IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
YOUNG'S MARKET COMPANY OF No. 87614-7-I WASHINGTON, LLC, DIVISION ONE Appellant,
v. UNPUBLISHED OPINION
STATE OF WASHINGTON, DEPARTMENT OF REVENUE,
Respondent.
SMITH, J. — Young’s Market Company, a wholesale distributor, received
over $21 million in termination payments from a competitor when a supplier
terminated its contract without cause. The Department of Revenue1 assessed
$315,227.11 in business and occupation (B&O) taxes. Young’s appealed and
the Washington State Board of Tax Appeals upheld the Department's
assessment on summary judgment. Young’s sought judicial review in superior
court and the matter was certified to this court for direct review. Young’s claims
the termination payments are not subject to B&O tax and, if they are, they should
be taxed under the “tax on wholesalers” designation. We affirm the Board’s
determination that the payments are subject to B&O tax and were properly
classified under “service and other activities.”
1 The Department of Revenue is Washington State’s primary licensing and tax collection agency. The Department oversees and administers a variety of Washington’s taxes, including the business and occupation tax. No. 87614-7-I/2
FACTS
Young’s is a wholesale distributor of alcoholic beverages. As a wholesale
distributor, Young’s competes with other distributors for the exclusive right to
distribute particular brands of alcoholic beverages to suppliers. The business of
wholesale distribution is regulated by the Wholesale Distributor/Supplier Equity
Agreement Act, ch. 19.126 RCW (Franchise Act2). The Franchise Act provides
certain protections to wholesale distributors, including the right to receive
monetary compensation from a successor distributor when a supplier terminates
a wholesale distributor’s distribution rights without cause. RCW 19.126.040.
These protections are deemed to be incorporated into every agreement of
distributorship. RCW 19.126.040.
In the wholesale distribution industry, suppliers commonly terminate
distribution agreements without cause in favor of a successor distributor. When
a supplier terminates an agreement without cause, the successor distributor must
compensate the terminated distributor for the fair market value of the terminated
distribution rights. RCW 19.126.040(5). “Fair market value” may be fixed by
agreement of the parties or by arbitration. RCW 19.126.040(4). In any given
year, Young’s may gain or lose several suppliers.
In 2013, Young’s entered into a brand transfer agreement with Southern
Wine & Spirits of Washington, LLC, a competitor in the wholesale distribution
business. A brand transfer agreement is created in anticipation of the
2We use the same short-hand description for this statute as in the Board of Tax Appeals’s decision and the brand transfer agreement.
2 No. 87614-7-I/3
termination of distribution rights and sets forth procedures for the transfer of said
rights from one distributor to another, including the method for calculating “fair
market value.” The recitals in the brand transfer agreement between Young’s
and Southern included, in part, the following: [T]he parties anticipate that, from time to time, certain Suppliers may change the appointment of the distributor of one or more Products in the Territory and the Parties believe it is in their mutual best interests to agree in writing to the procedures each Party will follow to effectuate an orderly and efficient change in the appointment of the distributor of the Products in accordance with the Franchise Act. ... The purpose of this Agreement is to ensure a smooth and orderly transition of the Products from the Prior Distributor to the New Distributor, to avoid disputes over the application of the Franchise Law, and to compensate the Prior Distributor for the loss of the distribution rights to the Products in the Territory in compliance with the Franchise Act.
The agreement also set the fair market value of terminated distribution rights.
Between 2013 and 2016, suppliers for four brands—Bacardi, Ole Smoky,
Disaronno, and Stoli—terminated Young’s distribution rights without cause and
appointed Southern as the successor distributor. In accordance with the brand
transfer agreement and the Franchise Act, Southern compensated Young’s when
it acquired the distribution rights to each of these brands.3
In 2018, the Department of Revenue audited Young’s state excise tax
returns for the period of January 1, 2014, to December 31, 2016. The
Department found that Young’s failed to report B&O tax on all payments it
3Southern paid Young’s $2,214,182.95 for Stoli; $364,280.00 for Ole Smoky; $547,854.00 for Disaronno; and $17,272,421.00 for Bacardi.
3 No. 87614-7-I/4
received from Southern for its terminated distribution rights. The Department
determined compensation payments for terminated distribution rights were gross
income of Young’s business and subject to B&O tax. Accordingly, the
Department issued an assessment for $315,227.11 in B&O taxes under the
“services and other activities” classification.
Young’s moved for administrative review with the Department’s
Administrative Review and Hearings Division (ARHD). The ARHD upheld the
Department’s assessment and denied reconsideration. Young’s appealed to the
Board of Tax Appeals. Both Young’s and the Department moved for summary
judgment. In its motion, Young’s contended the compensation payments were
not subject to B&O tax because they were received by operation of law and not
considered “gross profits.” The Board issued an initial decision granting the
Department’s motion for summary judgment and denying Young’s motion. In its
decision, the Board concluded that Young’s “entered into Brand Transfer
Agreements voluntarily, and for its own gain, benefit, or advantage,” and this was
a “business activity” under RCW 82.04.140. Accordingly, the payments, which
the Board deemed “settlement payments for lost business income, not gross
proceeds of sales,” were subject to B&O tax. The Board also concluded that,
even if the transactions were sales—as Young’s contended—the sales were not
“casual or isolated sales” and not exempt from B&O tax.
Young’s filed an exception to the initial decision. Young’s reasserted its
original argument and claimed, in the alternative, if the compensation was
subject to B&O tax, it should be reclassified under the “tax on wholesalers”
4 No. 87614-7-I/5
classification. The Board denied Young’s request for review and adopted the
initial decision as its final decision. Young’s sought judicial review of the Board’s
decision in King County Superior Court. The court certified the case for direct
review by this court under RCW 34.05.518(1)(b).
ANALYSIS
Young’s claims the Board erred when it granted the Department’s motion
for summary judgment and held the statutorily mandated amount Young’s
received pursuant to RCW 19.126.040(4) was subject to B&O tax, because loss
of distribution rights is not business activity. Alternatively, Young’s contends if
the payments are subject to B&O tax, they should be considered an isolated sale
exempt from the tax or as a tax on wholesalers. The Department maintains the
Board did not err and the payments Young’s received were by reason of its
business activities and, therefore, were gross income of the business subject to
B&O tax. Additionally, the Department contends the Board properly determined
the payments were subject to the tax rate under the “service and other activities”
classification.
Under the Administrative Procedure Act, ch. 34.05 RCW, we review a
decision of the Board of Tax Appeals de novo. RCW 82.03.180. An agency
order may be reversed if “ ‘[t]he agency has erroneously interpreted or applied
the law.’ ” Steven Klein, Inc. v Dep’t of Revenue, 183 Wn.2d 889, 895, 357 P.3d
59 (2015) (alteration in original) (quoting RCW 34.05.570(3)(d)). Questions of
statutory interpretation are questions of law that we also review de novo.
5 No. 87614-7-I/6
Olympic Tug & Barge, Inc. v. Dep’t of Revenue, 163 Wn. App. 298, 306, 259
P.3d 338 (2011).
Our primary objective when interpretating a statute is to “ ‘ascertain and
carry out the intent of the legislature.’ ” HomeStreet, Inc. v. Dep’t of Revenue,
166 Wn.2d 444, 451, 210 P.3d 297 (2009) (quoting Rozner v. City of Bellevue,
116 Wn.2d 342, 347, 804 P.2d 24 (1991)). First, we look to the plain meaning of
the statute. HomeStreet, 166 Wn.2d at 451. “Plain meaning ‘is to be discerned
from the ordinary meaning of the language at issue, the context of the statute in
which that provision is found, related provisions, and the statutory scheme as a
whole.’ ” Lake v. Woodcreek Homeowners Ass’n, 169 Wn.2d 516, 526, 243 P.3d
1283 (2010) (quoting State v. Engel, 166 Wn.2d 572, 578, 210 P.3d 1007
(2009)). While we may look at the broader statutory scheme to discern the
language of the statute, “we ‘must not add words where the legislature has
chosen not to include them.’ ” Lake, 169 Wn.2d at 526 (quoting Rest. Dev., Inc.
v. Canawill, Inc., 150 Wn.2d 674, 682, 80 P.3d 598 (2003)).
In Washington State, a B&O tax is levied and collected on every person
for “the act or privilege of engaging in business activities.” RCW 82.04.220(1).
“Engaging in business” is defined as “commencing, conducting, or continuing in
business.” RCW 82.04.150. “ ‘Business’ includes all activities engaged in with
the object of gain, benefit, or advantage to the taxpayer or to another person or
class, directly or indirectly.” RCW 82.04.140. Engaging in business may include
involuntary activity, such as when “the taxpayer does not personally undertake
the transaction from which they realize a gain.” Quinn v. State, 1 Wn.3d 453,
6 No. 87614-7-I/7
478-81, 526 P.3d 1 (2023) (holding the tax on capital gains was an excise tax,
not a property tax, because “ ‘[v]oluntariness’ in this context is best understood
as pertaining to some action that results in a sale or transfer of property as the
taxable event, whether or not reflecting the individual will of the taxpayer”).
B&O tax is “measured by the application of rates against value of
products, gross proceeds of sales, or gross income of the business, as the case
may be.” RCW 82.04.220(1). “ ‘Gross income of the business’ means the value
proceeding or accruing by reason of the transaction of the business engaged in.”
RCW 82.04.080(1). This includes the gross proceeds of sales and compensation
for services rendered. RCW 82.04.080(1). “ ‘Value proceeding or accruing’
means the consideration, whether money, credits, rights, or other property
expressed in terms of money, actually received or accrued.” RCW 82.04.090.
B&O tax is not a tax on profit, net 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
Wash.-Or. v. Dep’t of Revenue, 81 Wn.2d 171, 173, 500 P.2d 764 (1972).
B&O tax is applied to different business activities at different rates. Klein,
183 Wn.2d at 897. The tax rate for wholesale sales is equal to “the gross
proceeds of sales of such business multiplied by the rate of 0.484 percent.”
RCW 82.04.270. The tax on wholesalers applies to “every person engaging
within this state in the business of making sales at wholesale, except persons
taxable as wholesalers under other provisions of this chapter.” RCW 82.04.270.
When a person engages in “any business activity other than or in addition to an
activity taxed explicitly under another section in this chapter,” the “service and
7 No. 87614-7-I/8
other activities” tax rate applies. RCW 82.04.290. The “service and other
activities” tax classification is a catchall category and includes “any type of
business activity or service ‘which does not constitute a sale at retail or a sale at
wholesale.’ ” Klein, 183 Wn.2d at 897 (internal quotation marks omitted) (quoting
RCW 82.04.290(2)(a), (b)). The tax rate under the “service and other activities”
classification is equal to “the gross income of the business multiplied by the rate
of 1.75 percent.” RCW 82.04.290(2)(i).
B&O tax is broad, and the legislature “ ‘intended to impose the business
and occupation tax upon virtually all business activities carried on within the
state.’ ” Klein, 183 Wn.2d at 896 (quoting Simpson Inv. Co. v. Dep’t of Revenue,
141 Wn.2d 139, 149, 3 P.3d 741 (2000)). An exemption from taxation must be
clearly and explicitly authorized by the legislature. Belas v. Kiga, 135 Wn.2d 913,
933, 959 P.2d 1037 (1998) (“[I]t has been the well settled rule in this state for
over 70 years that the court will find an exemption from taxation only where the
legislature has authorized such by clear and explicit language.”).
1. Applicability of B&O Tax
Young’s contends the Board erred when it determined the payments
received as compensation for the loss of its distribution rights were subject to
B&O tax. The Department claims the Board properly concluded the payments
were gross income of the business and subject to B&O tax. We agree with the
Department.
Whether the compensation received by Young’s is subject to B&O tax
depends on whether the compensation resulted from Young’s being engaged in
8 No. 87614-7-I/9
business activities, as contemplated by ch. 82.04 RCW. Young’s maintains it
was not engaged in a business activity when it received payments from Southern
because losing its distribution rights was not voluntary and entering a settlement
agreement to determine the amount of a statutorily mandated payment is not a
business activity.
First, as the Supreme Court stated in Quinn, activity does not need to be
voluntary to be subject to B&O tax. 1 Wn.3d at 480. In Quinn, the Court noted
excise taxes can be triggered by events not voluntarily undertaken by the
taxpayer, such as when a minority shareholder is bound by the decision of the
majority shareholder and must pay taxes on the sale of property. 1 Wn.3d
at 480. The fact that Young’s did not want to have its distribution rights
terminated does not mean it was not “engaged in business” for purposes of B&O
tax when it transferred the rights and received compensation.
Young’s next asserts that entering into a contractual agreement to
determine the value of a lost asset is not a business activity that generates
taxable gross income and is thereby not subject to B&O tax. As support,
Young’s notes that it would have received the payments even if it had not
entered into the brand transfer agreement with Southern. But it is not the act of
entering into the agreement that is considered the business activity, it is the act
of transferring distribution rights and receiving compensation.4 The transfer of
4 While Young’s is correct that the Board concluded Young’s “entered into Brand Transfer Agreements voluntarily” and identified this as business activity, we do not believe the Board meant to so narrowly construe the business activity as the actual act of entering in the brand agreements versus the process of transferring/receiving distribution rights.
9 No. 87614-7-I/10
distribution rights is a business activity explicitly contemplated by the Franchise
Act and is an inherent part of the wholesale business.5 See RCW 19.126.040.
Therefore, when Young’s transferred its distribution rights and received
compensation, it engaged in a business transaction, and proceeds from that
transaction are considered gross income of the business.
Young’s identifies no provisions in the Franchise Act that would exempt
payments received as compensation for the termination of distribution rights.
See, e.g., TracFone Wireless, Inc. v. Dep’t of Revenue, 170 Wn.2d 273, 296-97,
242 P.3d 810 (2010) (“ ‘[T]axation is the rule and exemption is the exception, and
where there is an exception, the intention to make one should be expressed in
unambiguous terms.’ ” (quoting Columbia Irrig. Dist. v. Benton County, 149
Wash. 234, 240, 270 P. 813 (1928))). Accordingly, amounts received under
RCW 19.126.040 are gross income received by reason of engaging in business
activity and subject to B&O tax.
Next, Young’s claims that even if entering into an agreement is a business
activity, it is not subject to B&O tax. Young’s maintains that, according to the
Department’s own guidance, “legally required settlement payments received for
damage to an asset . . . is not a B&O taxable business activity.” As concluded
above, the business activity Young’s engaged in is not merely entering into the
settlement agreement. But even if the act of entering into a settlement
5 The brand transfer agreement notes, “Parties anticipate that, from time to time, certain Suppliers may change the appointment of the distributor.” This is a recognized, common activity in the wholesale business.
10 No. 87614-7-I/11
agreement is considered the business activity, the payments received are still
subject to B&O tax.
Young’s cites to the Department’s “Legal settlements – Are they Taxable?”
article to contend legal settlements are not subject to B&O tax. The article
states, in pertinent part: If you receive payments after engaging in a specific business activity, taxes are based on that activity. Some examples include: • breach of a retail construction contract where the other party did not pay the prime contractor for their construction services rendered (retailing business and occupation (B&O) tax and retail sales tax) • breach of an engineering contract where the other party did not pay the engineering firm for their design services rendered (service and other activities B&O tax) • unauthorized use of intangible property (royalties B&O tax) ... If you receive payments for non-business purposes, such as personal injury or property damage (excluding inventory), you do not owe B&O tax on this income. This may also include certain insurance or other legal settlements. Examples include payments you receive: • to cover damage to operating assets • for personal injury • for eminent domain
First, Young’s contends the payments arose from the loss of or damage to
property and, therefore, are not subject to B&O tax. But Young’s is not receiving
money for personal injury or property damage, and the guidance states only
“certain . . . legal settlements” are exempt from B&O taxes. Young’s does not
identify why, if the compensation received is considered a legal settlement, the
settlement proceeds are not subject to B&O tax.
11 No. 87614-7-I/12
Next, Young’s challenges the Department’s claim that the payments
Young’s received were “payments for engaging in a specific business activity.”
But, as discussed supra, the payments were received as a result of Young’s
transferring its distribution rights, which is a specific business activity; therefore,
B&O tax applies.
Young’s also cites to several Department determinations to support its
claim that payments received as part of a settlement agreement are not subject
to B&O tax, but those determinations are distinguishable. In Revenue
Determination No. 13-0269, a taxpayer received money from a landlord as an
incentive to move before the end of their lease term because the landlord
intended to use the building for its own purposes. Wash. Dep’t of Revenue,
Determination No. 13-0269, 33 Wash. Tax Dec. 144, 149 (2014). The taxpayer
operated a moving and storage business, and the lease agreement was part of
its business operations. Id. at 151. The taxpayer alleged the amount received
was a pre-litigation negotiated settlement of a breach of lease contract claim, not
gross income of the business. Id. The Board agreed, noting the Taxpayer was
“not ‘engaged in the business’ of being forced to relocate.” Id. Unlike the
taxpayer in that case, Young’s is engaged in the wholesale business—which
includes the transfer of distribution rights—and the compensation resulted from
its wholesale business activities, not from an unrelated breach of contract.
Another determination Young’s cites is Revenue Determination No. 98-
164, where the Department of Transportation (DOT) required utility companies to
relocate their facilities because of a state highway reroute. Wash. Dep’t of
12 No. 87614-7-I/13
Revenue, Determination No. 98-164, 19 Wash. Tax Dec. 393, 393-95 (2000). In
lieu of eminent domain proceedings, DOT and the companies entered into
contracts providing DOT would reimburse the taxpayers for moving costs. Id. at
396. The taxpayers maintained the payments were reimbursements not subject
to B&O tax. Id. at 395. The Board agreed with the taxpayers that the payments
from DOT were to mitigate damages and were not subject to taxation. Id. at 396-
97.
Young’s maintains this determination is analogous because it “reinforces
that payments received as a result of involuntary action imposed by a third
party—even if the amount of such payments were a result of a contractual
agreement—are not sufficient to impose B&O tax.” But the facts here are
distinguishable. That determination was narrowly focused on compensation in
lieu of eminent domain proceedings and, like the other determination Young’s
cited, it did not involve activities related to the taxpayer’s business. But, here,
transferring distribution rights and receiving compensation is an activity
encompassed in the business of wholesale distribution. Because compensation
received under RCW 19.126.040 is “accrued by reason of the transaction of the
business,” the payments were properly classified as gross income of the
business and subject to B&O tax. Accordingly, we affirm the Board’s decision
that the payments were subject to B&O tax.
2. Tax Classification
Young’s claims that, even if the compensation received was by reason of
taxable business activity, the activity should be taxed as either (1) a casual or
13 No. 87614-7-I/14
isolated sale or (2) wholesaling activity. The Department contends the Board
correctly identified that the payments should be taxed under the “service and
other activities” rate. We agree with the Department.
a. Casual or Isolated Sale
For purposes of B&O tax, a sale is “any transfer of the ownership of, title
to, or possession of property for a valuable consideration.” RCW 82.04.040(1).
A “casual or isolated sale” is “a sale made by a person who is not engaged in the
business of selling the type of property involved.” RCW 82.04.040(2). “Any
sales which are routine and continuous must be considered to be an integral part
of the business operation and are not casual or isolated sales.” WAC 458-20-
106. When a business engages in a “casual or isolated sale,” B&O tax does not
apply. WAC 458-20-106.
Here, Young’s did not sell its distribution rights to Southern because it did
not have any distribution rights to sell. Once the supplier terminated its contract
with Young’s, Young’s was no longer in “possession” of the distribution rights.
Both the brand transfer agreement and the Franchise Act include language that
distinguishes when a sale occurs versus when a transfer occurs. For example,
when discussing the transfer of distribution rights, the brand transfer agreement
states, [A]ny amount paid to the Prior Distributor by a Supplier in connection with the termination of the Prior Distributor's distribution rights as a termination fee or other express compensation for termination pursuant to a written agreement between the Prior Distributor and such Supplier will be credited against the FMV Price.
14 No. 87614-7-I/15
But when talking about inventory still held by the prior distributor, the agreement
states, “The New Distributor will purchase, and the Prior Distributor will sell the
Prior Distributor’s” inventory. (Emphasis added.) If the compensation paid to the
prior distributor for the distribution rights was a sale, the agreement would
indicate the previous distributor must sell the distribution rights, as it did with the
inventory. RCW 19.126.040 also recognizes the distinction between sale of
distribution rights and compensation paid for distribution rights. Compare RCW
19.126.040(3) (“The wholesale distributor may sell or transfer its business . . . .”),
with RCW 19.126.040(5) (“[A] successor distributor must compensate the
terminated distributor for the fair market value of the terminated distributor's
rights to distribute the brand.”). Accordingly, the compensation Young’s received
was not the result of a sale. Because we find a sale did not occur, we do not
address the issue of “casual or isolated sale.”
b. Wholesaling / Service and Other Activities
Young’s asserts that if the transfer of distribution rights is not a sale, the
compensation should be taxed under the “tax on wholesalers” rate. The
Department maintains the compensation payments should be taxed under the
“service and other activities” rate. We agree with the Department.
The “tax on wholesalers” applies to “every person engaging within
[Washington] in the business of making sales at wholesale” and “as to such
persons the amount of tax with respect to such business shall be equal to the
gross proceeds of sales of such business multiplied by the rate of 0.484 percent.”
RCW 82.04.270. The “tax on service and other activities” applies to “every
15 No. 87614-7-I/16
person engaging within [Washington] in any business activity other than or in
addition to an activity taxed explicitly under another section in this chapter . . . ;
as to such persons the amount of tax on account of such activities is equal to the
gross income of the business multiplied by the rate of 1.75 percent.” RCW
82.04.290(2)(i). This “catchall” provision includes “any type of business activity
or service ‘which does not constitute a sale at retail or a sale at wholesale’ ”
Klein, 183 Wn.2d at 897 (internal quotation marks omitted) (quoting RCW
82.04.290(2)(a),(b)).
Young’s contends that because the Board determined Young’s received
the compensation because it “operat[es] as a wholesaler distributor of alcoholic
beverages,” the wholesaling rate of 0.484 percent must apply. This contention
assumes that all wholesale distribution activity is taxed similarly. But B&O tax
applies at different rates for different activities. Klein, 183 Wn.2d at 897.
The “tax on wholesalers” applies to the activity of “making sales at
wholesale”; if a wholesale distributor is engaged in activity other than making
sales, the “services and other activities” designation applies. See Klein, 183
Wn.2d at 897. Because transferring distribution rights is not a “sale at
wholesale,” the wholesale tax rate does not apply to the compensation received
by Young’s. See, e.g., Klein, 183 Wn.2d at 899.
In Steven Klein, Inc. v. Department of Revenue, a car dealership, Klein
Honda, received incentive payments (“dealer cash”) for selling certain car models
during specific time periods. 184 Wn. App. 344, 347-48, 336 P.3d 663 (2014),
aff’d, 183 Wn.2d 889, 357 P.3d 59 (2015). This court held the payments were
16 No. 87614-7-I/17
subject to B&O tax because Klein received the payments “in the course of
conducting its auto dealership business” and the payments were “connected to a
business activity.” Klein, 184 Wn. App. at 353. We also held participation in the
dealer cash program was “a discrete business activity beyond the mere retail
sale of those vehicles.” Id. Because the activity was in addition to Klein’s retail
sales, the court determined the payments were appropriately taxed under the
“service and other activities” classification. Id. The Washington Supreme Court
affirmed our ruling that the incentive payments were gross income of the
business and subject to B&O tax under the “services and other activities”
classification. Klein, 183 Wn.2d at 902.
Young’s contends Klein is not analogous because to receive dealer cash
Klein had to engage in a discrete business activity—selling certain cars during
specific times—whereas, here, Young’s distribution rights were unilaterally
terminated. Young’s re-raises its argument that it did not engage in a business
activity and, even if it did, the activity was not discrete from wholesale sales. As
discussed supra, Young’s did engage in a business activity discrete from
wholesale sales. And, despite Young’s not initiating the activity that resulted in
the transfer of distribution rights and receiving compensation, Young’s still
realized a gain/benefit (i.e., compensation payments) from the activity.
Additionally, while transferring distribution rights is an activity within the
wholesale business, it is not a wholesale sale. In Klein, the Supreme Court
noted, “although Klein Honda must sell a car to a customer to be eligible for
dealer cash, the dealer cash program is a distinct program that provides Klein
17 No. 87614-7-I/18
Honda with income in addition to its income from retail sales through a separate
contract with another party.” 183 Wn.2d at 899. Similarly, transferring
distribution rights is a distinct activity from wholesale sales and, therefore, the
compensation should be taxed under RCW 82.04.290. We conclude the Board
correctly determined the compensation payments were subject to the “service
and other activities” rate.
We affirm.
WE CONCUR: