Recently, that has begun to change.  Courts are no longer invariably dismissing such claims.  Large and established businesses such as Target and Netflix have settled ADA claims based on the inaccessibility of their websites and have agreed to make their websites accessible.

It’s anticipated that later this year the U.S. Department of Justice will issue new regulations on website accessibility which may take a “broad view” of the ADA’s applicability to websites.   See the discussions of this impending development here and here.

The Act is generous to plaintiffs’ lawyers who can recover their fees and costs in addition to statutory damages for any violation of the ADA.  It’s consequently prudent to begin building accessibility into any commercial website before your business becomes a defendant.

© 5/13/2013 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.

In an April 26, 2011 blog post I discussed the Court of Appeals’ earlier decision in Synectic Ventures which affirmed the trial court’s award of summary judgment to the defendant who was both the managing member of a limited liability company and the chairman of the board, treasurer and equity owner of a corporation indebted to the limited liability company, who unilaterally altered the terms of the corporation’s indebtedness to the LLC without disclosure or consent of the LLC’s other members.  The LLC’s other members and the LLC had challenged that unilateral alteration of the loan terms as a breach of the defendant’s duty of loyalty.

In awarding the defendant managing member and the defendant corporation summary judgment the trial court and the court of appeals had relied on language in the LLC operating agreement generally granting the defendant as managing member the right to bind the company.  The Supreme Court rejected that analysis holding that any contractual modification of the general duty of loyalty which the defendant owed to the LLC and its members must be “specific” and consistent with the statutory restriction on elimination of a manager’s duty of loyalty in ORS 63.155(10)(a).

That is, the Court essentially seemed to hold in Synectic Ventures that any contractual reduction in the general duty of loyalty defined in ORS 63.155(2) must take the form of a specific identification of those “. . . types or categories of activities that do not violate the duty of loyalty, if not unconscionable . . .  and “[s]pecify the number or percentage of members . . . or managers . . .” that may authorize or ratify a specific act or transaction that would otherwise violate the duty of loyalty.  ORS 63.155(10)(a)(A) and (B).  The Court will not, in short, imply a contractual diminishment of the duty of loyalty where such a contractual contraction of that duty is not specifically stated in accordance with the statutory provisions allowing the parties to modify that duty.

The Supreme Court’s holding in Synectic Ventures illustrates, again, the need for careful drafting both in limited liability company operating agreements and in most other contracts.  As with the earlier decision by the Court of Appeals, it is the language of the operating agreement on which the court focuses.

The case also demonstrates the need for those thinking of forming or becoming members or managers of any limited liability company to obtain and consult with their own attorney concerning the terms of the operating agreement defining their rights and obligations.  Caveat emptor.

© 3/20/2013 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.

Wrong.  In Oregon, every divorce judgment must have a provision that states that neither parent may move to a residence more than 60 miles from the other parent without providing the other parent reasonable notice and providing notice of the move to the court. This provision allows the parent that is not moving to object to the move or try to rework the parenting plan so that it’s more convenient for both parents.

Reasonable notice is not defined.  Certainly notice the day of the move isn’t reasonable.  The amount of notice necessary depends on the distance of the move, the purpose behind the move, and when you found out that you needed to move.  A month is probably reasonable notice in most circumstances, but the best measuring stick is to tell the other parent about the move and provide written notice as soon as the decision is made.

Since our courts aren’t models of efficiency, if the other parent files an objection to the move, the case may not be heard for two or more months.  During that time, you probably will not be allowed to move.

So why not move first, provide notice later? Erase that thought immediately.

If you fail to provide notice you can be held in contempt of court which can result in losing custody of the children.  Judges don’t like their orders to be violated, and don’t like it when a parent doesn’t consider the children or the other parent before deciding to uproot the children to a new city.

The judge will need to determine whether the move is in the children’s best interest – not the parent’s best interest.  Moving because you want to be closer to your boyfriend probably won’t fly unless there are other reasons pushing the move.

In determining what is within the child’s best interest, judges will look at: whether the child’s needs are better served by the move; whether the moving parent will continue to foster the parent-child relationship between the other parent and the child; the reason for the move; the emotional ties between the parent that’s not moving and the child; whether the non-moving parent was regularly exercising parenting time; whether there is abuse; etcetera.  This is not an exclusive list.

Since people move for any number of reasons, there is no one size fits all approach to analyzing these types of cases.  Having been involved in these types of cases, they are fact specific and generally end up in litigation.

Consequently, if you plan on moving to a new city or state, and the move is more than 60 miles (unless a shorter distance is stated in the judgment), you should give the other parent and the court written notice as soon as possible.

© 1/18/2013 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

As far as estate and gift tax changes go, there weren’t many made in the new legislation. Here’s the estate and gift tax landscape as of today:

1.                  The changes are permanent (until changed by a future congress).

We no longer need to worry that our estate tax laws will revert to the laws in place pre-2001 when Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  In EGTRRA, the changes to the federal estate and gift tax laws were temporary since part of the compromise between the parties was that EGTRRA would only be temporary.  The changes that EGTRRA made to tax laws were scheduled to expire at the end of 2010 but were extended (with changes) through 2012.  If the EGTRAA and the 2010 changes were allowed to expire this year, estate and gift tax laws, along with many other federal tax laws would have reverted to pre-2001 laws.

Had Congress failed to act, the amount an individual would have been able to pass tax free in 2013 would have decreased to $1.0 million – it was $5.12 million in 2012 – and the highest tax rate would have increased from 35 percent to 55 percent.   This potential change led to many high net worth individuals to gift significant assets in 2012 to take advantage of the $5.12 million estate and gift tax exemption.

Under the American Taxpayer Relief Act of 2012, the changes are permanent unless amended by a future act of Congress.

2.                  Maximum tax rate is 40 percent. 

The maximum tax rate is increased from 35 percent to 40 percent for estates over $5.0 million.  Although still high, it’s better than the alternative.

3.                  No changes in the basic exemption amount for individuals.

The American Taxpayer Relief Act of 2012 does not change the federal estate tax exemption.  The base amount is $5.0 million for individuals but this amount will be adjusted for inflation each year.  In 2013 the basic exemption is actually $5.25 million.  This means that an individual can transfer at least $5.0 million (as adjusted for inflation) tax-free either by gift during the individual’s lifetime or following the individual’s death by will, trust or intestate succession.  For example, if an individual gifts $4.0 million during his lifetime and dies with an estate worth $1.0 million, the estate will not owe any federal estate or gift taxes.

4.                  No increase in basic exemption amount for married couples and portability.

Married couples can exempt around $10.0 million from federal estate and gift taxes, but this amount will be adjusted for inflation.  Consequently, if both spouses pass away in 2013, the combined exemption would be $10.5 million.

In extending the 2010 estate and gift tax laws, Congress also included the portability language contained in the 2010 changes to EGTRRA.  This means that if a spouse passes away and her estate is less than the basic exemption amount, the remaining portion of the exemption passes to the surviving spouse.  For example, say wife passes away in 2013 and her estate is worth $2.0 million.  The remaining $3.25 million of the wife’s exemption can be used by the husband in making lifetime gifts or his estate when he passes away.  If husband passes away years later and has an $8.0 million estate, then his estate wouldn’t owe any federal estate taxes since the exemption increased from $5.0 million to $8.25 million.  Of course, there’s a catch.

For portability, the estate of the wife must file a federal estate tax return even though no estate taxes are owed.  Estate tax returns must be filed within 9 months following the date of death.  The filed return will be the benchmark for determining the amount of wife’s exemption transferred to husband.  Failure to file a return within the 9 month period will most likely result in a loss of the portability option.

5.                  No changes to annual gift tax exclusion amounts.

Individuals can gift up to $14,000.00 per year, per person gift-tax free and without dipping into the $5.0 million lifetime exemption.

Married couples can gift up to $28,000.00 annually, tax free, and without dipping into the federal estate tax exemption.

6.                  Unlimited gifts between husband and wife.

Married persons can continue to gift/transfer property to each other without utilizing the annual or lifetime gift tax exclusion amounts.

7.                  States didn’t change their laws.

Just because the feds decided to give you a break, does not mean that Oregon has made similar changes to its estate tax laws.  Oregon’s estate tax still applies to estates over $1.0 million and there is no portability.  The highest estate tax rate is 16.0 percent.

Avoiding the fiscal cliff does not mean that you should avoid your estate planning.  The truth of the matter is that a small portion of all estates are taxable – federally or by the state.  However, it’s the smaller estates that sometimes need the most planning due to family dynamics, individual beneficiary needs (i.e. individuals with disabilities or that are irresponsible or immature), or your own needs.  Proper planning during your lifetime ensures that your money and assets are used to benefit those individuals that you intend on benefiting – not attorneys and other advisers in needless litigation.  Any reduction in taxes is icing on the cake.

© 1/4/2013 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

Since there are no estate tax issues, they want a “simple will” that gives the property to the kids in equal shares.  In many situations, that type of a will might be appropriate.  However, during the initial meeting I learn that the oldest child and middle child aren’t on speaking terms.  In fact they haven’t communicated with each other in a number of years.

Delving further, I learn that the youngest child acts as an intermediary between the other siblings which has strained his relationship with each of his siblings. He also has developmental disabilities that limit his ability to work. He’s receiving SSI benefits and is also receiving health care coverage through Medicaid.

The middle child has managed to rack up thousands of dollars in credit card debt and has a slight gambling problem.  The oldest child is in a rocky marriage that has seen her split from her husband of 10 years on three separate occasions.  She makes considerably more money than her husband since he doesn’t work and their joint assets aren’t significant.

What began as a fairly straightforward estate plan has become quite complex and raises the following questions:

1. How do they keep the vacation property “in the family”?
2. How do they ensure that their youngest child will continue to receive SSI and Medicaid benefits?
3. How do they ensure that their middle child won’t blow his inheritance or lose it to creditors?
4. How do they protect property left to their oldest child from going to her husband if/when they divorce?
5. Who do they name as personal representative, trustee, or other legal representative responsible for administering their estate?

Following are various approaches that could be taken to resolve these questions.

1.         LLC Owns Vacation Property

Setting up a limited liability company to own and manage the beach property makes the most sense to keep it “in the family” and ensure that the kids have equal use of the property when the couple passes away.  The limited liability company could be formed during the couple’s lifetime and they would be the original members and managers.  They could do anything with the property during their lifetimes.  When they both pass away their membership interests would be transferred to the kids in equal shares.

To keep the property in the family, the operating agreement could be drafted to ensure that only descendants of the couple (grandchildren, great grandchildren, etc.) can own a membership interest in the company.  Other safeguards would be placed in the operating agreement to ensure creditors and ex-spouses couldn’t receive a child’s interest and that restrict each member’s ability to transfer membership interests.

An independent manager could be named to ensure that the property is cared for properly and to ensure equal use of the property. Fights about who gets which weekend, who pays for repairs/maintenance, etcetera would be resolved by the neutral manager.

2.         Supplemental Needs Trust for Youngest Child

A will leaving equal shares to each child directly could potentially disqualify the youngest child from receiving needs based government assistance.  Therefore, a supplemental needs trust should be drafted into the will to ensure that the youngest child is eligible to receive needs based government assistance such as SSI and Medicaid (Oregon Health Plan) after they have both passed away.  Essentially, by placing the youngest child’s share of the estate in a supplemental needs trust, the property devised to him would not be considered an asset in determining his eligibility for needs based financial assistance.  Without the trust he may be required to “spend down” his inheritance to a point that would make him eligible for those benefits.

A supplemental needs trust can be included in the couple’s wills so a separate trust document is not necessary. If drafted properly, the trust provides that the funds may not be used for the child’s basic needs, such as food, basic health care needs, clothing, and shelter.  The assets can be used for a myriad of other items such as paying the child’s cable and internet bill, traveling, specialized medical supplies, and various other items or services.  Essentially, the supplemental needs trust will ensure that the child can live a comfortable life without having to rely solely on government benefits.

3. & 4. Spendthrift Trust for the Middle and Oldest Child

Questions 3 and 4 have the same answer: both children need a spendthrift trust to manage their shares of the estate.  A spendthrift trust differs from the supplemental needs trust in that the trustee can pay for the children’s basic needs as well as supplemental or other needs.

The middle child needs a spendthrift trust to ensure that: he does not gamble his inheritance away; and, that his creditors cannot receive his inheritance by garnishment or other collection methods. It’s not unheard of for a creditor to garnish a child’s entire inheritance before the child sees one dime of it.

The trustee would have discretion to make distributions to the child or to pay for certain services directly, such as the child’s mortgage, monthly bills, etcetera.  By paying for services directly, the child’s creditors would not be able to garnish distributions from the trust.  The trust would give the trustee the ability to deny requests for funds from the child if the trustee believed that the child was gambling or using funds improperly.

If the oldest child gets divorced after the couple has passed away, an argument could be made by the ex-spouse of the oldest child that the inheritance left to the oldest child is a marital asset.  Thousands of dollars will be spent arguing over what the couple’s intent was – did they intend to benefit the ex-spouse?  Placing that child’s share in a spendthrift trust is one way to protect that child’s share of the estate and clearly state that the property held in the trust is intended to benefit the oldest child and not her spouse.

The trustee would have the final say in making distributions and the child cannot control distribution of trust assets. Most spendthrift trusts explicitly state a court cannot compel the trustee to make distributions and will state that the trustee can terminate that trust and distribute it to the other siblings or possibly the oldest child’s children.  The point is to keep the ex-spouse from having an interest in the trust property.

5.         Independent Personal Representative/Trustee

This couple will need to appoint an independent personal representative and trustee to oversee administration of their estate and the trusts described above.  Oftentimes, parents will appoint one child as the personal representative or trustee, or maybe two children.  However, in this situation, a professional trustee is probably necessary due to the size of the estate, the sibling rivalries, and the need for a truly independent trustee to administer the spendthrift trusts.

The expenses associated with naming an independent trustee outweigh the risks and burdens associated with naming a family member or friend. When creditors and ex-spouses try to attack spendthrift trusts, their first argument is that the trustee is not independent – i.e., the trustee is being controlled by the beneficiary.

Could the couple appoint an aunt, uncle, cousin or close family friend to serve as trustee? Sure they can, but my response is always: “would you want to be placed in that position?”   The answer is almost always no.  Family and friends may want to avoid controversy; consequently, every time the middle child requests money, the trustee gives it to him to avoid a fight.

As you can see, the value of an estate isn’t the only factor that should be considered in preparing an estate plan.  Family dynamics oftentimes dictate what documents we prepare and what is included in those documents more than the size of the estate. Although there are situations where a shorter will is appropriate, it does not mean that the will is “simple”.

© 10/24/2012 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

In that case the plaintiff, Dial, wrote a contract for providing DLF with temporary workers.  The contract stated that the temporary workers Dial provided would not be authorized to operate DLF’s machinery, equipment and motor vehicles without Dial’s prior written approval.  The contract also provided that the insurance Dial had for the temporary workers Dial provided DLF would not cover liability for injury or damages caused by Dial’s employees’ operation of DLF’s equipment or motor vehicles.  Finally, the contract stated that DLF accepted full responsibility for any loss or damages resulting from the operation of DLF’s equipment and vehicles without Dial’s prior written consent.

A DLF shift supervisor directed one of the workers Dial provided DLF to turn off a seed blender and to then go into a pit beneath that blender to remove debris.  Dial’s worker had failed to use any lock out procedures to keep the blender from being turned on before going into the pit.  One of DLF’s employees turned on the seed blender while Dial’s employee was in the pit thereby cutting off one of the Dial employee’s hands.

SAIF, plaintiff’s workers’ compensation carrier, covered the claim and then charged Dial a retrospective premium of $241,000.00 for which Dial sought reimbursement from DLF as damages under Dial’s contract.  Dial claimed that DLF had breached the contract arguing that this was precisely the kind of loss which the contract provision prohibiting Dial’s employees from operating DLF’s equipment was intended to address.  In support of its position Dial submitted an affidavit from its CEO stating that Dial’s intent in writing the contract was to protect against just such a retrospective workers’ compensation insurance premium charge.  DLF argued that the retrospective premium was not damage resulting from the operation of its equipment by Dial’s employee without Dial’s prior written consent and that its assumption of liability and full legal responsibility was limited to third party claims against Dial or DLF resulting from the unauthorized operation of DLF’s equipment, not from a charge for increased insurance premiums to Dial.

The trial court granted DLF summary judgment because the injury to Dial’s employee wasn’t caused by the Dial worker’s operation of the blender.  The Court of Appeals chose a more subtle path to the same result.  Instead of focusing on the causation issue, the Court of Appeals decided that the contractual provision in which DLF assumed full legal responsibility for any loss or damage resulting from the unauthorized operation of its equipment and vehicles was ambiguous. It ruled that the affidavit of Dial’s CEO had no bearing on the court’s interpretation of the contract because there was no indication in the affidavit that the CEO’s subjective intent had ever been expressed to DLF during contract negotiations.  Finally, the Court of Appeals resolved the ambiguity it had found against Dial solely because Dial had drafted the contract.

On balance, the trial court’s reasoning was simpler, more straightforward, and more harmonious with both the language of the contract and its apparent purpose.  The Court of Appeals’ opinion seems intent on first complicating the problem before struggling to untie its own knot to nonetheless reach the same conclusion as the trial court.

Regardless, the case itself is a reminder that in drafting any contract you should not only mean what you say but also say what you mean.

© 10/15/2012 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.

As a general rule members of a limited liability company are not personally liable for the debts, obligations, and liabilities of the company, whether arising in tort (i.e., auto accident, product liability, or a slip and fall), contract or otherwise solely because they are a member or manager of the limited liability company.  Exceptions to this rule have been established by statutes and courts and some of those exceptions are laid out below.

1.                  Independent Basis of Liability

A member is liable for that member’s own negligent or wrongful acts or omissions as long as an independent basis for liability exists (i.e., liability does not arise solely from the member’s status as a member or manager of the company).   For example, if a member is involved in an automobile accident while performing company business, the member cannot escape responsibility for damages arising from the automobile accident based on the fact that he was a member of the limited liability company.

If it’s a multiple member LLC then the other, non-negligent members would not be personally liable for those damages unless they were somehow negligent in allowing that member to operate a company vehicle.   Members may be personally liable for allowing another member (or an employee) who does not maintain insurance, or that the members know to have a number of DUIIs or other driving related offenses, to operate a company vehicle.

In addition to being liable for the member’s own wrongful or negligent acts or omissions, a member is liable for any debts or other obligations that the member personally guarantees.  Personal guarantees commonly accompany commercial leases and bank loans.  Credit card applications commonly state that the member applying for the credit card is personally liable for any unpaid amounts.  Therefore, contracts and agreements should be carefully reviewed to make sure that the member understands the liability that the member is guaranteeing and what happens if the company defaults on the debt or obligation.

2.         Piercing the Corporate Veil

Piercing the corporate veil is a doctrine created by courts to hold shareholders of corporations personally liable for obligations of the company. Many states, either through case law or legislation, have extended this doctrine to apply to limited liability companies.  California and Washington have enacted legislation that state that courts should apply the piercing the corporate veil case law and principles to limited liability companies.

Essentially, the test for determining whether to pierce a limited liability company’s veil boils down to whether the member, “to defeat justice or perpetuate fraud”, operates or manages the company in a way where it’s impossible to distinguish or separate the company from the member.   Simply put, is the LLC the members’ alter ego?

In Oregon, to pierce the limited liability company’s veil, the party seeking to hold the members of an LLC liable must prove that the company was under the direct control of the member(s); the member(s) engaged in improper conduct; and, the party’s inability to collect from the company was the result of improper conduct by the controlling member(s).  Improper conduct may include inadequate capitalization, milking the company by taking excessive or wrongful distributions, commingling assets, lack of separateness between the company and the member (use of the company’s finances to pay for personal items and bills), and failure to follow formalities dictated by statute or the operating agreement.

Failure to follow corporate formalities is not a major factor in a claim for piercing the limited liability veil since the organization, management and operation of a limited liability company is intended to be less rigid than that of a corporation.  In fact, many state statutes expressly provide that a failure to follow or observe the usual limited liability company formalities is not a ground to pierce the limited liability veil.  Piercing the corporate veil cases are fact specific and require extensive review of the company’s financial records, operating agreement, and organizational documents.

3.         Wrongful Distributions

A limited liability company may only make distributions if the members or manager make the determination that after the distribution is made:

a.         The company will be able to pay all of its debts as they come due in the ordinary course of business; and,

b.         The fair value of the company’s assets would at least equal the sum of the company’s total liabilities plus the amount necessary for the company to satisfy any member’s preferential right to distributions.

The company can base its determination to make distributions on either financial statements prepared in accordance with sound accounting practices, a determination of the fair value of the company, or another method that is reasonable under the circumstances.

Liability is generally limited to the amount of the distribution received by the member.  However, liability may be expanded if a wrongful distribution is used as a factor in establishing a claim to pierce the limited liability veil of the company.

Other exceptions to limited liability may apply depending on the state the company is organized in or doing business, the type of business the company is engaged in, and agreements that the members enter into during the course of business.

© 08/23/2012 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

Our award plaque

Our firm has been named the USA Leading Dealmaker for the McCoy Sales Corp./Fluid Connector Products, Inc. merger in Acquisition International’s 2012 M&A Awards.

You can read more about it in their press release here: AI MA Press Release

Are these types of arrangements legal, in other words, can an employee be required to participate in a tip pooling arrangement?

The answer depends on the law in effect in the state that the employee works.  On April 5, 2011 the Department of Labor issued regulations which state that all tips received by an employee are the property of the employee. These regulations clarify the 9^th Circuit Court of Appeals decision which found that tips received by an employee are the employee’s property except in cases where there is a tip pooling arrangement.  In that instance, the tips that are subject to the pooling arrangement were not the employee’s property.

The new regulations specifically state that all tips that an employee receives are an employee’s property with no exceptions. The employer may require an employee to participate in a valid tip pooling arrangement or take a credit against minimum wage, but only if the state in which the employee is employed allows such an arrangement or credit.

Each state has different requirements for a tip pooling arrangement.  In Oregon, tip credits against minimum wage are not allowed.  Additionally, tip pooling arrangements must be in writing, provided to the employee at the commencement of employment, and posted in a conspicuous place.  Management and ownership cannot receive any of the pooled tips.   If management or ownership received any of the pooled tips, the employer would be taking a tip credit which is not allowed under Oregon law.

For example, a bar pays its servers and bartenders minimum wage.  The bar manager takes 20 percent of the tips received by the bartenders and servers and places the tips into a pool to be redistributed.  The manager or owner cannot receive any of the funds contributed to the tip pool.  If the manager or owner did receive funds from the tip pool, then the manager would be taking a tip credit against minimum wage and violating Oregon’s minimum wage laws and the Fair Labor Standards Act (FLSA).

Additionally, the tip pool can only include employees that are “customarily and regularly” tipped employees.  If the tip pool includes cooks, dishwashers or other employees who are not customarily or regularly tipped then the tip pool is invalid.  Additionally, the funds in the tip pool cannot be distributed to independent contractors, such as bouncers, DJs or dancers, since they are not employees.

Failure to comply with the FLSA and Oregon law may result in the employer having to pay back wages, penalties for failing to pay wages, and the employee’s attorney fees.  In addition, the employee may have a claim for conversion which could carry punitive damages if the employer’s conduct is egregious.

© 07/12/2012 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

In Peck the court responded to a certified question from the Ninth Circuit Court of Appeals, Peck v. AT&T Mobility, 632 F.3d 1123 (9^th Cir. 2011), asking if:

Under RCW 82.04.500, may a seller recoup its B&O taxes where, prior to the sale of a monthly service contract, the seller discloses that in addition to the monthly service fee, it collects a surcharge to cover gross receipts taxes?

RCW 82.04.220(1), the statute in question, states that:

It is not the intention of this chapter that the taxes herein levied upon persons engaging in business [including B&O taxes] be construed as taxes upon purchasers or customers, but that such taxes shall be levied upon, and collectible from, the person engaging in the business activities herein designated and that such taxes shall constitute a part of the operating overhead of such persons.

Washington’s B&O tax is a gross receipts tax on business income.  The issue in Peck was whether a seller could explicitly add the amount of its B&O tax attributable to a specific sale of services to its charge for such services, in this case cellular phone service, where the written sales agreement specifically stated that the seller could recover that amount in addition to its monthly service charge.  The court in Peck acknowledged that the statute permits sellers to include the B&O tax attributable to any specific sale of goods or services to the price or charge for such services as a part of the seller’s total overhead if the amount of overhead included in the cost for B&O tax was not explicitly disclosed to the purchaser.  Nonetheless, Peck held that the seller violates the statute and cannot legally recover the amount of B&O tax attributable to each sale, despite a written agreement permitting such a charge, where the tax is explicitly added to the base price of the transaction.

In short, the seller can always recover the amount of B&O tax which it includes as an undisclosed portion of the selling price but, as Peck demonstrates, risks litigation and the loss of B&O tax which is explicitly disclosed to the purchaser.  This is an unnecessary stretching of the statute’s language to reach an ultimately incoherent and illogical result.

Simply read, RCW 82.04.220(1) just means what it says: i.e., that only the selling business is legally responsible for paying B&O tax even though, the statute recognizes, the customer will usually pay the seller’s B&O tax attributable to each sale just as the customer generally contributes to the payment of all of a seller’s other overhead with each sale.

The distinction between the sales tax and the B&O tax is not who ultimately pays the cost of the tax but instead who is legally liable for payment of the tax.  In the case of the sales tax it is the buyer or customer who is legally responsible for payment even though the seller may be legally obligated to collect that tax.  The seller or business is legally responsible for payment of the B&O tax.

In reaching its conclusion that AT&T’s explicit charge for B&O tax on its monthly statements was legally impermissible the court reaffirmed its rationale and holding in Nelson v. Appleway Chevrolet, Inc., 160 Wn.2d 173, 157 P.3d 847 (2007) holding that a seller could properly include the anticipated amount of B&O tax as an explicitly disclosed item during negotiations before the parties established a final selling price but could not explicitly add that tax as a charge additional to the sale price, even if the parties agreed during their negotiations to such an additional charge in principle before the buyer accepted the price and terms of sale.

The Peck court distinguished its reasoning in Nelson invalidating the B&O charge in that case from the Court of Appeals’ logic and holding in Johnson v. Camp Automotive, Inc., 148 Wn. App. 181, 199 P.3d 491 (2009) where the parties negotiated the amount of B&O tax in arriving at the final sales price including the amount of that tax.  Logically this is a distinction without a difference which bears no relationship to the language of RCW 82.04.220(1).

In the end, the opinion and holding in Peck suggests a court caught in the web of its own superfluous illogic wholly detached from the statutory language it is ostensibly applying.  That said, the only safe response to its holding is to add the cost of B&O tax attributable to any sale without any disclosure of that amount in the transaction documents.  Any explicit statement on the transaction documents concerning the inclusion of the cost of B&O tax risks entanglement in the same web of litigation which has ensnared AT&T in Peck for the past several years through the maze of both state and federal courts.

© 07/12/2012 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.