A [Confusing] Look at Vehicle Taxes

Imagine, if you will, you're flipping through the want-ads when you happen upon an advertisement for a car. The price seems right and its a model you've heard good things about. You call the listed phone number and arrange a meeting with the owner of said vehicle. After a careful inspection and a little haggling, you decide that you'll go ahead and purchase the car. Between the two of you, a price is arrived at that seems reasonable and fare. You hand him $500; he hands you a receipt, a signed and dated title, and a set of car keys. Done deal? Not by a long shot.

You take the title, the receipt, and your checkbook down to the local licensing agency to transfer the title into your name. The agent behind the counter taps on the keyboard then announces that you owe the state $320 in taxes and fees. Your knees start to buckle as the amount slowly sinks in. You ask yourself, "I owe over half of what I paid for the car in taxes? This can't be right!"

You regain your composure and assure the nice lady that you only paid $500 for the car and that her calculation must be wrong. She looks back at you and explains that while you may have only paid the seller $500, the fare market value of your particular vehicle is actually $3400. Therefore, the state has decided that this is the amount it will use to levy your tax.

"But, I only paid $500 for the damned car!" you exclaim.

The lady then explains that you have a couple of options to have your tax burden reduced. Suffice it to say, they all have to do with you having your particular vehicle revalued by a third party and I believe it involves getting affidavits notarized, too. Your receipt from the seller stating the selling price is essentially worthless in this whole process, save the language of it being sold "as is," or some other warranty, expressed or implied. (blah, blah, blah.)

Welcome to title transfer hell in Washington State!

Something similar happened to a fellow that I sold a vehicle to recently. Having just gone through this with a car I purchased, I warned him that he was headed for certain doom. It was my way of giving him both a pre and fare warning before he dropped into the lion's den. He came into the store where I work yesterday. He told me of his adventures with the state and his attempt to transfer the title. Needless to say, the state has made another happy customer.

So, I thought I would take a look at what it is that we're all being taxed for. Let me start by saying that this was no easy task. For one thing, I'm pretty sure that if you buy a used car from a private party, this should fall under the "use tax" section of the Revised Code of Washington. It's not a sale made under the privilege of selling at retail under RCW 82.04.050. From what I can figure, this only applies on the original sale of a vehicle when that vehicle is brand-new. (If someone knows differently and can point to the section of code, leave a comment below.)

From here on, we'll only concern ourselves with the use tax portion of the code. Hmmm... Where to start? Why not start where the state puts its hand on your shoulder and says, "Hey, Buddy, pay up." That would be RCW 82.12.020:

Use Tax Imposed

(1) There is hereby levied and there shall be collected from every person in this state a tax or excise for the privilege of using within this state as a consumer: (a) Any article of tangible personal property purchased at retail, or acquired by lease, gift, repossession, or bailment, or extracted or produced or manufactured by the person so using the same, or otherwise furnished to a person engaged in any business taxable under RCW 82.04.280 (2) or (7); (b) any prewritten computer software, regardless of the method of delivery, but excluding prewritten computer software that is either provided free of charge or is provided for temporary use in viewing information, or both; or (c) any extended warranty.

(5) The tax shall be levied and collected in an amount equal to the value of the article used, value of the extended warranty used, or value of the service used by the taxpayer multiplied by the rates in effect for the retail sales tax under RCW 82.08.020, except in the case of a seller required to collect use tax from the purchaser, the tax shall be collected in an amount equal to the purchase price multiplied by the rate in effect for the retail sales tax under RCW 82.08.020.

(Emphasis mine)

The words and phrases I've marked in blue are significant because they are defined in code to mean something different than what Webster's dictionary says. For example, "value of the article used" actually means (RCW 82.12.010):

For the purposes of this chapter:

(2)(a) "Value of the article used" shall be the purchase price for the article of tangible personal property, the use of which is taxable under this chapter. The term also includes, in addition to the purchase price, the amount of any tariff or duty paid with respect to the importation of the article used. In case the article used is acquired by lease or by gift or is extracted, produced, or manufactured by the person using the same or is sold under conditions wherein the purchase price does not represent the true value thereof, the value of the article used shall be determined as nearly as possible according to the retail selling price at place of use of similar products of like quality and character under such rules as the department may prescribe.

(Again, emphasis mine)

Did you catch that? The last bit about if an article is "sold under conditions wherein the purchase price does not represent the true value thereof, the value of the article used shall be determined as nearly as possible according to the retail selling price at place of use of similar products of like quality and character under such rules as the department may prescribe." That's where the state gets to revalue your vehicle. Notice it says to see the rules prescribed. Here they are (RCW 82.04.450):

Value of products, how determined.

(1) The value of products, including byproducts, extracted or manufactured shall be determined by the gross proceeds derived from the sale thereof whether such sale is at wholesale or at retail, to which shall be added all subsidies and bonuses received from the purchaser or from any other person with respect to the extraction, manufacture, or sale of such products or byproducts by the seller, except:

(a) Where such products, including byproducts, are extracted or manufactured for commercial or industrial use;

(b) Where such products, including byproducts, are shipped, transported or transferred out of the state, or to another person, without prior sale or are sold under circumstances such that the gross proceeds from the sale are not indicative of the true value of the subject matter of the sale.

(2) In the above cases the value shall correspond as nearly as possible to the gross proceeds from sales in this state of similar products of like quality and character, and in similar quantities by other taxpayers, plus the amount of subsidies or bonuses ordinarily payable by the purchaser or by any third person with respect to the extraction, manufacture, or sale of such products: PROVIDED, That the value of a product manufactured or produced for purposes of serving as a prototype for the development of a new or improved product shall correspond: (a) To the retail selling price of such new or improved product when first offered for sale; or (b) to the value of materials incorporated into the prototype in cases in which the new or improved product is not offered for sale. The department of revenue shall prescribe uniform and equitable rules for the purpose of ascertaining such values.

But the real question is this? Are you actually engaged in an act that is taxable when you, acting as a private party, sell your vehicle to another private party? The answer is kind of ambiguous in that RCW 82.04.190 defines "consumer" (referring back to RCW 82.12.020 which levies a tax on "the privilege of using within this state as a consumer [real property]") as:

(1) Any person who purchases, acquires, owns, holds, or uses any article of tangible personal property irrespective of the nature of the person's business... (the code goes on to list a variety of occupations.)

Notice that the above definition assumes that you're already engaged in some sort of business, as defined in RCW 82.04.140, that is taxable. Are you? Do you pay over to the state B&O taxes? That is what RCW 82.04 pertains to--Business and Occupation taxes. So, if you're not engaged in an activity where you're required to pay taxes under RCW 82.04, should you then be considered a "person who purchases, acquires, owns, holds, or uses any article of tangible personal property irrespective of the nature of the person's business"? At this point, I'm not totally sure. Unfortunately, my time has expired and I must go to work.

Don't worry. We'll look at this subject again.

UPDATE: I found more information at the County Auditor's site that I'll review for an unpcoming post.