Contractors Beware: Washington Imposes 50 Percent Penalty for Misuse of Resale Certificate

Taxpayers should not assume that what works in one state will work in another, as illustrated by a recent case in which a subcontractor misused a reseller permit and paid a hefty price.

For contractors and subcontractors operating multistate businesses, having to understand and keep up with state sales and use tax rules is a huge challenge. This is especially the case for contractors and subcontractors since they are often subject to unique sales and use tax requirements that don’t apply to general businesses. As a result, it is often tempting to stick with what you know – how sales and use taxes apply to my business in my home state should work (more or less) the same way in other states, right? Wrong! Taking this approach will inevitably result in noncompliance penalties, some of which can be quite harsh as was recently highlighted in a Washington Tax Determination, where an administrative law judge refused to waive a 50 percent resale certificate misuse penalty that was imposed on a subcontractor. [1]

In that ruling, the administrative law judge addressed the issue of whether a taxpayer’s misunderstanding of the proper usage of a reseller permit (i.e., a resale certificate) would be a reasonable cause sufficient for the Department of Revenue (the “Department”) to waive penalty under the regulations. The taxpayer in the case was a subcontractor that purchased materials to perform work for a government contract. The taxpayer explained that it did as it always did as a subcontractor, “issuing our Reseller Permit and paying no sales/use tax.” The taxpayer cited its ignorance of the proper use of a reseller permit in Washington and its lack of intent to evade sales tax as the reasons for requesting a penalty waiver.

Unfortunately for the taxpayer, under Washington law government contractors and subcontractors are treated as the consumers of the materials that they use in performing the work and would be subject to retail sales tax on their purchases for the job. [2] Worse yet, per Washington rules and regulations, the Department has no discretion to not impose a penalty of 50 percent for the improper use of a reseller permit. [3] The only remedy for the taxpayer to lower the assessment bill was to seek a penalty waiver by showing that the misuse was due to circumstances beyond the control of the buyer. However, the regulations clearly stated that “the penalty will not be waived merely because the buyer was not aware of either the proper use of the reseller permit or the penalty.” [4] The taxpayer ended up having to pay the use tax on its purchases for the audit period of four years, interest and the 50 percent reseller permit misuse penalty.

This ruling highlights the need for taxpayers to have a clear understanding of the tax rules in each state in which they operate, particularly if that business is one to which a unique set of rules typically applies, such as contractors and subcontractors. HA&W’s SALT team is ready to assist you with understanding your sales and use tax obligations so that penalties such as these can be avoided.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Det. No. 14-0404, 34 WTD 337 (July 31, 2015). Click here for the decision.

[2] RCW 82.04.190(6).

[3] WAC 458-20-102 (Rule 102).

[4] Id.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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