Judge rules Appleway tax illegal

The Appleway Automotive Group’s practice of tacking a “business-and-occupation tax overhead” charge onto the price of cars is illegal, a judge has ruled.

If Spokane County Superior Court Judge Kathleen O’Connor’s ruling survives an anticipated appeal, it could involve thousands of people and millions of dollars. Until then, the Appleway auto dealerships may continue assessing the B&O charge.

O’Connor agreed with Spokane resident Herb Nelson and his attorneys that state law doesn’t allow businesses to pass their B&O taxes to customers as an itemized charge – even if they warn customers in advance as Appleway does.

O’Connor also certified Nelson’s lawsuit, filed in April, as a class action on behalf of all customers of the various Appleway dealerships in Spokane Valley.

No Appleway spokesman could be reached for comment Thursday evening when information on O’Connor’s recent ruling became available.

However, Appleway General Manager Dan Barney asserted in court documents that the company was doing Nelson and other customers a favor. Calculating the dealership’s business-and-occupation tax on each transaction ensures that purchasers of inexpensive cars don’t subsidize luxury car buyers, Barney said.

If Appleway’s various dealerships followed the usual practice of building an average B&O charge into the price cars, the amount would be about $150, according to Barney. By breaking out the charge and assigning an amount based on the price of each car, people who purchase a $15,000 car would pay only $70.65 while those who buy a $50,000 vehicle would pay $235, Barney stated.

It was not clear from court records how long Appleway has been assigning a B&O charge to each sale.

Nelson was far from pleased when, after spending “several hours” negotiating a price in September 2002, an Appleway Volkswagen sales manager insisted on adding a $79.23 “business & occupation tax overhead” charge.

Nelson said in his lawsuit that he objected, but was told that Appleway was “required to assess and collect B&O tax and B&O sales tax.”

Nelson said he took the deal under protest because the 2000 red Volkswagen Cabriolet was a used car that his wife, Catherine, wanted.

Appleway responded that Nelson shouldn’t have been surprised by the additional charge because it is explained in “multiple disclaimers,” including signs in the showroom and in advertisements.

Indeed, part of the fine print at the bottom of a recent Appleway Volkswagen advertisement says the prices offered in the ad exclude various fees and taxes, including a “.004710 B&O overhead assessment.”

General Manager Barney said in court documents that the practice is similar to charges for disposing of hazardous wastes in auto shops or old tires in tire shops. In fact, Appleway levies a B&O “overhead charge” on parts and service bills as well as auto sales.

Anyway, Appleway attorney Frederick Ockerman said, Nelson got a good deal because his negotiated price was less than vehicle’s advertised price.

The law establishing B&O taxes on companies’ gross receipts for goods and services says the taxes are not intended to “be construed as taxes upon the purchasers or customers.” Rather, they are to be “part of the operating overhead” of businesses.

The state Department of Revenue said in a September 2000 opinion that the 0.471 percent B&O tax on retail sales could be passed on as an itemized charge if certain conditions were met, but the agency doesn’t endorse the practice.

“We encourage people, if they see that on their bill of sale, to ask to renegotiate the sales price downward by a like amount,” department spokesman Mike Gowrylow said.

The state Attorney General’s Office agreed with the Department of Revenue. Senior Counsel Douglas D. Walsh said in a memo that dealers could legally pass on their B&O tax if they first subtract that amount from the price of a car. But, Walsh said, such a policy is “fraught with risk of unfairness and deception.”

“We are concerned that dealers have not reduced the overhead component of their pricing and compensation structure … so charging B&O tax as a line item is essentially a profit center, since they are collecting it twice, both as a line item and in the final purchase price,” Walsh wrote.

Nevertheless, Appleway cited Walsh’s memo to the Washington State Independent Automobile Dealer’s Association as authority for its decision to tell customers that a B&O charge would be added to the price of vehicles.

One of Nelson’s attorneys, Max Jacobs, said the issue apparently has never before been addressed by a court. O’Connor’s ruling, if it stands, will supersede the informal opinions issued by Walsh and the Department of Revenue.

O’Connor authorized the two law firms representing Nelson – Tousley Brain Stephens of Seattle, and Phillabaum, Ledlin, Matthews & Sheldon of Spokane – to handle the class action for everyone who paid an itemized B&O charge.

Jacobs said he and his associates haven’t determined how many other businesses across the state follow the same policy as Appleway. He hopes to find out when customers start calling a new toll-free number to ask questions or register claims for the class action.

Jacobs estimated that typical Appleway purchasers may be entitled to refunds of $100 to $200, including interest.

The toll-free number is (800) 767-0501.