Harbor Air Service, Inc. v. State Dept. of Revenue

• Decision Date: 10 March 1977
• Docket Number: No. 44371,44371
• Parties: , 21 UCC Rep.Serv. 269 HARBOR AIR SERVICE, INC., Respondent, v. STATE of Washington, DEPARTMENT OF REVENUE, Appellant. *
• Court: Washington Supreme Court

Page 359

88 Wn.2d 359

560 P.2d 1145, 21 UCC Rep.Serv. 269

HARBOR AIR SERVICE, INC., Respondent, v. STATE of Washington, DEPARTMENT OF REVENUE, Appellant.^*

No. 44371.

Supreme Court of Washington, En Banc.

March 10, 1977.

Slade Gorton, Atty. Gen., Richard D. Hicks, Olympia, for petitioner.

Short, Cressman & Cable, James A. Oliver, Seattle, for respondent.

HAMILTON, Associate Justice.

This appeal concerns a successor's liability for its seller's taxes under RCW 82.32.140 when the successor has complied with Washington's Uniform Commercial Code--Bulk Transfers Article (RCW 62A.6), and the seller has included the Department of Revenue as one of its creditors. ¹

In early 1972, respondent agreed to purchase a flight service from Executive Flight Service, Inc. (Executive). On March 14, 1972, respondent gave notice of the impending sale to the Department of Revenue and provided the department with a list of Executive's creditors as required by RCW 62A.6--104(1)(c) ² and RCW 62A.6--107(3). ³ Executive's list of creditors included the Department of Revenue with no claimed amount shown. The department replied to this notice with a form letter dated March 29, 1972. This letter stated in part:

The Bulk Sales Affidavit of the above named Vendor, served by you on the Department of Revenue of the State of Washington, appears to be correct with the following exceptions:

We are unable to locate any record of having received excise tax returns for the period from January 1, 1972 through the close of business.

Audit- Outstanding.

Subsequently, Executive filed its final excise tax returns showing its close of business as being April 19, 1972, and paid its excise taxes for the period January 1, 1972 through April 19, 1972. Although the department's March 29, 1972 letter stated that an audit was outstanding, the actual audit had not begun at that time. The record before us does not disclose the date on which the audit actually began. The parties stipulated that the audit was completed on May 10, 1972. The department also conducted a supplemental audit on June 9, 1972. Meanwhile, on May 30, 1972, respondent disbursed the purchase funds which it was holding.

As a result of its audits, the Department of Revenue issued a tax assessment against Executive for taxes due during the period January 1, 1968 through April 19, 1972. On June 21, 1972, the department notified respondent of this tax assessment and of respondent's possible liability as a successor under RCW 82.32.140. On July 13, 1972, the department advised the respondent that the department was holding respondent liable for Executive's taxes.

Respondent filed an appeal with the Board of Tax Appeals, claiming that its compliance with the bulk transfers article precluded the department from asserting respondent's liability for Executive's taxes under RCW 82.32.140. The board disagreed and concluded that RCW 82.32.140 was applicable, notwithstanding respondent's compliance with the bulk transfers article. Respondent also argued to the board that the department's March 29, 1972 letter was ambiguous and misleading in reference to the tax period encompassed by the audit and, therefore, the department was estopped from asserting respondent's liability for any taxes due from Executive prior to January 1, 1972. The board found that even though the March 29, 1972 letter may have been ambiguous, 'normal discussions of the audit . . . must have disclosed the scope of the audit by the time the auditor finalized his report' so that the department was not estopped from enforcing RCW 82.32.140.

Respondent, pursuant to the administrative procedures act (RCW 34.04), appealed the board's decision to the Grays Harbor Superior Court, which reversed the board's decision. The Superior Court concluded that respondent's compliance with the bulk transfers article and the department's failure to file a liquidated claim within 30 days as required by RCW 62A.6--106(1) precluded the department from using RCW 82.32.140. The court also found the March 29, 1972 letter was insufficient notice that taxes might be due for any period prior to January 1, 1972, and therefore the department was estopped from holding respondent liable under RCW 82.32.140. The court entered a judgment reversing the Board of Tax Appeals and ordering the department to refund the taxes which respondent had paid under protest. It is from this judgment that the department has appealed.

We disagree with the Superior Court's conclusion that respondent's compliance with the bulk transfers article prevents the department from using RCW 82.32.140, for we believe the bulk transfers article is not applicable to the State in its tax collecting status. The bulk transfers article was enacted for the purpose of protecting unsecured creditors who have lent credit to the seller relying on the assets of the seller's business. See Official Comment 2, RCWA 62A.6--102. RCW 62A.6--109(1) lists the creditors who are protected by the bulk transfers article provisions:

(1) The creditors of the transferor (or claimants against the transferor) mentioned in this Article are those to whom the transferor is indebted for or on account of services, commodities, goods, wares, or merchandise, or fixtures and equipment, used in or furnished to the business of the transferor, or for or on account of money borrowed to carry on the business of the transferor or for or on account of labor employed in the course of the business of the transferor, of which the goods, wares and merchandise, or fixtures and equipment, bargained for or purchased are a part. Creditors who become such after notice to creditors is given (RCW 62A.6--105 and RCW 62A.6--107) are not entitled to notice.

The State does not fit within this definition. Although it does provide services to a business, it does not lend credit or provide services to a business in the normal debtor-creditor sense. The State provides governmental services to a business as a citizen of the State, and the business pays for the services in its capacity as a taxpayer. See Richards v. Blackmon, 233 Ga. 739, 213 S.E.2d 638 (1975). We do not find persuasive respondent's argument that the State is bound by the bulk transfers article, because certain provisions of RCW 62A.6--104(1)(c) and RCW 62A.6--107(3) require the transferee to deliver certain lists and schedules to the Department of Revenue. We believe these notice provisions were inserted in Washington's version of the Uniform Commercial Code ⁴ for the purpose of informing the department of the impending sale. If the legislature had intended the State to be considered a creditor under the bulk transfers article, it could easily have required the seller to list the State as one of its creditors under RCW 62A.6--104(2). ⁵ The notice provisions of RCW 62A.6--104(1)(c) and RCW 62A.6--107(3) do not in and of themselves make the State a creditor.

'(2) The list of creditors and the schedule must be signed and sworn to by the transferor or his agent. It must contain the names and business addresses of all creditors of the transferor, with the amounts when known, and also the names of all persons who are known to the transferor to assert claims against him even though such claims are disputed. If the transferor is the obligor of an outstanding issue of bonds, debentures or the like as to which there is an indenture trustee, the list of creditors need include only the name and address of the indenture trustee and the aggregate outstanding principal amount of the issue.'

Respondent also asserts that this court has already decided that back taxes are a debt for services in Seattle Lodge No. 211, Loyal Order of Moose v. Par-T-Pak Beverage Co., 55 Wash.2d 587, 349 P.2d 229 (1960), so that the State falls within the RCW 62A.6--109(1) definition of creditor. We do not believe the Par-T-Pak case can be read so broadly. That case involved the sole of a business by a vendor-lessee to a vendee-sublessee. The lessor was attempting to collect back taxes from the vendee-sublessee, because the lease provided that the tenant would pay all taxes. The State was not attempting to collect the taxes, rather the lessor, who had already paid the taxes, was attempting to collect them pursuant to a private agreement.

Even though the bulk transfers article does not apply to the State, we believe the Superior Court correctly reversed the Board of Tax Appeals on the issue of estoppel. The Department of Revenue urges us to uphold the board's decision, because the Superior Court did not give proper weight to the Board of Tax Appeal's decision as required by RCW 34.04.130(6). However, the court has the power, under RCW 34.04.130(6)(e), to reverse the board's decision if its findings are 'clearly erroneous in view of the entire record as submitted . . .'

Perhaps the best description of the 'clearly erroneous' test was set forth by the United States Supreme Court in United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746, 766 (1948): 'A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'

Ancheta v. Daly, 77 Wash.2d 255, 259--60, 461 P.2d 531, 534 (1969). The trial court found that the board's decision was based on assumptions not supported in the record. The board recognized the ambiguous nature of the department's March 29, 1972 letter but concluded that normal discussions surrounding the audit Must have disclosed the audit's scope before the respondent disbursed the purchase funds. There is nothing in the record regarding discussions with the auditor. In fact, the evidence before the board reveals that respondent did not know the audit covered any period prior to January 1, 1972, until respondent received notification of the tax assessment against...