Seattle Rule 5-034

Finance charges, carrying charges, interest and penalties.

(1) Introduction. This rule explains the business licensetax and utility taxation of finance charges, carrying charges, interest and/orpenalties received by taxpayers in the regular course of business.

(2) Business license tax. Persons who receive financecharges, carrying charges, service charges, penalties and interest are taxableunder the service and other business activities classification. Included inthis are:

(a) Interest amounts received by persons regularlyengaged in the business of selling real estate.

(b) Persons engaged in financial business activities.(Refer to Seattle Rule 5-520.)

(c) A penalty or interest charge assessed on a latepayment on a lease payment.

(d) Interest or finance charges received from aninstallment sale.

Generally, amounts categorized as "interest" ina lease payment for tangible personal property are taxable in the retailingclassification as part of the total lease payment for purposes of the business licensetax. See Seattle Rule 5-536.

(3) Exemptions and deductions. SMC Chapter 5.45 providesan exemption for credit unions, international banking facilities and amountsderived from the sale of real estate. Deductions are also permissible pursuantto SMC Chapter 5.45 for interest on investments or loans secured by mortgagesor deeds of trust and interest on obligations of the state, its politicalsubdivisions, and municipal subdivisions.

(4) Utility Tax. Interest, late fees, non-sufficient fundfees, and other penalties received by persons receiving gross income fromengaging in utility activities per Seattle Municipal Code Chapter 5.48 aretaxable under the appropriate classification of the utility tax code.

(5) Examples. The following examples identify a number offacts and then state a conclusion as to whether the situation results intaxable interest or finance charges. These examples should be used only as ageneral guide. The tax status of each situation must be determined after areview of all of the facts and circumstances.

(a) ABC Electric Company, who sells electricity toconsumers, receives $9,000.00 in late charges in the month of November. Thesefees are not taxable under the service and other business activitiesclassification of the business license tax. Per Section 4 above, the late feesare taxable under the selling of electricity classification of the utility taxcode pursuant to Chapter 5.48 of the Seattle Municipal Code.

(b) XYZ Furniture Company sells furniture and allows itscustomers to pay for the furniture over a twelve-month period. The sellercharges interest at twelve percent (12%) per annum for allowing the customer todefer immediate payment. The interest charged the customer is a separateactivity from the sale of the furniture and is taxable under the service andother business activities classification.

(c) Jane Doe is leasing a car from ABC Leasing, Inc. Thelease contract provides that if the customer is more than fifteen (15) dayslate in making the lease payment, a five percent (5%) penalty will be charged.Jane Doe was more than fifteen (15) days late in making her March payment andwas required to pay the five percent (5%) penalty. The penalty amount receivedby ABC Leasing is a separate activity from the lease of the vehicle and istaxable under the service and other business activities classification. Anyinterest included in the lease payment for the car is part of the lease paymentand subject to the retailing business license tax.

(d) John Doe sold his personal residence on contract. Hereceives monthly interest and principal payments. The interest is received inexchange for the seller"s deferring receipt of immediate payment. The saleof the residence was not related to any other business activities and John Doehas sold no other real estate. The interest is not taxable under the businesslicense tax since the transaction was a casual and isolated sale.

(e) Judy Smith is engaged in business as a real estatebroker and regularly sells real estate for others. Judy Smith sold her personalresidence on contract. She receives monthly interest and principal payments.She receives no other interest from real estate contracts. The sale of Judysproperty can be distinguished from the sale of real estate for others. Since thiswas a single sale of Judys residence, it is a casual and isolated sale and theinterest is not subject to business license tax.

(f) James Smith sold on contract seventeen oftwenty-three apartment complexes which he owned during a four-year period. Hereceives payment of principal and interest every month from these sales. Theonly other income he receives is from the rental of apartment units to non-transients. The income which James Smith receives as interest from the sale ofthe real estate is subject to the service business license tax. The rental ofthe apartment units is not taxable for the business license tax. The courtshave held that the selling and financing of sales of capital assets by means ofreal estate contracts does not constitute an investment within the meaning ofRCW 82.04.4281. James Smith is engaged in a taxable business activity. Adeduction is provided to sellers who are engaged in banking, loan, security, orother financial businesses if the sale is primarily secured by a first mortgageor trust deed on non-transient residential property (see 5.45.100 G). However,James Smith is not engaged in these types of business, nor was the loan securedin this manner. Persons in a financial business should refer to Seattle rule5-520.

(g) David Roe acquired four pieces of real property overa period of several years. These properties have been held for residentialrental to non-transients. David Roe sold all of the real estate in 1991 and isreceiving payments of principal and interest pursuant to sales contracts. Thedetermination of whether the interest received is subject to the businesslicense tax depends on all facts and circumstances and cannot be made based onthe limited facts set forth in this example. Additional facts and circumstanceswould include, but not be limited to, the extent to which David Roe haspurchased and sold real property in the past, the number of other salescontracts held by David Roe aside from the ones mentioned here, whether theproperty may have been acquired by inheritance, and the type of business inwhich David Roe regularly engages.

DIRECTOR'S CERTIFICATION

I, Glen M. Lee, Finance Director of the City ofSeattle, do hereby certify

under penalty of perjury of law, that the within andforegoing is a true and

correct copy as adopted by the City of Seattle,Department of Finance and

Administrative Services.

     DATED this ______ day of July 2016.

                              CITY OF SEATTLE,

                              a Washingtonmunicipality

                         By:     ____________________________________

                                Glen M. Lee,Finance Director

                                Department ofFinance and Administrative Services

Effectivedate: July 14, 2016