TAXATION ‑- REAL ESTATE SALES TAX ‑- EARNEST MONEY RECEIPTS AS CONTRACTS TO CONVEY REAL PROPERTY

TAXATION ‑- REAL ESTATE SALES TAX ‑- EARNEST MONEY RECEIPTS AS CONTRACTS TO CONVEY REAL PROPERTY

(1) The question of whether an "earnest money receipt" constitutes a contract to sell real property depends upon the nature of each particular writing.The inquiry should be directed to whether the owner of the real property has effectively bound himself by that instrument to convey the property to the prospective purchaser.

(2) If an earnest money receipt amounts to such a contract, a transfer of an interest in real property subsequent to the effective date of the Real Estate Sales Tax in compliance with an agreement entered prior thereto would be exempt from such tax.

(3) Where an earnest money agreement entered subsequent to the effective date of the tax constituted a contract to convey an interest in real property, the Real Estate Sales Tax would be due as a result of the entry into such agreement, a contract to convey being a taxable "sale" as defined in the ordinance.

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                                                                    July 23, 1951

Honorable Robert E. Conner
Prosecuting Attorney
Chelan County
34 Fuller ‑ Quigg Building
Wenatchee, Washington                                                                                                                Cite as:  AGO 51-53 No. 90

Dear Sir:

            In your letter of June 7, 1951, you requested information concerning our previous issuance of an opinion relative to whether the entry into an earnest money receipt before the effective date of the real estate sales tax constitutes such a contract to convey real property as to exempt a subsequent conveyance of such land between the same parties from the tax.  Inasmuch as no such opinion had been rendered, and because we have received numerous inquiries on the question and are aware of the widespread problems on this matter, both  [[Orig. Op. Page 2]] as to such instruments entered before and after the effective date of the tax, we are treating your letter as being, in the alternative, a request for our opinion on the following question:

            Where an earnest money receipt is entered into prior to the county ordinance imposing the Real Estate Sales Tax, is a transfer of such real property between the same parties after the tax is imposed exempt from such tax?

            Our conclusions may be summarized as follows:

            (1) The question of whether an "earnest money receipt" constitutes a contract to sell real property depends upon the nature of each particular writing.  The inquiry should be directed to whether the owner of the real property has effectively bound himself by that instrument to convey the property to the prospective purchaser.

            (2) If an earnest money receipt amounts to such a contract, a transfer of an interest in real property subsequent to the effective date of the Real Estate Sales Tax in compliance with an agreement entered prior thereto would be exempt from such tax.

            (3) Where an earnest money agreement entered subsequent to the effective date of the tax constituted a contract to convey an interest in real property, the Real Estate Sales Tax would be due as a result of the entry into such agreement, a contract to convey being a taxable "sale" as defined in the ordinance.

                                                                     ANALYSIS

            The Real Estate Sales Tax is imposed (by county ordinance, pursuant to the authority of chapter 11, Laws of 1951, Ex. Sess.) upon "each sale of any real property" located in the county.  The term "sale" is given a comprehensive definition.  Included are contracts to convey real property, but excluded are transfers "in compliance with" any contract entered into prior to the effective date of the ordinance.  The question, then, is whether an earnest money receipt entered prior to the ordinance is such a contract that a subsequent transfer of the real property in compliance therewith would be exempted.

            The broad question of whether an earnest money receipt constitutes a contract to convey land is incapable of definite answer without there being before us a particular writing.  The term "earnest money receipt" in itself means very  [[Orig. Op. Page 3]] little.  It can be merely a writing evidencing the receipt of money by the seller or his agent as a part of an offer to such seller made by a prospective purchaser.  Certainly, while it remains a mere offer there is no contract to convey the real property.  A subsequent transfer between the parties could not even be "in compliance with" such a writing.  The usual form of such writing, however, provides for acceptance by the seller of the offer to purchase the land, and when such acceptance is indicated on the instrument, a real problem exists as to whether an effective contract to convey real property has been entered such that a subsequent transfer would be in compliance therewith.

            With respect to this latter situation, we can give you no definite answer.  We must refer you to the statutes and common law for application against the provisions of each particular such writing to determine whether its terms constitute an enforceable contract whereby the owner has bound himself to convey the property to the prospective purchaser.  Such problems as the sufficiency of the legal description of the property to be conveyed, the sufficiency of the execution of the instrument, and the presence of the usual requirements of a valid contract all must be resolved.

            We note that your primary inquiry concerns earnest money receipts entered intoprior to the effective date of the county ordinance imposing the tax, presumably the county treasurer having been met with the contention by a land owner that the earnest money receipt constituted a contract to convey the land.  Under the ordinance a finding that the earnest money receipt is a contract will relieve that owner of the tax at the time of the transfer in compliance therewith.  However, and conversely, we draw your attention to the fact that a similar earnest money receipt entered into subsequent to the effective date of the ordinance would also constitute a contract to convey an interest in real property, and would thereby itself amount to a "sale" subject to the Real Estate Sales Tax.  This is, of course, due to the provision in the ordinance, as well as chapter 11, Laws of 1951, Ex. Sess., which includes within the definition of the term "sale," and therefore subject to tax if entered subsequent to the ordinance, any contract for the conveyance, grant, assignment, quitclaim, or transfer of ownership of or title to real property or any estate or interest in real property for a valuable consideration.

             [[Orig. Op. Page 4]]

            We regret we cannot be more specific in our answer to your inquiry, but feel that you will realize that it is impossible to give such an answer to a question involving an instrument which has no commonly accepted form.  Should you have a problem with respect to any particular such instrument we will be most happy to be of any possible assistance to you in passing thereon.

Very truly yours,

SMITH TROY
Attorney General

C. JOHN NEWLANDS
Assistant Attorney General