RAISBECK v. STATE DEPT OF REVENUE, 28821-4-II (Wash.App. 9-2-2003)

JAMES D. RAISBECK, Appellant v. STATE DEPT OF REVENUE, Respondent.

No. 28821-4-IIThe Court of Appeals of Washington, Division Two.
September 2, 2003.

Appeal from Superior Court of Thurston County Docket No: 00-2-01990-1 Judgment or order under review Date filed: 04/19/2002

Counsel for Appellant(s), John Dimmitt Smith, Graham Dunn PC, Pier 70, 2801 Alaskan Wy Ste 300, Seattle, WA 98121-1128.

Counsel for Respondent(s), Debra Ellen Casparian, Attorney Generals Office/Revenue Div, 905 Plum St. Bldg 3 Fl 2, P.O. Box 40123, Olympia, WA 98504-0123.

MORGAN, J.

A taxpayer protests his liability for business and occupations (B O) tax. The superior court held he was liable, and we agree. Thus, we affirm.

James D. Raisbeck is an aeronautical engineer. He is also chief executive officer, owner, sole board member, and sole shareholder of Raisbeck Engineering, Inc. (REI) and its wholly owned subsidiary, Raisbeck Commercial Air Group (RCAG). REI produces systems to enhance the productivity, performance, and comfort of business and commercial aircraft.

In 1982, Raisbeck personally drafted a contract between himself and REI. Titled `Technology Agreement,’ the contract provided:

1) Raisbeck has and continues to innovate technology which is patentable, protected, or proprietary to Raisbeck;
2) Said technology concerns aircraft systems aimed at increasing the performance and productivity of general aviation and commercial airplanes;
3) Corporation recognizes the uniqueness of these developing technologies and wishes to enjoy exclusive rights to their development, marketing, and sales, all toward making a profit directly from said rights;
4) Raisbeck hereby agrees to grant said exclusive rights as described above, to Corporation as these technologies reach maturity suitable for final development, marketing, and selling.
5) Corporation hereby agrees to pay unit royalties for each such technology covered by this agreement. Said royalties shall be reasonable, mutually agreed upon between the parties, and paid by Corporation to Raisbeck only from proceeds of actual sales to customers purchasing systems incorporating technologies covered by this agreement.[1] z

Raisbeck signed the contract twice once as an individual and once as president of REI.

Between 1982 and 1999, Raisbeck transferred the following patents to REI:

A. 1995 United States Patent D 355,635; aircraft aft fuselage storage locker;

B. 1990 United States Patent 4,909,709; throttle/propeller mixer can;

C. 1989 United States Patent 484,382; dual turning vane air inlet assembly; and
D. 1985 United States Patent D 279,469; cargo carrier for attachment to the wing of aircraft.[2]

On each patent, Raisbeck is named as the inventor.

In addition to transferring patents, Raisbeck also transferred the following items that were not patented:

E. King Air

i. Enhanced performance leading edges

ii. Dual aft body stakes

iii. Fully enclosed main landing gear doors

iv. Raisbeck quiet turbo fan propellers

v. Composite exhaust stack fairings

F. Raisbeck Stage 3 noise abatement system[3]

The parties refer to these items as `know-how,’ so we will do likewise.

In an audit for the period January 1995 through March 1999, the Washington State Department of Revenue (DOR) determined that Raisbeck was in the business of being `an inventor that sells the rights to his patents and/or ideas’ to his closely-held corporations. It also determined that he had received $5.9 million in royalties from RCAG and $3.2 million in royalties from REI. It assessed $108,582.18, which Raisbeck paid.

After paying, Raisbeck sued for a refund under RCW 82.32.180. On November 1, 2001, he moved for summary judgment, contending primarily that he was not in the business of being an inventor, that he had never held himself out as such, and that his transfers of patents and know-how under the Technology Agreement were a single `casual and isolated’ sale. Alternatively, he contended that DOR had miscalculated the amount due. He concluded that he was entitled to a complete or partial refund.

On November 9, 2001, DOR filed a cross-motion for summary judgment. It contended that Raisbeck was in the business of inventing and selling aircraft related products, that the Technology Agreement did not `meet the narrow exemption of a casual or isolated sale[,]’ and that Raisbeck was liable for the amount he had paid.

Before April 19, 2002, the parties stipulated that Raisbeck’s tax liability for the audit period was $73,555, and that he was entitled to a refund of the difference. On April 19, 2002, the trial court granted DOR’s motion for summary judgment, subject to the stipulation. On May 15, 2002, Raisbeck filed this appeal.

According to RCW 82.04.220, Washington levies a BO tax on `every person a tax for the act or privilege of engaging in business activities.’ According to RCW 82.04.140, ‘[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.’ Hence, business encompasses virtually all commercial activities.[4]

Although there are exemptions to the BO tax, they must be `narrowly construed.’[5] One exemption relieves from BO tax liability a `casual or isolated sale.’[6] According to RCW 82.04.040, a sale is `any transfer of the ownership of, title to, or possession of property for a valuable consideration. . . .’ According to that same statute, 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.’ According to WAC 458-20-106, a sale is not casual or isolated if it falls within one of the following descriptions:

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.

Furthermore, persons who hold themselves out to the public as making sales at retail or wholesale are deemed to be engaged in the business of selling, and sales made by them of the type of property which they hold themselves out as selling, are not casual or isolated sales even though such sales are not made frequently.

Because of these provisions, we address two questions here. (1) Was Raisbeck in the business of inventing and selling patents and know-how? (2) Were his sales of patents and know-how a `casual or isolated sale?’

I.
The first question is whether Raisbeck was engaged in the business of selling inventions. He obtained patents in his name, not in the name of his corporations. He said in the Technology Agreement that he `has and continues to innovate technology which is patentable, protected, or proprietary’ and that he was selling those technologies to REI so it could make `a profit directly from said rights[.]’[7] He transferred a series of patents and know-how pursuant to the Technology Agreement. As consideration for his transfers, he received royalties each December. Given that the legislature intended to impose `the business and occupation tax upon virtually all business activities carried on within the state[,]’[8] we hold that he was engaged in the business of inventing and then selling his inventions.

II.
The next question is whether the exemption for a `casual and isolated’ sale applies. Relying on Budget Rent-A-Car v. Department of Revenue,[9]
Raisbeck argues that the `transfer of patent rights and know-how subsequently and pursuant to the terms of the Technology Agreement are not individual sales, they are a single sale that occurred back in April, 1982.’[10] He also argues, for the first time on appeal, that he and his corporations are being subjected to `double taxation.’

A.
In the Technology Agreement, Raisbeck agreed to grant exclusive rights to his inventions `as these technologies reach maturity suitable for final development, marketing, and selling.’ This suggests the possibility of multiple transfers, which is in fact what happened. When he thereafter crafted an invention, he transferred it to REI or its subsidiary, in exchange for royalties payable each December. He made at least ten transfers to REI or its subsidiary or about one every 20 months, despite the complex nature of the items being transferred. These were not `casual and isolated’ sales, and he is not entitled to an exemption on that ground.

Nor does Budget Rent-A-Car v. Department of Revenue affect this result. After selling 458 cars to a dealer, the taxpayer in that case claimed that each sale was `casual and isolated.’ The Supreme Court rejected that claim, and its holding there is entirely consistent with ours here.

B.
Raisbeck argues for the first time on appeal that the `transfer of technology pursuant to the Technology Agreement and the subsequent development and sale of such technology as aircraft-related products should not be taxed as two taxable events.’ Hence, he concludes, DOR was required to disregard the corporate form and treat him and his two closely-held corporations as a single entity. The State responds that `Raisbeck should not be able to disregard his business structure . . . to avoid taxation.’[11]

We reject Raisbeck’s characterization of his business as `Raisbeck d/b/a REI[.]’[12] By Raisbeck’s own choice, REI is a separate corporation that is taxed on the equipment it sells. He is an individual who is taxed on the royalties he receives. Neither is liable for tax imposed on the other, and there is no double taxation.

We also reject Raisbeck’s reliance on RCW 82.04.030.[13] He and REI are not `a group of individuals’ because REI is not an individual. Moreover, he and REI are not `acting as a unit’ with respect to transferring inventions in exchange for royalties because they are on opposite sides of the Technology Agreement. Raisbeck must pay BO tax, and the trial court did not err by so ruling.

Arguments not addressed lack merit or need not be reached.

Affirmed.

A majority of the panel having determined that this opinion will not be printed in the Washington Appellate Reports, but will be filed for public record pursuant to RCW 2.06.040, it is so ordered.

HUNT, C.J. and BRIDGEWATER, J., concur.