March 2002
A County Assessor's Office requested information and/or a basic legal explanation of why a Limited Liability Company (LLC) isn't treated like a Sole Proprietorship for purposes of the Head of Family personal property tax exemption. The taxpayer, an LLC, would like the Head of Family Exemption applied to its Personal Property Assessment and has told the assessor that the business is like a Sole Proprietorship with just a husband and wife being the owners of the LLC. The issue is whether an LLC can qualify for the Head of Family exemption provided by RCW 84.36.110(2).
Answer
The definition of "person" in RCW 84.04.075 includes a "firm, company, association or corporation." In addition, RCW 1.16.080(2) provides:
Unless the context clearly indicates otherwise, the terms 'association,' 'unincorporated association,' and 'person, firm, or corporation' or substantially identical terms shall, without limiting the application of any term to any other type of legal entity, be construed to include a limited liability company.
Thus, a "person," as used in the property tax statutes, clearly includes LLCs unless otherwise expressly provided in statute or unless the context indicates otherwise.
However, just because an LLC may be a person for property tax purposes, it does not follow that an LLC is entitled to the Head of Family exemption. The exemption for the head of a family applies to "individuals" rather than all" persons." RCW 84.36.110(2) provides, in relevant part:
The personal property, other than specified in subdivision (1) hereof, of each head of a family liable to assessment and taxation of which such individual is the actual and bona fide owner to an amount of three thousand dollars of actual values . . . . (Emphasis added.)
In contrast to sole proprietorships, LLCs are not "individuals." This is made clear from the provisions of chapter 25.15 RCW which contain the statutes authorizing and regulating LLCs. RCW 25.15.030(2) states that "a limited liability company has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs." It is clear from this statute that an LLC is not an individual; for if an LLC were considered to be an individual, there would be no need for the statute to state that an LLC has the same powers as an individual as it relates to carrying on its business and affairs.
The term "individual" has been defined as follows:
As a noun, this term denotes a single person as distinguished from a group or class, and also, very commonly, a private or natural person as distinguished from a partnership, corporation, or association; but it is said that this restrictive signification is not necessarily inherent in the word, and that it may, in proper cases, include artificial persons.
As an adjective, 'individual' means pertaining or belonging to, or characteristic of, one single person, either in opposition to a firm, association, or corporation, or considered in his relation thereto.
Black's Law Dictionary 773 (6th ed. 1990) (emphasis added). The above definition of "individual" supports the conclusion that the term usually pertains to natural persons (i.e., a human beings) rather than artificial entities such as corporations or LLCs.
Additional support for the conclusion that the Head of Family exemption in RCW 84.36.110(2) applies only to natural persons is found in RCW 84.36.120, which states:
For the purposes of RCW 84.36.110, 'head of a family' shall be construed to include a surviving spouse not remarried, any person receiving an old age pension under the laws of this state and any citizen of the United States, over the age of sixty-five years, who has resided in the state of Washington continuously for ten years.
The context of RCW 84.36.120 indicates that the term "head of a family" refers to natural persons, as an LLC or other artificial entity cannot be a surviving spouse and, presumably, cannot receive an old age pension.
Interpreting the head of a family exemption as not applying to LLCs and other artificial entities is in keeping with the rule of statutory construction that "an exemption in a taxing statute is to be construed strictly against the claim of exemption." Yakima First Baptist Homes, Inc. v. Gray, 82 Wn.2d 295, 299, 510 P.2d 243 (1973).
Finally, the conclusion that the Head of Family exemption does not apply to LLCs is consistent with the Department's long standing position, expressed in a Tax Commission Ruling dated March 8, 1935, that the exemption does not apply to a business that is a separate and distinct legal entity from the individual or individuals who own the business. In that ruling, the Tax Commission, based on an Attorney General Opinion, noted that the head of a family exemption did not apply to partnership property because a partnership, unlike a sole proprietorship, is a separate and distinct legal entity for taxing purposes from the individual partners who compose the partnership. An LLC is likewise a separate and distinct legal entity for state tax purposes from the individual member or members who compose the LLC.