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Division I: Dealer Cash Incentives to In-Inventory Vehicle Subject to B&O Tax

Klein Honda v. Dep’t of Revenue

This appeal has to do with used-car dealerships. You see, when used car dealerships sell certain cars at a specific point in time, the manufacturer will kick them back money which they refer to as dealer cash. The whole question of this case is whether that money they receive is subject to the business and occupation tax. Seller car, get some cash from the manufacturer. Sounds a lot like income, no?

As it turns out, Klein Honda had received over $1 million in dealer cash between 2003 in 2006. They were assessed almost $17,000 in additional taxes during an audit.

The department, “explained that dealer cash “is a payment to the Dealer for certain action: the sale of a particular car model within a specific time frame. This award was not part of the negotiated price; in other words, it was not contemplated at the time the Dealer purchased the vehicle from the manufacturer.”"

The court held that dealer cash is in fact a business activity. It includes all gross revenues received “in the course of doing business."

     We disagree with Klein Honda that dealer cash needs to represent compensation for an additional service to be taxable. Rather, the B&O tax applies to the gross income of business. The definition of “gross income of the business” demonstrates that this includes many activities that are not services, such as interest, royalties, dividends, and other emoluments. Likewise, RCW 82.04.290(2) nowhere requires an additional service for the 1.5% tax rate to apply. Rather, wrote receiving income from providing services is sufficient, but not necessary to trigger RCW 82.04.290(2).

Klein Honda also argued that the dealer cash amounted to a discount and wholesale price. This all turns on when the contract for the sale of the car was made. However, Klein Honda made its wholesale purchase of the vehicle without application of a dealer cash payment. “Rather, dealer cash applies to eligible vehicles already inclined Hondas inventory and is contingent upon Klein Honda selling those vehicles during a specified time period."

I’m not sure if other dealerships were treating dealer cash as B&O tax-exempt, but under this opinion, they are certainly not allowed to now.

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