TAXATION ‑- REAL ESTATE SALES TAX ‑- OPTIONS TO PURCHASE ENTERED PRIOR TO TAX

TAXATION ‑- REAL ESTATE SALES TAX ‑- OPTIONS TO PURCHASE ENTERED PRIOR TO TAX

An option to purchase real estate does not amount to a contract to convey land.  In consequence, a conveyance of real property after the effective date of the ordinance imposing the Real Estate Sales Tax is subject to that tax, not being entitled to the exemption granted to transfers in compliance with contracts to convey entered prior to the effective date of such ordinance.

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                                                                  August 3, 1951

Honorable Maloy Sensney
Prosecuting Attorney
Benton County
Prosser, Washington                                                                                                              Cite as:  AGO 51-53 No. 100

Dear Sir:

            We have your letter of July 10, 1951, in which you ask our opinion on the following question:

            Where the owner of real property gives to the Federal Government prior to the effective date of the Real Estate Sales Tax an option to purchase his land, but is allowed to, and does, remain in possession thereof, and the option to purchase is exercised and title is transferred after the effective date of such tax, is such transaction subject to the Real Estate Sales Tax?

            Our conclusion may be summarized as follows:

            An option to purchase real estate does not amount to a contract to convey land.  In consequence, a conveyance of real property after the effective date of the ordinance imposing the Real Estate Sales Tax is subject to that tax, not being entitled to the exemption granted to transfers in compliance with contracts to convey entered prior to the effective date of such ordinance.

                                                                     ANALYSIS

             [[Orig. Op. Page 2]]

            You state that prior to the imposition of the Real Estate Sales Tax by your county, as well as by Walla Walla and Franklin Counties, owners of certain lands within the McNary Dam Lake area executed options to the United States Government for the purchase by the government of certain lands, but that the owners were allowed to remain in possession of the property until the option was exercised.  Your question is whether, in the situation where the option is exercised and title is conveyed after the effective date of the ordinance imposing the Real Estate Sales Tax, such a transaction is subject to the Real Estate Sales Tax.  In so asking, you obviously have reference to the provision in the ordinance which exempts from the tax transfers after the effective date thereof in compliance with contracts for such conveyance entered prior to such effective date.

            An option to purchase real estate does not amount to a contract for the "conveyance, grant, assignment, quit-claim [[quitclaim]], or transfer" of real property.  Jacobson v. Barnes, 158 Wash. 691, 291 Pac. 1109.  Not amounting to such a contract, there is no basis for exempting the transaction from the Real Estate Sales Tax as being in compliance with a pre‑existing contract to convey the property between said parties.

            You state, however, that in this particular case the landowners are permitted to remain in possession, and ask if there is not a situation similar to the entry of a lease with option to purchase.  You point out that where leases with option to purchase have been entered prior to the effective date of the ordinance transfers in compliance with the option exercised after the date of the ordinance are exempt under the terms of the ordinance.  A lease with an option to purchase of the type referred to in both chapter 11, Laws of 1951, Ex. Sess. and the model ordinance is one where the lessee, as the potential purchaser, contracts for and enters into possession.  In the situation outlined by you, the potential purchaser does not enter into possession, but on the contrary permits the owner to continue in possession.  Such is not a lease with an option to purchase, but is a mere option to purchase.  The ordinary incident of an option to purchase is that the owner remains in possession until the option is exercised and further arrangement is made concerning possession of the property.  We must conclude that the feature whereby the owner retains possession of the property has no bearing upon the taxability of this transaction to the extent that it might indicate the entry of a contract to convey the land prior to the effective date of the ordinance.

            We further wish to point out that chapter 11, Laws of 1951, Ex. Sess. the statute which empowers counties to impose the Real Estate Sales Tax, makes no provision for the exemption of transfers after the effective date of the tax when made in compliance with contracts and leases with option to purchase  [[Orig. Op. Page 3]] entered prior thereto.  This latter feature is found only in the ordinance.  We do not pass upon the validity of this feature, nor do we mean to infer that it is improper, but feel that the completeness of this opinion requires that this feature be mentioned.

Very truly yours,

SMITH TROY
Attorney General

C. JOHN NEWLANDS
Assistant Attorney General