First National Fleet And Lease Inc, V. State Of Wa Dept Of Revenue

Opinion

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

FIRST NATIONAL FLEET AND LEASE, INC., No. 88853-6-I

Petitioner, DIVISION ONE v. UNPUBLISHED OPINION DEPARTMENT OF REVENUE, Respondent.

BUI, J. — First National Fleet and Lease, Inc, (First National) seeks review of the Board of Tax Appeals (BTA) decision that upheld a tax evasion penalty imposed by the Department of Revenue against First National. Finding no error, we affirm.

FACTS

First National has operated its business of selling used vehicles and related financial products since 2005. 1 For each retail sales transaction, First National submits paperwork to the Department of Licensing (DOL) to issue titles and licenses for the vehicles. During the audit period of January 1, 2012, through March 31, 2015, First National reported to the DOL 4,294 retail sales of vehicles to in-state customers, and First National collected retail sales taxes on all of these sales.

First National submitted monthly excise tax returns to the Department of

1 Unchallenged findings of fact made by the Board are accepted as true on appeal.

Stuewe v. Dep’t of Revenue, 98 Wn. App. 947, 950, 991 P.2d 634 (2000).

Revenue (Department). For preparation, Jihad “JR” Rifai, the sole owner of First National, would prepare a log of sales made each month in a spreadsheet, which he used to complete the excise tax returns. On all vehicles sales transactions to in-state customers, First National collects retail sales taxes, retail business and occupation (B&O) taxes, and motor vehicle taxes.

The Department received an anonymous fraud referral, which prompted the Department to conduct an audit of First National for the tax period of January 1, 2012 through March 31, 2015. For every transaction during the audit period, First National submitted titling and licensing paperwork to the DOL. The Department found that during this timeframe, First National reported 4,294 retail sales of vehicles to in-state customers to the DOL.

First National also collected sales tax for each of these transactions and deposited the funds into its general account, but did not remit the collected retail sales taxes to the Department for 1,211 transactions. Also, First National did not pay either retailing B&O 2 or motor vehicle taxes. Based on the Department’s assessment, First National’s retail income was $14,872,750.00 from the 1,211 unreported sales. First National did not remit $1,405,721.00 in retail sales taxes, $70,051.00 in retailing B&O taxes, and $44,391.00 in motor vehicle taxes. The Department assessed a $760,082.00 evasion penalty and other penalties and statutory interest and issued its determination on May 24, 2017.

2 “The business and occupation tax is not a tax on either profit or net gain or capital gain

or sales, but a tax on the total money or money’s worth received in the course of doing business.” Budget Rent-A-Car of Washington-Oregon, Inc. v. Dep’t of Revenue, 81 Wn.2d 171, 173, 500 P.2d 764 (1972) (citing Young Men’s Christian Ass’n v. State, 62 Wn.2d 504, 383 P.2d 497 (1963)).

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First National paid the taxes owed, interest, and non-evasion penalties.

First National disagreed with the Department’s decision to impose the tax evasion penalty and on July 2, 2018, it requested the BTA to review the Department’s decision.

On April 12, 2021, a hearing was held before the BTA, and First National called three witnesses to testify: Rifai, First National office employee Candy Romero, and Sandy Jameson, who worked for the accounting firm Rekdal Hopkins Howard P.S. The Department also called three witnesses.

Romero has worked for First National as a title clerk since 2009. During the audit period, she was responsible for getting titles for vehicles that were sold. Romero stated that once the office manager placed all the paperwork necessary inside a folder referred to as a “deal jacket,” in her bin, the vehicle was deemed ready to be titled. To get the title and license for the vehicle, she would contact the DOL to pick up the paperwork, and within “24 to 48 hours, [DOL] would return with plates,” and then she would file the “car deal.” According to Romero, the process of getting the title and license and timing of filing the sale would change whenever there was a new officer manager. Romero testified she relied on paper documents to track vehicles that needed to be titled and licensed because she did not know how to use the tracking system that was being used during the time period that was audited. Romero also stated that there were times when people would take deal jackets to get paperwork they needed and then did not return the deal jackets to the original location.

Rifai testified that he “always prepared the excise tax himself” until he

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hired Jameson to implement new processes and train staff on the new system. He would submit the excise tax returns to the Department monthly, and on the due date, he would go to the dealership and review the deal jackets in the “one bin where all the deals were filed for the month, [he would] go through those [and] put them on [his] Excel spreadsheet . . . tally up the amounts and file the amounts on [his] spreadsheet.” He would compile First National’s monthly excise tax returns by reviewing deal jackets from a completed sales bin. Rifai asserted he was unaware that staff would remove deal jackets from the bin to review items that impacted their commission and pay.

Rifai stated his company grew too quickly, he could not hire sufficient qualified staff to keep up with the rapid growth of the business, and the business process that was in place could not keep up with the growth. Rifai maintained that the failure to remit the additional taxes owed during the audit period was a result of an honest mistake and not an attempt to evade payment.

Sandy Jameson, from the accounting firm Rekdal Hopkins and Howard P.S., testified that she helped First National implement a new tracking system. At the beginning of 2016, Jameson worked with First National to “implement an accounting system, an inventory system, put some policies and procedures in place and create workflow and train [Rifai’s] office staff and get them started in a fully encompassed [document management software] system.” Jameson testified that she was on site two days a week for three to four months. According to Jameson, First National “did not have any systems in place, so it was basically starting from the ground and working our way up, completely overhauling the

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office and training.”

The BTA upheld the Department’s determination to assess the evasion penalty and concluded

“[I]t is highly probable that the Taxpayer knew a tax liability was due . . . [which] is further shown by the fact that it remitted retail sales tax, as well as associated retailing B&O taxes and motor vehicle taxes, for its other retail vehicle sales to in-state customers.”

....

“[T]hus, shown by clear, cogent, and convincing evidence, that the Taxpayer’s failure to remit excise taxes on 28 percent of its retail vehicle sales to in-state customers was willful, and thus resulted from an intent to evade payment.”

The BTA found it highly improbable that First National’s “sense of its own gross sales receipts was off by roughly $15 million during the audit period, and that the Taxpayer failed to notice nearly $1.5 million in unremitted retail sales taxes accruing in its bank accounts.” It further found that the underreporting was consistent, occurred every month of the audit period, and lasted for years. Lastly, the BTA found First National’s proffered explanation for its underreporting was not credible.

First National petitioned to the BTA for review of its initial decision. The BTA denied the petition and adopted its initial decision as its final decision. First National appealed to superior court, which transferred the matter to this court pursuant to RCW 34.05.518(3)(b).

ANALYSIS

We review decisions by the BTA under the Washington Administrative Procedure Act (APA), ch. 34.05 RCW. RCW 82.03.180; Echo Glob. Logistics, Inc. v. Dep’t of Revenue, 22 Wn. App. 2d 942, 945, 514 P.3d 704 (2022). As the

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party challenging the invalidity of the BTA’s action, First National has the burden to show that BTA’s action was invalid. RCW 34.05.570(1)(a); Envolve Pharmacy Sols., Inc. v. Dep’t of Revenue, 25 Wn. App. 2d 699, 709, 524 P.3d 1066 (2023). First National contends the BTA erroneously affirmed the Department’s decision to impose the evasion penalty. Challenges to evidence Preliminarily, we address First National’s contention the BTA should have considered the statements made by tax review officer (TRO) Carl Lewis to Rifai during their informal administrative review meeting. The statements allegedly include such things as Lewis’ complimenting Rifai for attending the meeting because “usually guilty parties do not attend these hearings.” According to Rifai, TRO Lewis said he and the auditor “did not find any discrepancies in the files that show that we [First National] were trying to tamper with the numbers or hide anything from the Department.” Rifai also testified that TRO Lewis allegedly said that “we already agreed that there’s no tampering, and the burden of proof has not been met to charge that penalty.” The record was not clear the “we” Lewis referred to. The Department objected to the statements as hearsay.

The APA has more relaxed standards for admitting hearsay evidence.

Fettig v. Dep’t of Soc. & Health Servs., 49 Wn. App. 466, 473, 744 P.2d 349 (1987). Under the APA, “[e]vidence, including hearsay evidence, is admissible if in the judgment of the presiding officer it is the kind of evidence on which reasonably prudent persons are accustomed to rely in the conduct of their affairs.” RCW 34.05.452(1). We review an agency’s evidentiary decisions for

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abuse of discretion. Port of Seattle v. Pollution Control Hrg’s Bd., 151 Wn.2d 568, 642, 90 P.3d 659 (2004). A tribunal “ ‘abuses its discretion when its exercise of discretion is manifestly unreasonable or based upon untenable grounds or reasons.’ ” Okamoto v. Wash. Employ. Sec. Dep’t, 107 Wn. App. 490, 495, 27 P.3d 1203 (2001) (quoting Davis v. Glove Mach. Mfg. Co., 102 Wn.2d 68, 77, 684 P.2d 692 (1984)).

Citing WAC 458-20-100, First National contends the BTA erred in applying the “reasonably prudent person” standard, arguing “it verges on absurd that a taxpayer would not rely on what Department [sic] representative said to him,” because TRO Lewis was an attorney who was “trained in the interpretation of the Revenue Act, public guidance issued by the department, and precedents established by prior rulings and court decisions.”

It is true that First National correctly described Lewis’ duties as a tax review officer. The BTA agreed with First National’s argument, “[y]ou are correct, [First National’s counsel] that . . . [t]his is the kind of evidence on which reasonably prudent persons are accustomed to rely on the conduct of their affairs.” However, the BTA ruled that under the circumstances where a written decision by the Department about First National would be forthcoming, a reasonable person would not rely on oral statements made by a TRO. The BTA’s rationale in distinguishing between information communicated in writing versus orally was not manifestly unreasonable or based upon untenable grounds. We find no abuse of discretion, and the BTA did not err in excluding Lewis’ statements.

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Even if there was error, First National fails to establish how it was prejudiced by the exclusion of the statements. Argument unsupported by reference to the record or citation to authority will not be considered. RAP 10.3(a)(6). Cowiche Canyon Conservancy v. Bosley, 118 Wn.2d 801, 809, 828 P.2d 549 (1992). Challenges to Conclusions of Law We next turn to First National’s challenges to the BTA’s conclusions of law (COL) 10, 12, and 13. First National did not challenge any findings of facts, thus they are verities on appeal. Mariani v. Dep’t of Fin. Insts., 34 Wn. App. 2d 361, 369, 568 P.3d 689 (2025), rev. denied, 578 P.3d 768 (2025). Conclusions of law are reviewed de novo under an error of law standard, and under this standard, “we accord substantial weight to an agency’s interpretation of a statute within its expertise, and to an agency’s interpretation of rules that the agency promulgated.” Dep’t of Revenue v. Nord Nw. Corp., 164 Wn. App. 215, 223, 264 P.3d 259 (2011) (quoting Verizon Nw. v. Wash. Employment Sec. Dep’t, 164 Wn.2d 909, 915, 194 P.3d 255 (2008)).

We will determine whether “[t]he order is not supported by evidence that is substantial when viewed in light of the whole record before the court, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this chapter.” RCW 34.05.570(3)(e). We do not weigh credibility or substitute our judgment for that of the agency. Bowers v. Pollution Control Hrg’s Bd., 103 Wn. App. 587, 596,13 P.3d 1076 (2000). “We may reverse an administrative order if it is unsupported by substantial evidence.”

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Seymour v. Wash. St. Dep’t of Health, Dental Quality Assur. Comm’n, 152 Wn. App. 156, 172, 216 P.3d 1039 (2009); RCW 34.05.570(3)(e); Ames v. Wash. St. Health Dep’t Med. Qual. Assur. Comm’n, 166 Wn.2d 255, 260, 208 P.3d 549 (2009).

A. Intent to evade First National challenges the BTA’s COL 10, which states “[a] consistent pattern of understating substantial amounts of income over a period of years is highly persuasive evidence of a fraudulent intent to evade taxes.”

Under WAC 458-20-228(5)(f), the Department may apply an evasion penalty when a taxpayer “knows a tax liability is due” and “attempts to escape detection or payment of the tax liability through deceit, fraud, or other intentional wrongdoing.” The Department has the burden to show intent to evade by clear, cogent, and convincing evidence. WAC 458-20-228(5)(f). “Intent to evade may be shown by circumstantial evidence.” Grimes v. Department of Revenue, No. 51276,1998 WL 1162122, at *2 (Wash. Bd. of Tax Appeals January 1, 1998). WAC 458.20.228(5)(f)(ii)(B) provides a nonexclusive list of actions that are generally considered to establish an intent to evade a tax liability, which includes “[t]he willful failure of a seller to remit retail sales taxes collected from customers to the department.

The unchallenged findings state that during the audit period, First National failed to report 28 percent of its overall retail sales, which amounted to $14,872,750, and did not remit approximately $1.5 million of the collected retail sales taxes from these transactions to the Department. Additionally, these

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unreported transactions “occurred over the entire 39 months of the audit period,” and that First National “underreporting consistently ranged from 20 percent to 40 percent of its overall in-state retail vehicle sales.” Finally, First National’s explanation about the removal of deal jackets would have, according to the auditors, the expected result of “unreported sales cluster at a particular period” during the reporting month, but instead, the auditors discovered that the “unreported sales occurred . . . consistently through the month.”

First National contends it was not reasonable for the Department to find intent based only on a review of documentation, without interviewing Rifai, to assess his credibility. While it is true the auditors did not interview Rifai, notwithstanding that their standard audit procedure did not entail “interact[ing]” with the taxpayer, First National fails to explain how the Department would have reached a different decision if the auditors had face-to-face contact with Rifai.

The BTA’s conclusion of fraudulent intent to evade taxes, given the consistent pattern of understating substantial amounts of income over a period of years, is properly supported by the record.

B. Fraud on the State First National also challenged COL 12 and 13, which read:

12. Unexcused failure to timely turn over sales tax actually collected by a seller is a breach of the seller’s fiduciary duty, and amounts as a matter of law to fraud on the state . . . .

13. The Taxpayer’s failure to turn over a large dollar amount and percentage of collected retail sales taxes was a breach of its fiduciary duty rising to the level of fraud on the state. Emphasis added.

The seller’s responsibilities regarding sales tax collection are contained in

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RCW 82.08.050(2), which provides in part: “[t]he tax required by this chapter, to be collected by the seller, is deemed to be held in trust by the seller until paid to the department.” The sales tax is designed to be paid by the purchasing public and collected by the seller. RCW 82.08.050; Kitsap-Mason Dairymen’s Ass’n v. Tax Comm’n, 77 Wn.2d 812, 816, 467 P.2d 312 (1970). “Inherent in RCW 82.08 is the fact that taxes collected in the name of the state are not property of the seller.” Grimes, 1998 WL 1162122, at *3. The integrity of the entire taxing system demands that funds collected as taxes be remitted to the state.” Grimes, 1998 WL 1162122, at *3.

The seller, as trustee of sales tax funds collected from purchasers, stands in a fiduciary relationship with the State. Grimes, 1998 WL 1162122, at *3. A trustee owes to the beneficiary of the trust the highest degree of good faith, diligence, loyalty, and integrity. Esmieu v. Schrag, 88 Wn.2d 490, 498, 563 P.2d 203 (1977). “Unexcused failure to timely turn over sales tax actually collected by a seller is a breach of the seller’s fiduciary duty, and amounts as a matter of law to fraud on the state.” Grimes, 1998 WL 1162122, at *3.

Here, the record shows that First National breached its fiduciary duty by failing to remit the sales tax it collected. It is undisputed that First National did not remit to the Department the taxes it collected. First National then used the unremitted retail sales taxes to purchase vehicle inventory to benefit its business. Finally, as discussed supra, First National’s explanation for the underreporting, because of the deal jackets and “poor accounting” practices, was found to be not credible given that the explanation went to the timing of the reporting and did not

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explain the consistent and significant underreporting of the sales and taxes.

The BTA’s conclusion that First National committed fraud by breaching its fiduciary duty to timely remit significant amount of taxes collected, without credible explanation, is supported by the record.

We affirm the final order of the BTA.

WE CONCUR: