High court hears dispute over whether distributor’s termination payments are taxable under Washington’s B&O law

The Washington court heard arguments in Young’s Market v. Department of Revenue on whether statutorily mandated payments a beverage distributor received after manufacturers terminated its distribution rights must be included in gross receipts subject to the state’s business and occupation (B&O) tax.

Kelly Barrett, assistant attorney general representing the Department of Revenue, told the court Young’s Market received roughly $21,000,000 after suppliers terminated its rights to four brands and argued those payments "arose from Young's business activities of distributing spirits in this state." Barrett said the statutory scheme that governs transfers and compensation in the spirits industry makes such payments part of the distributor’s business activity and therefore taxable under the catch‑all classification when no other classification applies.

The case matters because classification determines the tax rate and liability. Scott Edwards, counsel for Young’s Market, stressed that the payments compensate the company for the loss of an intangible business asset — distribution rights recorded on the balance sheet — and are therefore not accounting "income." Edwards argued that "that is not income. It is cash, but it is not income," and that the B&O tax, as an excise measured by identified business activities, should not be applied to a mere asset impairment if the payment is compensation rather than proceeds from a sale or from performing the taxed activity.

The bench pressed both sides on the practical and legal nexus between formation of distribution contracts and later payments. One judge observed that the industry model either produces wholesale revenues or, when a contract is terminated, produces a fair‑market‑value substitute for future revenues. Edwards emphasized that the record shows no voluntary sales of distribution rights during the audit period and only four unilateral terminations over four years, arguing the distributor did not "engage in the activity of transferring distribution rights." He urged the court to identify precisely what activity produced the payments.

Barrett countered that the payments are not mere compensation outside the statutory definition but arise from activities integral to the regulated spirits market — acquiring, transferring and receiving compensation for rights — and therefore fall into the statutory "catch‑all" classification when not otherwise described as wholesale. Barrett pointed to precedent in which the court treated additional manufacturer payments to a dealer as separable business activity rather than proceeds from retail sales.

Counsel debated the tax consequences if the payments were instead classified as wholesaling: Edwards noted the wholesaling B&O rate is approximately 0.484 percent, while the service/catch‑all classification carries a roughly 1.5 percent rate, a difference with significant fiscal impact. Barrett replied that measuring damages with a wholesale‑based formula does not by itself convert the payments into wholesale proceeds where the statutory definitions are not met.

The argument also touched on statutory references discussed at the bench and in briefs. The transcript records counsel citing provisions of the Revised Code of Washington (RCW) and a prior case referred to as the Stephen Klein matter as part of the Department's statutory and precedential support for taxing such payments.

After oral argument, the court stated the case would be submitted for decision. The docket moved on to the next matter.