Did buying the ownership of an existing LLC shift the LLC's pre-sale Washington tax liabilities to its former owner?

Plain-English summary

The Washington Department of Revenue held that an LLC remained responsible for taxes accrued before its current owners bought the company.

The LLC continued under the same legal form, business name, location, and UBI number throughout the audit period. An LLC is legally separate from its members, so changing the owners did not create a new taxpayer or transfer the old LLC's operating liabilities to the former owner.

The assessed B&O, retail sales and use taxes, penalties, and interest arose from the LLC's own business activities. The perceived unfairness to buyers who learned of the liability after purchasing the ownership interests did not change which entity owed the tax.

Result: petition denied.

What this means for you

Buyers of LLC membership interests

Buying the entity generally means the same entity continues with its existing tax liabilities. An ownership change is different from buying selected assets through a new company.

LLC members and managers

The company—not its individual members—is the taxpayer for liabilities generated by the LLC's operations, unless another law imposes separate personal responsibility.

Deal and diligence teams

Review excise-tax returns, audits, unremitted sales tax, penalties, interest, and state account history before acquiring ownership interests. Contract remedies do not erase the entity's liability to the Department.

Common questions

Q: Why did the former owner not remain the only liable party?

A: The LLC itself accrued the liability, and the same LLC continued after its members changed.

Q: Did the Department treat the buyer as a successor business?

A: No. The determination found there was no new successor entity; the original LLC had operated throughout. It noted that successor liability could apply alternatively if there had been a successor.

Q: Did keeping the same name and UBI matter?

A: Yes. Along with the same legal form and location, those facts showed that the same business entity continued.

Citations and references

• RCW 25.15.070(2)(c) (LLC as a separate entity, as cited in the determination)
• RCW 82.04.030 (definition of person)
• RCW 82.04.080 and RCW 82.04.220 (B&O tax liability)
• RCW 82.08.020 and RCW 82.08.050 (retail sales tax liability)
• RCW 82.32.140 (successor liability, discussed as an alternative)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 34WTD179.pdf
• Source archive: Volume 34 ZIP (member 34 WTD 179.pdf)

Original ruling text

Det. No. 14-0314, 34 WTD 179 (March 27, 2015)

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Cite as Det. No. 14-0314, 34 WTD 179 (2015)

BEFORE THE APPEALS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
)
...
)
)

DETERMINATION
No. 14-0314
Registration No. . . .

[1]
RCW 82.04.220; RCW 82.08.020; RCW 82.04.030: LIMITED
LIABILITY COMPANY (LLC) – CHOICE OF BUSINESS ENTITY
RESPECTED – MEMBER OF LLC SEPARATE FROM THE BUSINESS
ENTITY. An LLC that is sold to new owners, but maintains its business form, business name, business location, and UBI number, is liable for taxes accrued prior to the sale, because the LLC is the entity that accrued the tax liability and remains the entity liable for the tax after the entity is sold. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination.

Weaver, A.L.J. – A limited liability company (LLC) that was assessed retail sales tax, business and occupation (B&O) tax, penalties, and interest, protests the assessment on the grounds that its current owners purchased the LLC from a prior owner during the audit period. The LLC’s current owners claim that they should not be held accountable for periods when the LLC was owned by someone else. Because the LLC was engaged in business as a separate legal entity for the entire audit period, we hold that the change in ownership of the LLC is immaterial, and that the LLC owes the tax, penalties, and interest that it accrued through its business activities. Taxpayer’s petition is denied.1 ISSUE Whether, under RCW 82.04.220 and RCW 82.08.020, the Department can collect taxes accrued by an LLC when the change in ownership of that LLC occurred after the taxes were due, but before the taxes were assessed. FINDINGS OF FACT
[Taxpayer] was audited for the period of January 1, 2011, through March 31, 2013, by the Audit Division of the Department of Revenue (Department). The audit resulted in an assessment totaling $. . . , which was issued on August 29, 2013. The assessment consisted of $. . . in retail 1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

Det. No. 14-0314, 34 WTD 179 (March 27, 2015)

180

sales tax, $. . . in retailing business and occupation (B&O) tax, $. . . in service and other activities B&O tax, $. . . in use tax, a credit of $. . . in syrup tax, interest of $. . . , and a 5% assessment penalty of $. . . . On appeal, the Taxpayer’s sole argument is that its current owners bought the business on January 24, 2012. After the ownership change, Taxpayer continued operating under the same business name, at the same business location, and under the same UBI number. Taxpayer takes the position that any taxes owed for periods prior to the ownership change are rightfully owed by Taxpayer’s prior owner. On appeal, Taxpayer argues that because the current owner was not made aware of its tax liability until after the owner purchased the business, it is unfair for the Department to collect from Taxpayer, instead of the prior owner. ANALYSIS Washington imposes a business and occupation tax “for the act or privilege of engaging in business” in this state. RCW 82.04.220. Washington also imposes a retail sales tax on each retail sale in this state. RCW 82.08.020. If the seller fails to collect the tax, the seller must pay the tax to the Department. Taxpayer was formed as a limited liability company (LLC). An LLC is a separate entity or “person,” under the law, from the persons or entities which comprise its membership. RCW 25.15.070(2)(c); RCW 82.04.030. Washington courts and the Department generally will respect [an individual’s] choice of business entity. See, e.g., Det. No. 05-0200, 25 WTD 12 (2006). . . . In this case, there is no dispute that Taxpayer was the business entity engaged in business in this state and is therefore liable for B&O tax on the gross income of its business. See RCW 82.04.080. There is also no dispute that Taxpayer was the business entity that sold goods in this state and is therefore liable for retail sales tax on the sale of those goods. See RCW 82.08.050. Finally, there is no dispute that Taxpayer was the business entity to whom the assessment of retail sales tax and B&O taxes was issued. Taxpayer operated in its current form, under its current business name, in its current location, and under its current UBI number, for the entire audit period. Taxpayer’s appeal is based on the [perceived] unfairness of taxing it for periods prior to when it was sold to its current owners. But it is immaterial who owned Taxpayer and that Taxpayer’s ownership structure may have changed. Taxpayer was the entity that accrued the tax liability at issue in this case and Taxpayer is therefore the party liable for that liability.2 Taxpayer has raised no legal argument why it should not be held liable for taxes, penalties, and interest that it accrued in the course of its operations. Having found that the ownership structure of Taxpayer is immaterial for purposes of determining whether Taxpayer is liable for taxes accrued as a result of its own business operation, we sustain the assessment.

2
Alternatively, even if the Taxpayer was a successor business after the ownership change, it would still owe the tax. See RCW 82.32.140; Det. No. 05-0313, 26 WTD 27 (2007). On these facts, however, we find that Taxpayer is not a successor, but was, itself, engaged in business during the entire audit period.

Det. No. 14-0314, 34 WTD 179 (March 27, 2015)

DECISION AND DISPOSITION
Taxpayer’s petition is denied.
Dated this 30th day of September, 2014.

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