Did a construction company rebut Washington's evasion penalty for sales tax it collected but did not remit?

Plain-English summary

The Washington Department of Revenue again upheld a 50% evasion penalty against a construction company that charged customers retail sales tax but did not remit most of the collected tax over several years.

The owner prepared invoices in Excel that separately stated sales tax, while his inexperienced daughter handled bookkeeping and tax filings from other records that did not separately show the tax. During 2018 through 2021, the company mostly reported wholesaling activity and remitted retail sales tax only once, even though audit invoices showed it had collected a substantially larger amount from customers.

On reconsideration, the company argued that intent should be evaluated separately for the owner and bookkeeper and submitted more evidence about the daughter's inexperience, the company's shift to prime-contracting work, bank deposits, and customer discounts. The determination rejected that framing: the taxpayer was the corporate entity, so the Department considered the business's actions as a whole. Charging and collecting tax while failing to remit it over a period of years supported the prima facie evasion case, and the new records did not overcome the clear, cogent, and convincing evidence. Reconsideration was denied.

What this means for you

Contractors and retailers

Sales tax collected from customers is held for the state. Separate invoicing, collection, return classification, and remittance controls must reconcile every filing period.

Family businesses

Dividing billing and tax filing among family members does not divide the entity's legal intent or responsibility. Make sure the person filing returns can see the invoices and tax collected.

Accountants and advisers

Bookkeeping inexperience may explain an honest error, but it is much weaker when the entity repeatedly charged tax and failed to remit it. A reconsideration request needs objective new evidence, not cumulative statements about internal misunderstanding.

Common questions

Q: What must the Department prove for the evasion penalty?

A: It must show by clear, cogent, and convincing evidence that the taxpayer knew tax was due and tried to escape detection or payment through deceit, fraud, or other intentional wrongdoing.

Q: Is every sales-tax underpayment evasion?

A: No. The rule excludes honest mistakes, miscommunication, and lack of accounting knowledge. Here, however, the company actually charged and collected substantial sales tax over years and did not remit it.

Q: Whose intent mattered—the owner’s or the bookkeeper’s?

A: The determination evaluated the corporate taxpayer as a whole because the entity, not either individual, was primarily liable for the tax.

Q: Did the new bank and discount records change the result?

A: No. They added no material information about whether the entity intended to evade the collected tax, and evidence of the bookkeeper's inexperience was cumulative.

Citations and references

• RCW 82.32.090(7) and WAC 458-20-228(5)(f) (evasion penalty and intent)
• RCW 82.02.010 (taxpayer definition)
• Colonial Imports, Inc. v. Carlton Northwest, Inc., 121 Wn.2d 726, 853 P.2d 913 (1993) (clear, cogent, and convincing evidence)
• Det. No. 04-0098, 23 WTD 331 (2004) (collected sales tax and prima facie evasion case)
• Det. No. 16-0066, 35 WTD 540 (2016) (taxpayer's burden of production)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD048.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD048.pdf)

Original ruling text

Det. No. 23-0075R, 45 WTD 048 (May 5, 2026)

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Cite as Det. No. 23-0075R, 45 WTD 048 (2026)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
...
)
)
)

DETERMINATION
No. 23-0075R
Registration No. . . .

RCW 82.32.090; RCW 82.02.010; WAC 458-20-228 – EVIDENCE OF INTENT TO EVADE – The Department has the burden of proving a taxpayer’s evasion by clear, cogent, and convincing evidence. The Department looks to the actions of the corporate entity as a whole when determining evasion. Failing to remit retail sales tax creates a prima facie case against the Taxpayer. The taxpayer may then rebut the Department’s prima facie case. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision for in any way to be used in construing or interpreting this Determination. Kelly, T.R.O. – A construction company appeals the assessment of the evasion penalty assessed after an audit discovered the business collected but did not remit sales tax over several years. It contends its actions were unintentional. The Department previously denied Taxpayer’s petition. On reconsideration, Taxpayer provides additional records as to intent and contends the Department made twenty-three legal errors regarding the evidentiary standard. The new records are insufficient to alter the determination. We do not find the evidentiary standard was improperly applied previously. Taxpayer’s petition is denied on reconsideration. 1 ISSUES

1. Did the Department properly uphold the evasion penalty under RCW 82.32.090(7) and WAC
   458-20-228 (Rule 228)?
2. Does the additional documentation provided by Taxpayer rebut the Department’s prima facie
   [case] showing the evasion penalty should apply under Rule 228? FINDINGS OF FACT We incorporate the facts set forth in Determination No. 23-0075 by reference and restate only those relevant to our discussion here. 1

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

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. . . (Taxpayer) is a construction business focusing on plaster installation [and] based in . . . Washington. The Department of Revenue’s Audit Division (Audit) audited Taxpayer for the period of January 1, 2018, through December 31, 2021 (Audit Period). Taxpayer is a family run business. . . . (Owner) owns the business. Owner hired his daughter . . . (Daughter) as the bookkeeper in early 2018. Daughter had no prior bookkeeping or accounting background, having just graduated college with a degree in biology. Pursuant to Taxpayer’s petition, Daughter’s training consisted of Taxpayer’s prior accountant giving her some instruction during which, “[Owner] assumed the accountant would address all Washington excise tax reporting,” and “[Daughter] did not receive the training on excise taxes [Owner] assumed she had.” According to Taxpayer’s petition, Taxpayer previously, “had some difficulty with reporting,” where Taxpayer overpaid tax for more than four years. With the help of an outside accountant, Taxpayer got a refund for four years of overpayment. Taxpayer’s petition claims that Owner retained control of billing even after Daughter took over the accounting. He billed customers in Excel with invoices that listed retail sales tax as a distinct charge. Daughter’s accounting consisted of using Quickbooks, bank statements, customer checks, and the Department’s website to file taxes, track job costs and profitability, and generally maintain the books. She used Quickbooks to record expenses and input deposits, but never used it or any other program for invoicing. Neither Quickbooks nor the bank statements showed sales tax separately itemized, and Daughter asserts that she did not look at the invoices from Excel showing sales tax until late 2019. Daughter contends she was unaware that Taxpayer was collecting retail sales tax from customers. Daughter said, “In summary, there was a separation where my dad would invoice, and I would submit the taxes.” Taxpayer’s Petition, Exhibit 1, page 1. During the Audit Period, Taxpayer reported income mainly under the wholesaling B&O tax classification. Taxpayer only reported under the retailing and retail sales tax classifications once in November 2021. During the Audit Period, Taxpayer remitted $. . . in retail sales tax. Audit found sales invoices showing Taxpayer had collected retail sales tax but had not remitted it to the Department. Taxpayer collected and failed to remit a total of $. . . in retail sales tax during the Audit Period. Audit issued a Notice of Balance Due letter . . . on June 14, 2022, for a total of $. . . , comprising
$. . . in tax adjustments, $. . . in penalties, and $. . . in interest to that point. Audit gave credit on overreported wholesaling B&O tax and asserted retailing B&O and retail sales tax on sales where retail sales tax was collected but not remitted. Audit also asserted retail sales tax on wholesale sales due to missing reseller permits. Audit applied a fifty percent evasion penalty on the retail sales tax Taxpayer collected but did not remit. Taxpayer timely petitioned for review of the fifty percent evasion penalty. Taxpayer attempts to rebut the Department’s finding of evasion, contending that the failure to remit retail sales tax was unintentional. Taxpayer’s petition was denied in Det. No 23-0075. We held that the evasion penalty was appropriate as Taxpayer knew a tax liability was due, and Taxpayer attempted to avoid taxation through intentional wrongdoing. We further held that after Taxpayer’s attempt to rebut

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this evidence, the evidence of evasion weighed heavily in favor of upholding the evasion assessment. Taxpayer timely filed for reconsideration. On reconsideration, Taxpayer submitted additional records and argument. Taxpayer provided a number of new records. We summarize them as additional records demonstrating Daughter’s inexperience in her position, Taxpayer’s transition to working as a prime contractor in 2018, various bank deposit records, and records of specific discounts given. Audit reviewed these records thoroughly. Taxpayer’s additional arguments consist of identifying what Taxpayer terms twenty-three separate errors in the Department’s determination. In doing so, Taxpayer reinterprets what it believes should be necessary to prove evasion and terms the application of the current legal standard as errors. Taxpayer interprets the intent element as applying to individual actors rather than the Taxpayer itself. ANALYSIS The legal requirements for evasion remain the same as in our initial determination. Here we reanalyze the facts, including the additional information provided on reconsideration, based on the same law. As such, we reiterate our prior explanation of the laws and rules. The Department is required to assess a fifty percent penalty if it finds that any deficiency resulted from an intent to evade a tax. RCW 82.32.090(7). This is further explained by Rule 228, specifically: The evasion penalty is imposed when a taxpayer knows a tax liability is due but attempts to escape detection or payment of the tax liability through deceit, fraud, or other intentional wrongdoing. An intent to evade does not exist where a deficiency is the result of an honest mistake, miscommunication, or the lack of knowledge regarding proper accounting methods. The department has the burden of showing the existence of an intent to evade a tax liability through clear, cogent and convincing evidence. Rule 228(5)(f). We summarize Rule 228 as having two elements. First, that a taxpayer knew a tax liability was due. Second, that same taxpayer attempts to avoid taxation through intentional wrongdoing. The Department has the burden of proving both elements of evasion by clear, cogent, and convincing evidence. Id. Clear, cogent, and convincing evidence has been described as evidence convincing the trier of fact that the fact at issue is “highly probable,” or stated another way, the evidence relied upon must be “clear, positive and unequivocal in [its] implication.” Colonial Imports, Inc. v. Carlton Northwest, Inc., 121 Wn.2d 726, 735, 853 P.2d 913 (1993). To meet this burden, the Department must present objective and credible evidence that clearly demonstrates intent to evade a known tax liability; mere suspicion of intent to evade is not enough to meet this burden. Det. No. 03-0147, 22 WTD 274, 276 (2003). “Intent is a state of mind. As

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such, it must usually be proved by circumstantial evidence.” State v. LaRue, 5 Wn. App. 299, 306, 487 P.2d 255 (1971). Circumstantial evidence carries the same weight as direct evidence, and constitutes evidence that allows for reasonable inferences based on common sense and experience. See State v. Hieb, 107 Wn.2d 97, 111, 727 P.2d 239 (1986). Mere underreporting of collected retail sales tax does not constitute evasion. Det. No. 98-065, 17 WTD 359, 371 (1998) (evasion not found where the taxpayer claimed underreporting was due to dishonest bartenders). However, substantial underreporting of collected retail sales tax does constitute evasion. Det. No. 97-134R, 18 WTD 163, 167 (1999) (evasion found where the taxpayer filed “no business” returns when it had gross receipts and also failed to remit collected retail sales tax). Rule 228 lays out a nonexclusive list of taxpayer actions for consideration of intent to evade. The one example relevant to this analysis is, “The willful failure of a seller to remit retail sales taxes collected from customers to the department.” Rule 228(5)(f)(ii)(B). We have previously held that failing to remit retail sales tax creates a prima facie case against the Taxpayer, stating: The Board of Tax Appeals has said that in the case of the retail sales tax, a prima facie showing of fiduciary fraud, and hence a prima facie showing of tax evasion, is made simply by showing that the seller has collected and failed to turn over the funds to [the Department]. A seller, as trustee of retail sales tax funds collected from purchasers, stands in a fiduciary relationship with the state. A trustee owes to the beneficiary of the trust the highest degree of good faith, diligence, loyalty, and integrity; a trustee must act solely in the beneficiary's interest. Unexcused failure to timely turn over trust funds actually collected by a seller on behalf of the state is a breach of the seller's fiduciary duty, and amounts as a matter of law to fraud on the state. . Det. No. 04-0098, 23 WTD 331 (2004) (citing Sunrise Fiberglass Engineering v. Dept. of Revenue, BTA Docket No. 41913, 13 WTD 203 (1993), and David Grimes v. Dept. of Revenue, BTA Docket No. 51276 (1998)). In the same determination we went on to state that the taxpayer may then rebut the Department’s prima facie case, stating: Once [the Department] has clearly demonstrated the existence of each of the elements of evasion, a burden of production is imposed on the taxpayer to come forward with evidence of honest mistake, ignorance of the law, negligence, or some other fact which tends to rebut [the Department]’s evidence. Mere subjective and self-serving statements by the taxpayer regarding intent, without more, are insufficient to meet this burden of production. Any evidence presented by the taxpayer must be weighed against that presented by [the Department]. Because the burden placed on the taxpayer is one of production only, the burden of proof as to evasion still rests with [the Department]. The evidence of evasion presented by
[the Department] when viewed alone, or along with the taxpayer's evidence, must weigh heavily in favor of upholding the assessment.

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Id. We also held that business experience tends to undercut or negate the possibility that a taxpayer was unaware that it was required to report and pay taxes. Id.

1. Did the Department make errors in applying the legal standard to uphold an evasion penalty
   under Rule 228?
   In the petition for reconsideration, Taxpayer asserts arguments advancing an alternative evidentiary standard wherein the intent of the individuals working for Taxpayer should be separately analyzed. The statute on penalties, including the evasion penalty, applies to “taxpayers.” See RCW 82.32.090. This is further explained by Rule 228, specifically: The evasion penalty is imposed when a taxpayer knows a tax liability is due but attempts to escape detection or payment of the tax liability through deceit, fraud, or other intentional wrongdoing. Rule 228(5)(f) (emphasis added). Chapter 82.32 does not define a number of terms including “taxpayer” directly but rather cross references chapters 82.01 through 82.27 for applicable definitions. In Chapter 82.02 we find a definition for “taxpayer” which states: “Taxpayer” includes any individual, group of individuals, corporation, or association liable for any tax or the collection of any tax hereunder, or who engages in any business or performs any act for which a tax is imposed by this title. "Taxpayer" also includes any person liable for any fee or other charge collected by the department under any provision of law, including registration assessments and delinquency fees imposed. RCW 82.02.010. We read this to mean that the liability for the tax is what creates a “taxpayer.” Neither Owner nor Daughter are primarily personally liable for the tax due by Taxpayer. Taxpayer is liable for its own taxes. In this circumstance, references to the term “taxpayer” are read to apply to the corporate entity as it has the primary liability. Thus, when evaluating whether the criteria for evasion are met, we look at the actions of the tax-paying entity as a whole. Upon review, we find the Department’s application of the evidentiary standard with the corporate entity Taxpayer as the “taxpayer” in this circumstance to be consistent with prior interpretation of rules and statutes. We are not persuaded that there is any legal basis upon which we should grant the relief requested. We deny the petition as to this issue.
2. Does the additional documentation provided by Taxpayer alter the outcome of the application
   of the evasion penalty under Rule 228?

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Taxpayer provided a number of new records. We summarize them as additional records demonstrating Daughter’s inexperience in her position, Taxpayer’s transition to working as a prime contractor in 2018, various bank deposit records, and records of specific discounts given. Neither the assorted bank records nor the records of specific discounts given reveal any new information. Thus, they do not have any impact on the legal analysis of the application of the evasion penalty. Both Daughter’s inexperience and Taxpayer’s transition to working as a prime contractor represent evidence put forth by Taxpayer on reconsideration to rebut the Department’s prima facie showing of evasion. Once the Department has clearly established the elements of evasion, a burden of production is imposed on the taxpayer to produce evidence of honest mistake, miscommunication, ignorance of law, lack of knowledge, or some other fact that tends to rebut the Department’s evidence. Det. No. 16-0066, 35 WTD 540 (2016). However, mere subjective and self-serving statements by the taxpayer regarding intent, without more, are insufficient to meet this burden of production. 23 WTD at 338. Daughter’s inexperience in her position was unquestioned and previously considered. Cumulative evidence on this topic is unpersuasive. Taxpayer’s transition to a prime contractor represents lack of experience in collecting retail sales tax. While Taxpayer previously advanced this argument in its initial petition, it was not explicitly considered in the prior determination as irrelevant. We reiterate, in this case Taxpayer charged and then failed to remit sales tax. This is not a circumstance where Taxpayer under collected, remitted late, or didn’t know it needed to collect tax in the first place. Taxpayer charging, collecting, and failing to remit over $. . . of retail sales tax over a period of years wholly obviates any suggestion that inexperience played a role. We do not find Taxpayer’s new records have any impact on our prior analysis. We sustain the assessment of the evasion penalty. DECISION AND DISPOSITION Taxpayer's petition is denied on reconsideration. Dated this 1st day of September 2023.