Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGO 1954 No. 361 - Dec 15 1954
Attorney General Don Eastvold


The real estate sales tax applies to a lease with an option to purchase, though the option may be executed separately.

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                                                               December 15, 1954

Honorable Tom A. Durham
Prosecuting Attorney
Whatcom County
Courthouse, 311 Grant Avenue
Bellingham, Washington                                                                                                              Cite as:  AGO 53-55 No. 361

Attention:  Mr. Jack Rowles, Deputy

Dear Sir:

            You have requested the opinion of this office on a question involving the following facts:  For a consideration of $600 "A" gives "B" an option, good for five years, to buy certain real property for a stated price.  The option also provides that if it is exercised by "B" he will be given credit on the price for any payments he may have made as rent on a lease of the property.  At the same time a straight lease of the property, which in no way refers to the option, is made between "A" as landlord and "B" as tenant.

            You ask if this transaction is subject to the real estate sales tax levied pursuant to chapter 28.45 RCW.

            In our opinion the transaction is taxable.


            RCW 28.45.010 (1953 Supp.) provides in relevant part that

             [[Orig. Op. Page 2]]

            "As used in this chapter, the term 'sale' shall have its ordinary meaning and shall include * * * any lease with an option to purchase real property, * * *.

            "The term shall not include * * * transfer of any leasehold interest other than of the type mentioned above, * * *"

            The question is essentially whether the effect of that definition can be effectively circumvented by the use of two documents rather than one.

            It does seem clear that the legislature intended to permit taxation by the various counties of the transactions defined by the statute as "sales."  RCW 28.45.050 (1953 Supp.).  The tax when levied is not upon any particular form of documentary evidence for the transaction.  But the combination of documents posited above will give the lessee the same rights against the lessor as he would have if the transaction had been set out in one document.  The transaction itself, therefore, is identical in substance with a transaction defined by the statute as a taxable "sale."  In such cases the courts look through matters of form to determine the essential nature of the agreement.  See, for example,State v. Goessman, 13 Wn. (2d) 598, and In re Smiley's Estate, 35 Wn. (2d) 863, 866, where it said:

            "* * * In our determination of this question we must be guided by the substance or effect of the transaction rather than the particular form or label adopted.  * * *"

            It is quite true that a lease, as such, is not taxable.  Nor is an option, without more.  But the legislature has provided that a coincidence of these two forms of agreement between the same parties will produce a tax.  There is nothing in the phrase "lease with an option to purchase" which necessitates single‑document construction.  If such a construction is made, a broad avenue of evasion is thereby opened.  Nor is it material that given the opposite conclusion a tax would attach upon the execution of a deed if the option should be exercised.  The statute makes the tax applicable at the earlier date.

             [[Orig. Op. Page 3]]

            It is also immaterial that if the parties choose to forego the protection of recording for the option agreement‑-whether as a term of the lease or otherwise ‑-identification of the true character of the transaction may be difficult for the treasurer.  That problem can be dealt with under RCW 28.45.100.

            We hope the foregoing will prove to be of assistance to you.

Very truly yours,

Attorney General

Assistant Attorney General