AOL Gets Its Day In Court (Finally) And Is Awarded Washington Sales Tax Refund

On May 9, 2012, the Washington State Board of Tax Appeals granted summary judgment to AOL, Inc., holding that AOL's purchases of services permitting its customers to connect with AOL's data center and the Internet were not subject to retail sales tax. AOL Inc. v. Wash. Dep't of Revenue, No. 11-076 (Wash. B.T.A. May 9, 2012). The procedural lessons of this case may be as important in Washington tax practice as the substantive case.

Procedural Lessons Learned

Prior to obtaining relief at the Board of Tax Appeals ("Board"), AOL sought to have the courts address the substantive legal issue in two different lawsuits. Its goal was subverted in both cases because of a strict "pay to play" requirement.

The Washington Department of Revenue ("Department") had issued two assessments of Washington state retail sales tax, interest and penalties against AOL on December 15, 2006, for the periods 1998 through 2001 and 2002 through March 31, 2006 that amounted to nearly $50 million. On the same day AOL filed administrative appeals with the Department's Appeals Division.

In June 2007, AOL recognized that it might need to litigate the legal issue, but still wanted to avoid paying the nearly $50 million to do so. In an attempt to get to court without paying the assessments, AOL filed an amended return for the January 2000 tax period, paid $331,377 in retail sales tax and interest related to the amended return, and initiated a lawsuit in Thurston County Superior Court, seeking an order stating that the retail sales tax was not due as well as a refund of the $331,377. AOL LLC v. Wash. Dep't of Revenue, No. 07-2-02109-1 (Thurston Cnty. Super. Ct.).

On December 13, 2007, the Department successfully moved to dismiss the Superior Court action on the grounds that AOL had failed to satisfy the "pay to play" requirements of Washington law. The court accepted the Department's argument that AOL was required to pay all of the first assessment ($19 million) if the amended return related to a part of that assessment period (but not the second assessment of $27 million). AOL appealed the dismissal to the Court of Appeals, and it affirmed the trial court's decision. AOL LLC v. Wash. Dep't of Revenue, 149 Wn. App. 533, 205 P.3d 159 (2009).

In a second attempt to reach the merits, AOL filed a return and paid retail sales tax of $5,700 for the June 2008 tax period, which was outside the earlier assessment periods. It then filed another refund suit on December 23, 2008. AOL LLC...