United States: Washington Board Of Tax Appeals Holds Merger Extension And Termination Fees Were Isolated Sales Not Subject To B&O Tax

The Washington Board of Tax Appeals has granted a taxpayer's motion for summary judgment and held that extension and termination fees that the taxpayer received pursuant to a merger agreement were casual or isolated sales that were not subject to the state's Business & Occupation (B&O) tax.1 The fees resulted from isolated sales of contract rights rather than routine transactions that were integral to the taxpayer's manufacturing business.


The taxpayer was a Washington corporation that manufactured and sold abrasive waterjet cutting machines.2 In September 2008, the taxpayer, its largest shareholders, and Flow International Corporation (Flow) agreed that the taxpayer's shareholders would sell their stock to Flow in exchange for cash and shares of Flow's stock. Following its completion, this transaction would make the taxpayer a wholly-owned subsidiary of Flow. This was the first merger agreement that the taxpayer and its shareholders had entered into since the taxpayer's incorporation in 1993.

The merger agreement was amended twice. In November 2008, the first amended agreement gave Flow until the end of March 2009 to complete the transaction. After Flow provided notification that it would be unable to conclude the transaction by the March 2009 deadline, the parties entered into a second amended agreement providing that Flow would pay the taxpayer a $2 million fee to extend Flow's deadline to August 15, 2009. Also, under the second amended agreement, Flow agreed to pay the taxpayer an additional termination fee of $4 million if Flow was unable to meet this extended deadline.

In May 2009, Flow decided not to proceed with the merger and paid the extension and termination fees. On its 2009 Washington B&O tax returns, the taxpayer reported both the $2 million extension fee and $4 million termination fee under the manufacturing B&O tax classification. The Washington Department of Revenue audited the taxpayer in 2011 and assessed additional tax on the $6 million that the taxpayer received from Flow, by applying the service and other B&O tax classification on such amounts. The taxpayer appealed the assessment to the Department's Appeals Division, which affirmed the assessment. After the taxpayer timely filed a notice of appeal with the Board, the taxpayer and Department filed their cross-motions for summary judgment.

Extension and Termination Fees Were Isolated Transactions

The Board granted the taxpayer's motion for summary judgment and confirmed that the entire $6 million in extension and termination fees received by the taxpayer was not subject to the B&O tax under either the manufacturing or service and other B&O tax classifications. In doing so, the Board explained that B&O tax is based on the "gross income of the business," which a Washington statute defines as "the value proceeding or accruing by reason of the transaction of the business engaged in."3 The taxpayer successfully argued that the Department improperly imposed B&O tax on the $6 million of extension and termination fees because the taxpayer engaged in the business of manufacturing waterjet cutting tools rather than the business of negotiating merger agreements. After emphasizing that the negotiated merger was an isolated activity in the taxpayer's 20-year corporate history, the taxpayer contended that the Department "has consistently (and properly) concluded that the measure of the B&O tax does not extend to consideration received from isolated transactions outside a taxpayer's regular business."

The taxpayer based its argument on three types of transactions that have been deemed to be beyond the scope of "the business engaged in" and thus beyond the reach of B&O tax. First, the taxpayer cited to a Washington statute and regulation that define a "casual or isolated sale" as "a sale made by a person who is not engaged in the business of selling the type of property involved."4 To support this argument, the taxpayer cited published determinations in which the Department applied the exclusion for casual or isolated sales to sales of intangible property such as stock and patent rights.5 Second, the taxpayer observed that an administrative rule describes a farmer's occasional provision of farming services to other farmers, for a fee, as "casual and incidental to the farming activity" and thus not subject to B&O tax for horticultural services.6 Third, the taxpayer noted that the Department has issued guidance explaining that it excludes from B&O taxation the amounts a taxpayer receives in legal settlements that do not compensate the business for lost business sales or income.7

In response, the Department argued that the extension and termination fees were subject to the B&O tax because the taxpayer received them in the course of "engaging in business." A Washington statute defines "business" to include "all activities engaged in with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly."8 According to the Department, the taxpayer entered into agreements with Flow for the taxpayer's "own personal corporate gain" or for the benefit of others. A Washington statute defines "engaging in business" as "commencing, conducting, or continuing in business and also the exercise of corporate . . . powers."9 The Department argued that the taxpayer exercised its corporate powers and engaged in business for purposes of the B&O tax by entering into the second amended agreement with Flow.

The Department addressed the three items that the taxpayer used to support its argument. First, in response to the taxpayer's contention that the transaction was a "casual or isolated sale," the Department argued that the receipts were not the result of a "sale" because there was no transfer of property for valuable consideration. Second, the Department argued that the occasional sale rule for farming cited by the taxpayer was not applicable because there is a distinction between exercising corporate authority to enter into contracts and a farmer assisting a neighbour. Third, the Department contended that its guidance on legal settlements failed to support the taxpayer's argument because it did not provide an example showing how the Department would treat a settlement from a dispute concerning merger agreement transactions.

The Board agreed with the taxpayer's arguments and concluded that the taxpayer's receipts from Flow under the second amended agreement were not subject to B&O tax. Rather than being derived from the business the taxpayer engaged in, the receipts were derived from the taxpayer's "casual or isolated" sales that were not taxable. The statutory definition of "sale" includes tangible and intangible property, as well as real property.10 The Board explained that sales are "casual or isolated" if they are not "routine and continuous" or "an integral part of the business operation."11 In the instant case, the extension and termination agreements represented the taxpayer's sale of valuable contract rights. First, Flow purchased from the taxpayer for $2 million the right to complete the merger agreement during a certain extended period. Second, Flow was assured that the damages arising from its failure to complete the merger would be liquidated for $4 million. Therefore, the Board concluded that the taxpayer's sales of the contract rights to Flow were isolated and non-taxable sales rather than routine transactions that were essential to the taxpayer's manufacturing business.


This is a favorable decision for taxpayers with isolated sales that should not be subject to B&O tax. In this case, the taxpayer was a manufacturer that previously had not engaged in any merger transactions during its 20-year history. As a result, the merger extension and termination fees were isolated transactions that were not part of the taxpayer's routine business operations. Companies that receive significant amounts for transactions that do not occur on a regular basis or revolve around events that do not normally happen should consider whether the decision in this matter provides support for completely excluding receipts from these transactions from the B&O tax base. This decision also demonstrates the aggressive position taken by the Department in applying the B&O tax and disallowing the exception for isolated or casual sales through its broad interpretation of what constitutes engaging in business. Despite the strong facts supporting the taxpayer's argument that the sales were isolated, the Department maintained that the sales were subject to B&O tax.


1 Omax Corp. v. Washington Department of Revenue, Washington Board of Tax Appeals, Docket No. 13- 158, Sept. 10, 2015 (published Sept. 29, 2015).

2 The taxpayer's articles of incorporation were filed in 1993 and provided that the "[t]he purpose of this corporation is to engage in any business, trade or activity which may lawfully be conducted by a corporation organized under the Washington Business Corporation Act."

3 WASH. REV. CODE § 82.04.080(1) (emphasis added).

4 WASH. REV. CODE § 82.04.040(2); WASH. ADMIN. CODE § 458-20-106.

5 Det. No. 87-212, 3 WTD 259 (1987); Det. No. 85-97A, 7 WTD 383 (1985).

6 WASH. ADMIN. CODE § 458-20-209(3)(a).

7 The taxpayer cited the Department's legal settlements guidance that is available at http://dor.wa.gov/content/getaformorpublication/publicationbysubject/taxtopics/legalsettlement s.aspx.

8 WASH. REV. CODE § 82.04.140.

9 WASH. REV. CODE § 82.04.150.

10 Lacey Nursing Center v. Department of Revenue, 11 P.3d 839 (Wash. Ct. App. 2000).

11 Id.; Budget Rent-A-Car v. Department of Revenue, 500 P.2d 764 (Wash. 1972).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.