and the recordkeeping
requirements needed to document the transactions. The retail
sales and use tax exemptions provided for core deposits and
credits by RCW 82.08.036 and 82.12.038 are discussed in WAC 458-20-250.
Unless otherwise stated, "tax," "taxable," and "nontaxable,"
as used in this rule, refer to retail sales or use tax only. The
terms "trade-in," "traded in," and "property traded in" have
their ordinary and common meaning. The terms refer to property
applied, in whole or in part, toward the selling price of
property of like kind. Readers are advised that the fact that
sales and purchase transactions might be characterized as a "like
kind" under Section 1031 of the Internal Revenue Code does not
control for the purpose of the trade-in exclusion in RCW 82.08.010 and 82.12.010.
(2) General nature of the trade-in exclusion. RCW 82.08.010
and 82.12.010 define the terms "selling price" and "value of the
article used," in pertinent part, to mean the consideration,
whether money, credits, rights, or other property except trade-in
property of like kind, expressed in terms of money paid or
delivered by a buyer to a seller. As a result, the buyer of
tangible personal property is entitled to reduce the measure of
retail sales or use tax if (a) the buyer delivers the trade-in
property to the seller, (b) the trade-in property is delivered as
consideration for the purchase, and (c) the property traded in is
"property of a like kind."
(a) The trade-in exclusion applies to all trade-in property
of like kind delivered by a buyer to a seller as consideration
for a purchase. Thus, if a buyer trades in two motor vehicles
when purchasing one motor vehicle, the buyer is entitled to a
reduction in the measure of tax based on the value of both
trade-in vehicles.
(b) The trade-in exclusion is limited to retail sales and
use taxes. There is no comparable exclusion for business and
occupation (B&O) tax. (See definition of "gross proceeds of
sales" in RCW 82.04.070 and of "value proceeding or accruing" in
RCW 82.04.090.)Sales tax need not have been paid on the item
being traded in to be eligible for the trade-in exclusion.
(3) Buyer to deliver trade-in property to seller. The buyer
must deliver trade-in property to the "seller."
(a) RCW 82.08.010 defines "seller" as "every
person . . . making sales at retail or retail sales to a buyer or
consumer, whether as agent, broker, or principal." There is no
requirement that the seller be the owner of the property being
sold to the buyer. RCW 82.08.010 anticipates and includes
situations where a "seller" is selling property that he or she
does not actually own, such as in consignment sales transactions.
For example, Broker enters into a consignment sale contract
with Susan Smith to sell her Boat A. John Doe contacts Broker
expressing interest in purchasing Boat A, provided his Boat B is
accepted as a trade-in on the purchase. John Doe executes a
purchase agreement with Broker which specifically identifies both
Boat A being purchased and the trade-in. Broker accepts delivery
and ownership of Boat B and places Boat B into Broker's own
inventory. In turn Broker arranges delivery of the craft
purchased to John. The buyer (John) has delivered the trade-in
property (Boat B) to the seller (Broker). There is no
requirement that Broker purchase Boat A from Susan (thereby
becoming the owner) prior to selling Boat A to John and accepting
Boat B as trade-in property because, as a broker, Broker is a
seller under RCW 82.08.010.
(b) The trade-in exclusion does not apply to transactions
where a seller transfers tangible personal property in or out of
its own inventory in exchange for other property it also owns.
(4) Trade-in as consideration. Property traded in must be
consideration delivered by the buyer to the seller. The sales
documents must identify the tangible personal property being
purchased and the trade-in property being delivered to the
seller. This does not require simultaneous transfers of the
property being traded in and the property being purchased, but it
does require that the delivery of the trade-in and the purchase
be components of a single transaction. Sales documents, executed
not later than the date the trade-in property is delivered to the
seller, must identify the property purchased and the trade-in
property as more fully explained in subsection (7) below.
The following examples identify a number of facts and then
state conclusions with respect to the trade-in exclusion. These
examples should be used only as a general guide. The tax results
of other situations must be determined after a review of all the
facts and circumstances.
(a) Jane Doe offers to purchase Sailboat A from Dealer, if
Dealer accepts her Sailboat B as a trade-in on the purchase.
Dealer declines to accept ownership of Jane's Sailboat B, but
instead offers to sell Sailboat B on a consignment basis with the
net proceeds to be applied toward the purchase if Sailboat B is
sold within three months. Jane accepts and Sailboat B is sold
within the three-month period, and the net proceeds are applied
to Jane's purchase of Sailboat A.
Jane is not entitled to the trade-in exclusion. An
agreement to sell property on consignment does not constitute
consideration "paid or delivered by a buyer to a seller," even if
the subsequent proceeds are applied to the purchase price.
(b) Sally Jones decides to upgrade from her existing motor
home to a new, larger motor home. The salesperson at a local RV
dealership explains that while the dealership does not currently
have on hand a motor home meeting Sally's needs, it can order one
for her from the manufacturer. The salesperson also explains
that if Sally trades in her motor home at the time she enters
into the purchase contract, the dealership will accept the motor
home as a down payment toward the purchase of the new motor home.
Sally signsthe purchase contract, the dealership orders the new
motor home, and Sally delivers her motor home to the RV dealers
(who accept ownership thereof). Sally's new motor home is
delivered to her eight months later.
Sally is entitled to the trade-in exclusion because the
motor home was delivered to the RV dealership as consideration
paid toward her purchase of the new motor home.
(c) Mr. B and Coastal Brokers enter into a consignment sales
agreement. Under the terms of this agreement, Coastal Brokers
will sell Mr. B's sailboat on a consignment basis and at the time
of sale place the proceeds due Mr. B into a trust account for use
toward a possible purchase of a yacht by Mr. B. Mr. B's sailboat
is sold and the proceeds due to Mr. B placed in the trust
account. Mr. B subsequently purchases a yacht from Coastal
Brokers, and the trust account proceeds are applied to the
purchase price of the yacht.
Mr. B is not entitled to the trade-in exclusion. The
delivery of Mr. B's sailboat to Coastal Brokers and Mr. B's
purchase of the yacht are not components of a single transaction.
In addition, Mr. B's delivery of his sailboat for consignment
sale by Coastal Brokers does not constitute consideration "paid
or delivered by a buyer to a seller," even if proceeds from the
sale are applied to the purchase of the yacht.
(d) John Smith agrees to purchase Travel Trailer A from
Dealer if Dealer accepts John's Travel Trailer B as a trade-in on
the purchase. Dealer accepts ownership of Travel Trailer B at an
agreed-upon value, on the condition that John pay Dealer a
monthly fee to reimburse Dealer for financing costs associated
with Travel Trailer B. This fee is to be paid for a period of
four months or until Dealer sells Travel Trailer B, whichever is
shorter. John has no further responsibility with respect to
Travel Trailer B after this period.
John is entitled to the trade-in exclusion because he
delivered Travel Trailer B to Dealer as consideration paid toward
Travel Trailer A. The fees John paid to reimburse Dealer for
financing costs associated with the trade-in property do not
change the nature of the transaction, though for the purposes of
the trade-in exclusion they do reduce the originally agreed-upon
value of the trade-in property.
(5) Property of like kind. The term "property of like kind"
means articles of tangible property of the same generic
classification. It refers to the class and kind of property, not
to its grade or quality. The term includes all property within a
general classification rather than within a specific category in
the classification. Thus, as examples, it means furniture for
furniture, motor vehicles for motor vehicles, licensed
recreational land vehicles for licensed recreational land
vehicles, appliances for appliances, auto parts for auto parts,
and audio/video equipment for audio/video equipment. These
general classifications are determined by the nature of the
property and its function or use. It may be that some kinds of
property fit within more than one general classification. For
example, a motor home is both a motor vehicle and a licensed
recreational land vehicle. Thus, for purposes of the trade-in
exclusion, a motor home may be taken as a trade-in on a travel
trailer, truck, camper, or a truck with camper attached, and vice
versa. Similarly, a travel trailer may be taken as trade-in on a
motor home even though a travel trailer is not a motor vehicle;
both are licensed recreational land vehicles. Conversely, a
utility trailer may not be taken as trade-in on a travel trailer
because a utility trailer is neither a motor vehicle nor a
licensed recreational land vehicle. Likewise a car may not be
taken as trade-in on a camper and vice versa.
It is not required that a car be traded in exclusively on
another car in order to get the trade-in reduction of the tax
measure. It could, as well, be traded in as part payment for a
truck, motorcycle, motor home, or any other qualifying motor
vehicle. Similarly, a sofa for a recliner chair, a pistol for a
rifle, a sailboat for a motorboat, or a gold chain for a wrist
watch are the kinds of generic trade-in transfers which would
qualify. The exclusion of the value of property traded in,
however, does not include such things as a motorcycle for a boat,
a diamond ring for a television set, a battery for lumber,
computer hardware for computer software, or farm machinery
(including tractors and self-propelled combines) for a car.
(6) Value of property traded in. The seller and buyer
establish the value of property traded in. The parties may not
overstate the value of the trade-in property in order to
artificially lower the amount of retail sales or use tax due.
Absent proof of a higher value, the property traded in must be
determined by the fair market value of similar property of like
quality, quantity, and age, sold or traded under comparable
conditions.
(7) Trade-in value exceeds selling price. If the trade-in
value exceeds the selling price of the item sold, the selling
price of the item being purchased should be used as the trade-in
value. For example, a Washington resident purchases a car with a
value of $5,000 and trades in a car with a fair market value of
$7,000. The net due to the purchaser is $2,000. When the seller
completes the excise tax return, he or she should report a
trade-in value of $5,000 and not $7,000 because the trade-in
value is capped at selling price of the item being purchased.
(8) Recordkeeping. RCW 82.32.070 requires every person
liable for any tax to keep and preserve records from which tax
liability can be determined. To substantiate a claim for the
trade-in exclusion, the sales agreement and/or invoice must
identify both the property being purchased and the trade-in
property. Such identification includes the model number, serial
number, year of manufacture, and other information as
appropriate. The sales agreement and/or invoice must also
specify the selling price and the value of the trade-in property.
A copy of the sales agreement or invoice must be retained as
a part of the seller's sales records. The following is an
example of an invoice providing the necessary information
regarding a sales transaction with trade-in:
Sold: 2000 Mountain Home 8.5 ft. Camper
Model MH-20DT, Serial No. 200010
$9,075
Less "trade-in" - 1983 Meadowlark 8 ft.
Camper
Model No. ML883, Serial No. 0001
$2,000
(9) Encumbered property traded in. A buyer is entitled to
full value for trade-in property, which is otherwise encumbered
by a security interest or the subject of a conditional sale, or
retail installment sales contract.
(10) Casual or isolated sales. The retail sales tax applies
to all casual or isolated retail sales made by any person who is
required to be registered and reporting tax to the state. The
trade-in exclusion applies in the case of a casual or isolated
sale, provided the statutory requirements are satisfied. The
recordkeeping requirements explained in subsection (7) apply to
casual or isolated sales.
Persons who are not engaged in business activity, e.g.,
private persons, are not required to be registered and are not
required to collect sales tax on their casual or isolated sales.
RCW 82.08.0251 and WAC 458-20-106 (Casual or isolated
sales -- Business reorganizations). The use of property acquired
through casual sales is subject to use tax. See RCW 82.12.0251
and WAC 458-20-178.
(11) Trade-ins as sales. RCW 82.04.040 defines the term
"sale" in pertinent part to mean "any transfer of the ownership
of, title to, or possession of property for a valuable
consideration." When property is traded in, ownership in that
property is transferred. As a result, under the law a buyer
delivering trade-in property to a seller is making a sale of the
trade-in property.
(a) If the buyer is not in the business of selling the type
of property being traded in the buyer incurs no B&O tax
liability. (See WAC 458-20-106 on casual or isolated sales.)
(b) On occasions where the buyer is in the business of
selling the type of property being traded in, the buyer incurs a
B&O tax liability.
For example, Leasing purchases a new car from Dealer. This
car will be part of Leasing's inventory of cars that it rents to
customers. Leasing delivers a used car out of its inventory to
Dealer as a part of the consideration paid for the new car. The
trade-in of the used car by Leasing is considered a wholesale
sale to Dealer. This is not a casual or isolated sale because
Leasing is in the business of selling cars in the form of
rentals.
(c) In most cases, a buyer delivers trade-in property to a
seller who is in the business of reselling trade-in property
(e.g., a buyer trading in an automobile to a new car dealer).
The buyer in these cases has no responsibility to collect retail
sales tax.
(12) Retail services. The exclusion of the value of
property traded in from the selling price tax measure applies
only to sales involving tangible personal property traded in for
tangible property sold. It does not apply to any transactions
involving services that have been statutorily included as "sales
at retail" (see RCW 82.04.050). For example, a construction
contractor may not accept part payment in tangible property to
thereby reduce the sales tax measure of the construction contract
selling price. Similarly, a seller of tangible personal property
may not accept retail services as part payment to thereby reduce
the selling price tax measure. Such transfers neither qualify as
trade-in transfers of tangible property nor "in-kind" transfers.
(13) Trade-in for rental property. Under RCW 82.04.050,
rentals or leases of tangible personal property are "retail
sales." The "selling price" is also the measure of tax for such
rentals and leases. Where tangible property is traded in as part
payment for the rental or lease of property of like kind (e.g., a
used computer against the rental of a new one), the sales tax
will apply to all payments after the value of the property traded
in has been depleted or consumed and the lessor of the property
actually begins making charges for the lease or rental of
tangible property. Refer to WAC 458-20-211 (Leases or rentals of
tangible personal property, bailments) for more information
regarding the tax-reporting responsibilities with respect to
lease or rental transactions.
A lessee must first purchase leased property before trading
it in toward the purchase/lease of other property to be entitled
to the trade-in exclusion. A buyer cannot satisfy the statutory
requirement that the trade-in property be delivered to the seller
as a part of the consideration for the purchased property if the
buyer does not have ownership of and the right to sell the
property being traded in. For example, Jane Doe leases Auto A
from Leasing Company. Jane decides to lease a newer Auto B from
Leasing Company. Jane exercises her option to purchase Auto A,
and then delivers Auto A as a trade-in towards the lease of Auto
B. Jane is entitled to the trade-in exclusion. By delivering
her ownership of Auto A to Leasing Company, Jane has satisfied
the statutory requirement that she as the buyer deliver trade-in
property to the seller as a part of the consideration paid for
Auto B.
(14) Real property transfers. Because the trade-in
exclusion is limited to tangible personal property, the trade-in
exclusion does not apply to sales of real property or
transactions where real property is traded in for tangible
personal property.
(15) Use tax. RCW 82.12.010 defines the measure of the use
tax as the "value of the article used." As explained in
subsection (2) of this rule, the statutory definition excludes
"trade-in property of like-kind." Therefore, the measure of the
use tax for tangible property upon which no retail sales tax has
been paid (e.g., if it were purchased in another state) is the
same as the measure of the retail sales tax. In such cases the
value of the property traded in should be excluded from the use
tax measure.
The consumer-user, or any seller who has a duty to collect
this state's use tax, must retain the sales records reflecting
property "traded in," as explained in subsection (7) of this
rule.