Date of Adoption: May 28, 1999.

Purpose: WAC 458-20-135, explains the tax reporting responsibilities of extractors. WAC 458-20-136, explains the tax reporting responsibilities of manufacturers and processors for hire. WAC 458-20-13601, explains the application of the retail sales and use tax exemptions provided by RCW 82.08.02565 and 82.12.02565 for certain machinery and equipment used by manufacturers and processors for hire.

Citation of Existing Rules Affected by this Order: Amending WAC 458-20-135 Extracting natural products and 458-20-136 Manufacturing, processing for hire, fabricating.

Statutory Authority for Adoption: RCW 82.32.300.

Under RCW 34.05.350 the agency for good cause finds that immediate adoption, amendment, or repeal of a rule is necessary for the preservation of the public health, safety, or general welfare, and that observing the time requirements of notice and opportunity to comment upon adoption of a permanent rule would be contrary to the public interest.

Reasons for this Finding: These rules are necessary to implement the manufacturing machinery and equipment sales and use tax exemption, as amended by chapter 211, Laws of 1999. Some of the legislative changes, which provided clarification of the exemption, were retroactive to 1995. Taxpayers have a limited time to file refund claims and will suffer financial hardships if not provided sufficient information to determine if they are eligible for refunds as well as the exemption itself. There is insufficient time to adopt a permanent rule before the statute of limitations runs out at the end of 1999. Adoption of these rules will provide immediate information to taxpayers, tax practitioners, and department staff to use in determining the taxability of specific machinery and equipment.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 1, Amended 2, Repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

Number of Sections Adopted on the Agency's Own Initiative: New 1, Amended 2, Repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 0, Repealed 0. Effective Date of Rule: Immediately.

May 28, 1999

Claire Hesselholt

Rules Manager

((The word "'extractor' means)) (1) Introduction. This rule explains the application of the business and occupation (B&O), retail sales, and use taxes to persons extracting natural products. Many persons extracting natural products also use the same extracted products in a manufacturing process. This rule provides guidance for determining when an extracting activity ends and the manufacturing activity begins. Persons engaged in a manufacturing activity should also refer to WAC 458-20-136 (Manufacturing, processing for hire, fabricating) and 458-20-13601 (Manufacturers and processors for hire--Sales and use tax exemptions for machinery and equipment).

In addition to all other taxes, harvesters of timber may be subject to the forest excise tax levied by chapter 84.33 RCW (Timber and Forest Lands). Chapter 458-40 WAC (Taxation of Forest Land and Timber) provides important tax-reporting information regarding the forest tax program.

(2) Extracting activities. RCW 82.04.100 defines the term "extractor" to mean every person who, from the person's own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, for sale or for commercial or industrial use mines, quarries, takes or produces coal, oil, natural gas, ore, stone, sand, gravel, clay, mineral or other natural resource product((, or)). The term includes a person who similarly fells, cuts or takes timber, Christmas trees other than plantation Christmas trees, or other natural products((, or)). It also includes any person who takes fish((, or takes, cultivates, or raises)) shellfish, or other sea or inland water foods or products.

(('Extractor')) (a) The term "extractor" does not include:

(i) Persons performing under contract the necessary labor or mechanical services for others ((or));

(ii) Persons cultivating or raising fish entirely within confined rearing areas on the person's own land or on land in which the person has a present right of possession((." (RCW 82.04.100.)

The following examples are illustrative of operations which are included within the extractive activity:

(1))) (iii) Persons who fell, cut, or take plantation Christmas trees from the person's own land or from land in which the person has a present right of possession; or

(iv) Persons cultivating or raising shellfish or any other cultural aquatic product as defined in RCW 15.85.020 on the person's own land or on land in which the person has a present right of possession. This exclusion from the definition of "extractor" is because these persons qualify as farmers under RCW 82.04.213.

(b) An extractor may subsequently take an extracted product and use it as a raw material in a manufacturing process. The following examples explain when an extracting process ends and a manufacturing process begins for various situations. These examples should be used only as a general guide. Similar determinations for other situations can be made only after a review of all of the facts and circumstances.

(i) Logging operations, including the ((bucking, yarding, and loading of timber or logs after felling, as well as the)) actual cutting or severance of trees are extracting activities.  ((It)) Extracting includes other activities necessary and incidental to logging, such as logging road construction or maintenance, slash burning, slashing, scarification, stream cleaning or rebuilding, miscellaneous cleaning, and trail work, where such activities are performed pursuant to a timber harvest operation((: Provided, That persons performing such activities must identify in their business records the timber harvest operation of which their work is a part)). As a general rule, the extracting activity ends once the tree is felled, cut, or taken. The subsequent activity of cutting, delimbing, and measuring with respect to the felled, cut, or taken trees is a manufacturing activity. (See WAC 458-20-136 on manufacturing.).

(((2))) (ii) Mining and quarrying operations are extracting activities, including the ((activities incidental to the preparation of the products for market, such as screening, sorting, washing, crushing, etc.))

The crushing and/or blending of rock, sand, stone, or gravel are not extracting activities. These are manufacturing activities. (See WAC 458-20-136 on manufacturing.) Likewise, any screening, sorting, piling, or washing of the material, when the activity takes place in conjunction with crushing or blending, is considered a part of the manufacturing activity if it takes place after the first screen. If there is no separate first screen, only those activities subsequent to the materials being deposited into the screen are considered manufacturing activities.

(((3))) (iii) Fishing operations, including the taking of any fish, or the taking, cultivating, or raising of shellfish, or other sea or inland water foods or products (whether on publicly or privately owned beds, and whether planted and cultivated or not) ((for sale or commercial use.  It)) in an extracting activity. Extracting includes the removal of the meat from the shell((, and the cleaning and icing of fish or sea products by the person catching or taking them.  It does not include cultivating or raising fish entirely within confined rearing areas under RCW 82.04.100)). The filleting or steaking of fish are manufacturing activities. (See WAC 458-20-136 on manufacturing.)

Extracting-interstate or foreign sales. Persons who extract products in this state and sell the same in interstate or foreign commerce are taxable under the classification extracting upon the value of the products so sold, and are not taxable under retailing or wholesaling-all others in respect to such sales. (See also WAC 458-20-193.)

Extracting-for commercial use. Persons who extract products in this state and use the same as raw materials or ingredients of articles which they manufacture for sale are not taxable under extracting.  (For tax liability of such persons on the sale of manufactured products see WAC 458-20-136, manufacturing, processing for hire, fabricating.)

Persons who extract products in this state for any other commercial or industrial use are taxable under extracting on the value of products extracted and so used. (See WAC 458-20-134 for definition of commercial or industrial use.)

Extracting for others.)) (3) Tax-reporting responsibilities of persons extracting natural products. Persons who extract products in this state are subject to the extracting B&O tax upon the value of the products, unless otherwise provided by law. Extractors who sell the products at retail or wholesale in this state are subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases, the extractor must report under both the "production" (extracting) and "selling" (wholesaling or retailing) classifications of the B&O tax, and claim a tax credit under the multiple activities tax credit (MATC) system. See also WAC 458-20-19301 (Multiple activities tax credits) for a more detailed explanation of the MATC reporting requirements.

(a) An extractor making retail sales must collect and remit retail sales tax on all sales to consumers, unless the sale is exempt by law (e.g., see WAC 458-20-244 regarding sales of certain food products). Extractors making wholesale sales must obtain resale certificates from their customers to document the wholesale nature of any transaction. (Refer to WAC 458-20-102 on resale certificates.)

(b) Persons performing under contract, either as prime or subcontractors, the necessary labor or mechanical services for ((others who are engaged in the business as)) extractors, are ((taxable under the extracting for hire classification of the business and occupation)) subject to the extracting for hire B&O tax upon their gross income from ((such)) the labor or services.  ((If the contract includes the hauling of the products extracted over public roads, such persons are also taxable under the motor transportation classification of the public utility tax upon that portion of their gross income properly attributable to such hauling.  However, the hauling for hire of logs or other forest products exclusively upon private roads is taxable under the service classification of the business and occupation tax upon the gross income received from such hauling.  (See WAC 458-20-180.))) Persons performing the necessary labor or mechanical services for manufacturers are subject to the processing for hire B&O tax. (See also WAC 458-20-136.)

(e) Persons constructing or maintaining logging roads pursuant to timber harvest operations are subject to use tax on all materials used in such construction, except for materials on which sales tax was paid at the time of purchase)) considered consumers of all materials incorporated into the logging roads. Their purchase and/or use of these materials is subject to either the retail sales or use tax.

[Statutory Authority: RCW 82.32.300.  86-09-058 (Order ET 86-7), § 458-20-135, filed 4/17/86; 83-07-034 (Order ET 83-17), § 458-20-135, filed 3/15/83.  Statutory Authority: RCW 82.01.060(2) and 82.32.300.  78-07-045 (Order ET 78-4), § 458-20-135, filed 6/27/78; Order ET 70-3, § 458-20-135 (Rule 135), filed 5/29/70, effective 7/1/70.]

Reviser's note: The bracketed material preceding the section above was supplied by the code reviser's office.
AMENDATORY SECTION(Amending Order 88-7, filed 10/7/88)

WAC 458-20-136
Manufacturing, processing for hire, fabricating.

(1) Introduction. This rule explains the application of the business and occupation (B&O), retail sales, and use taxes to manufacturers. It identifies the special tax classifications and rates that apply to specific manufacturing activities. The law provides a retail sales and use tax exemption for certain machinery and equipment used by manufacturers. Refer to RCW 82.08.02565, 82.12.02565, and WAC 458-20-13601 (Manufacturers and processors for hire - Sales and use tax exemption for machinery and equipment) for more information regarding this exemption. Persons engaging in both extracting and manufacturing activities should also refer to WAC 458-20-135 (Extracting natural products.)

(2) Definitions.  "The term 'to manufacture' embraces all activities of a commercial or industrial nature wherein labor or skill is applied, by hand or machinery, to materials so that as a result thereof a new, different or useful substance or article of tangible personal property is produced for sale or commercial or industrial use, and shall include the production or fabrication of special made or custom made articles." (RCW 82.04.120.) It means the business of producing articles for sale, or for commercial or industrial use from raw materials or prepared materials by giving these matters new forms, qualities, properties, or combinations.  It includes such activities as making, fabricating, processing, refining, mixing, slaughtering, packing, curing, aging, canning, etc.  It includes also the preparing, packaging and freezing of fresh fruits, vegetables, fish, meats and other food products, the making of custom made suits, dresses, coats, awnings, blinds, boats, curtains, draperies, rugs, and tanks, and other articles constructed or made to order, and the curing of animal hides and food products.

(((2))) The term "to manufacture" also includes:

(a) The production or fabrication of dental appliances, devices, restorations, substitutes, or other dental laboratory products by a dental laboratory or dental technician, effective October 1, 1998 (chapter 168, Laws of 1998);

(b) The cutting, delimbing, and measuring of felled, cut, or taken trees, effective July 1, 1995 (chapter 211, Laws of 1999, and chapter 3, Laws of 1995 1st sp.s.);

(c) The crushing and/or blending of rock, sand, stone, gravel, or ore, effective July 1, 1995 (chapter 211, Laws of 1999, and chapter 3, Laws of 1995 1st sp.s.); and

(d) The cleaning of fish. The manufacturing B&O tax does not apply, however, if the cleaning activities are limited to the removal of the head, fins, or viscera from fresh fish without further processing, other than freezing. RCW 82.04.2403.

(3) The word "manufacturer" means every person who, from the person's own materials or ingredients manufactures for sale, or for commercial or industrial use any articles, substance or commodity either directly, or by contracting with others for the necessary labor or mechanical services.

(((3))) However, a nonresident of the state of Washington who owns materials processed for hire in this state is not deemed to be a manufacturer because of such processing. Further, any owner of materials from which a nuclear fuel assembly is fabricated in this state by a processor for hire is also not deemed to be a manufacturer because of such processing.

(4) The term "to manufacture" does not include:

(a) The conditioning of seed for use in planting ((or activities which consist of));

(b) The cubing of hay or alfalfa;

(c) The growing, harvesting, or production of agricultural products;

(d) The cutting, grading, or ice glazing of seafood which has been cooked, frozen, or canned outside this state; ((the mere cleaning and freezing of whole fish;)) or

(e) The repairing and reconditioning of tangible personal property for others.

(5) The term "processing for hire" means the performance of labor and mechanical services upon materials belonging to others so that as a result a new, different or useful article of tangible personal property is produced for sale or commercial or industrial use.  Thus, a processor for hire is any person who would be a manufacturer if that person were performing the labor and mechanical services upon that person's own materials.

(6) Persons who both manufacture and sell those products in this state must report their gross receipts under both the manufacturing and retailing or wholesaling classifications.  A credit may then be taken against the selling tax in the amount of the manufacturing tax reported.  (See also WAC 458-20-19301.)

(7) Manufacturing--interstate or foreign sales.  Persons who manufacture products in this state and sell the same in interstate or foreign commerce are taxable under the classification manufacturing upon the value of the products so sold, and are not taxable under retailing or wholesaling-all others in respect to such sales.  (See also WAC 458-20-193((A)).) A credit may be applicable if a gross receipts tax is paid on the selling activity to another state.  (See also WAC 458-20-19301.)

(8) Business and occupation tax--hops.  The business and occupation tax shall not apply to amounts received by hop growers or dealers for hops which are shipped outside the state of Washington for first use, if those hops have been processed into extract, pellets, or powder in this state.  Amounts charged by a processor or warehouser for processing or warehousing, however, are not exempt.

(9) Manufacturing--special classifications.  ((The law)) RCW 82.04.260 provides several special classifications and rates for activities which constitute "manufacturing" ((as defined in this rule)) under RCW 82.04.120. In all such cases the principles set forth in subsections (6) and (7) of this rule concerning multiple tax classifications and credit provisions are also applicable.  These special classifications and rates include

(a) Manufacturing wheat into flour, barley into pearl barley, soybeans into soybean oil, or sunflower seeds into sunflower oil (((RCW 82.04.260(2))));

(b) Splitting or processing dried peas (((RCW 82.04.260(3))));

(c) Manufacturing seafood products which remain in a raw, raw frozen, or raw salted state (((RCW 82.04.260(4))));

(d) Manufacturing by canning, preserving, freezing, processing, or dehydrating fresh fruits and vegetables (((RCW 82.04.260(5)))); and

(e) Manufacturing nuclear fuel assemblies (((RCW 82.04.260(9)).  In all such cases the principles set forth in subsections (6) and (7) of this section concerning multiple tax classifications and credit provisions are also applicable)).

(10) The special classification and rate provided by RCW 82.04.260 for slaughtering, breaking and/or processing perishable meat products and/or selling the same at wholesale (((RCW 82.04.260(7)))) combines manufacturing and nonmanufacturing activities into a single taxable business activity.  For persons who break, slaughter, and/or process meat products for others, the statutory classification and rate are applicable to the value of products so processed and delivered to customers within this state and to interstate or foreign customers.  The mere wholesale selling of perishable meat products not manufactured by the vendor is subject to the statutory classification and rate only upon gross receipts from sales within this state.  Interstate or foreign sales are deductible from gross proceeds of sales.  (See WAC 458-20-193((A)).)

(11) Manufacturing for commercial use.  Persons who manufacture products in this state for their own commercial or industrial use are taxable under the classification manufacturing on the value of the products so manufactured and used.  (See WAC 458-20-134 for definition of commercial or industrial use.)

(12) Processing for hire.  Persons processing for hire for consumers or for persons other than consumers are taxable under the processing for hire classification upon the total charge made therefor.

(13) Materials furnished in part by customer.  In some instances, the persons furnishing the labor and mechanical services undertakes to produce a new article, substance, or commodity from materials or ingredients furnished in part by them and in part by the customer.  In such instances, tax liability is as follows:

(a) The persons furnishing the labor and mechanical services will be presumed to be the manufacturer if the value of the materials or ingredients furnished by them is equal to or exceeds 20% of the total value of all materials or ingredients which become a part of the finished product.

(b) If the person furnishing the labor and mechanical services furnishes materials constituting less than 20% of the value of all of the materials which become a part of the finished product, such person will be presumed to be processing for hire.  The person for whom the work is performed is the manufacturer in that situation, and will be taxable as such.

(c) In cases where the person furnishing the labor and mechanical services supplies, sells, or furnishes to the customer, before processing, 20% or more in value of the materials from which the finished product is made, the person furnishing the labor and mechanical services will be deemed to be the owner of the materials and taxable as a manufacturer.

(14) Retail sales and use taxes.  Persons taxable as engaging in the business of manufacturing and selling at retail any of the products manufactured and persons manufacturing, fabricating, or processing for hire tangible personal property for consumers shall collect the retail sales tax upon the total charge made to their customers.

(((15))) (a) RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for certain machinery and equipment used by processors for hire and manufacturers. (See also WAC 458-20-13601.)

(b) Sales to processors for hire and to manufacturers of other articles of tangible personal property which do not become an ingredient or component part of a new article produced, or are not chemicals used in processing the same, are retail sales, and the retail sales tax must be collected thereon.  (However, see WAC 458-20-113 and 458-20-134 for certain express exemptions.) If the seller fails to collect the appropriate retail sales tax, the buyer is required to remit the retail sales tax (commonly referred to as "deferred retail sales tax”) or use tax directly to the department.

(((16) Use tax.)) (c) Manufacturers are taxable under the use tax upon the use of articles manufactured by them for their own use in this state unless a specific exemption applies.  (See WAC 458-20-113 ((and)), 458-20-134, and 458-20-13601 for certain express exemptions.)

(((17))) (d) See WAC 458-20-244 for sales and use tax on food products.

[Statutory Authority: RCW 82.32.300.  88-21-014 (Order 88-7), § 458-20-136, filed 10/7/88; 86-20-027 (Order 86-17), § 458-20-136, filed 9/23/86; 83-07-032 (Order ET 83-15), § 458-20-136, filed 3/15/83.  Statutory Authority: RCW 82.01.060(2) and 82.32.300.  78-07-045 (Order ET 78-4), § 458-20-136, filed 6/27/78; Order ET 71-1, § 458-20-136, filed 7/22/71; Order ET 70-3, § 458-20-136 (Rule 136), filed 5/29/70, effective 7/1/70.]

(1) Introduction. This rule explains the retail sales and use tax exemption provided by RCW 82.08.02565 and 82.12.02565 for sales to or use by manufacturers or processors for hire of machinery and equipment used directly in a manufacturing operation or research and development operation. This rule explains the requirements that must be met to substantiate a claim of exemption. For information regarding the distressed area sales and use tax deferral refer to WAC 458-20-24001 and chapter 82.60 RCW. For the high technology business sales and use tax deferral refer to chapter 82.63 RCW.

On and after July 25, 1999, a person engaged in testing for manufacturers or processors for hire is eligible to take the exemption, subject to the requirements explained below.

(2) Legislative history. The manufacturing machinery and equipment exemption, codified as RCW 82.08.02565 and RCW 82.12.02565, became effective July 1, 1995. The exemption has since been the subject of a number of changes: See 1995 1st sp.s. c 3, 1996 c 173, 1996 c 247, 1998, c 330, and 1999 c 211.

(a) In 1996, the exemption was extended to include charges for repairing, cleaning, altering, or improving the machinery and equipment. The same act also revised the definition of "machinery and equipment" to include tangible personal property that becomes an ingredient or component of the machinery and equipment, including repair and replacement parts. A second act extended the exemption to research and development engaged in by manufacturers or processors for hire. Both acts took effect June 6, 1996.

(b) In 1998, the duplicate certificate and annual reporting requirement were eliminated, effective June 11, 1998.

(c) In 1999, the 1995 legislation was clarified retroactively by ESHB 1887, chapter 211, laws of 1999, to include certain logging and mining activities, segmented manufacturing, and off-site testing by manufacturers, and to explain that hand-powered tools were excluded. As of July 25, 1999, the exemption is extended on a prospective basis to persons who perform third party testing for manufacturers or processors for hire.

(3) Definitions. For purposes of the manufacturing machinery and equipment tax exemption the following definitions will apply.

(a) "Cogeneration" means the simultaneous generation of electrical energy and low-grade heat from the same fuel.

(b) "Device" means an item that is not attached to the building or site. Examples of devices are: Forklifts, chainsaws, air compressors, clamps, free standing shelving, software, ladders, wheelbarrows, and pulleys.

(c) "Industrial fixture" means an item attached to a building or to land. Fixtures become part of the real estate to which they are attached and upon attachment are classified as real property, not personal property. Examples of "industrial fixtures" are fuel oil lines, boilers, craneways, and certain concrete slabs.

(d) "Manufacturer" has the same meaning as provided in chapter 82.04 RCW.

(e) "Manufacturing operation" means the manufacturing of articles, substances, or commodities for sale as tangible personal property. A manufacturing operation begins at the point where the raw materials enter the manufacturing site and ends at the point where the processed material leaves the manufacturing site. The operation includes storage of raw materials at the site, the storage of in-process materials at the site, and the storage of the processed material at the site. The term also includes that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site of which the cogeneration project is an integral part. The term does not include the production of electricity by a light and power business as defined in RCW 82.16.010 or the preparation of food products on the premises of a person selling food products at retail.

(i) Neither duration or temporary nature of the manufacturing activity nor mobility of the equipment determine whether a manufacturing operation exists. For example, operations using portable saw mills or rock crushing equipment are considered "manufacturing operations."

(ii) Manufacturing tangible personal property for sale can occur in stages, taking place at more than one manufacturing site. For example, if a taxpayer processes pulp from wood at one site, and transfers the resulting pulp to another site that further manufactures the product into paper, two separate manufacturing operations exist. The end product of the manufacturing activity must result in a article, substance, or commodity for sale.

(f) "Machinery and equipment" means industrial fixtures, devices, and support facilities, and tangible personal property that becomes an ingredient or component thereof, including repair parts and replacement parts. "Machinery and equipment" includes pollution control equipment installed and used in a manufacturing operation or research and development operation to prevent air pollution, water pollution, or contamination that might otherwise result from the manufacturing operation or research and development operation. "M&E" means "machinery and equipment."

(g) "Processor for hire" has the same meaning as used in chapter 82.04 RCW and as explained in WAC 458-20-136.

(h) "Qualifying operation" means a manufacturing operation, a research and development operation, or, as of July 25, 1999, a testing operation.

(i) "Research and development operation" means engaging in research and development as defined in RCW 82.63.010 by a manufacturer or processor for hire. RCW 82.63.010 defines "research and development" to mean: Activities performed to discover technological information, and technical and nonroutine activities concerned with translating technological information into new or improved products, processes, techniques, formulas, inventions, or software. The term includes exploration of a new use for an existing drug, device, or biological product if the new use requires separate licensing by the federal food and drug administration under chapter 21, C.F.R., as amended. The term does not include adaptation or duplication of existing products where the products are not substantially improved by application of the technology, nor does the term include surveys and studies, social science and humanities research, market research or testing, quality control, sale promotion and service, computer software developed for internal use, and research in areas such as improved style, taste, and seasonal design.

(j) "Sale" has the same meaning as "sale" in chapter 82.08 RCW, which includes by reference RCW 82.04.040. RCW 82.04.040 includes by reference the definition of "retail sale" in RCW 82.04.050. "Sale" includes renting or leasing, conditional sale contracts, leases with option to purchase, and any contract under which possession of the property is given to the purchaser but title is retained by the vendor as security for the payment of the purchase price.

(k) "Support facility" means a part of a building or a structure or improvement, used to contain or steady an industrial fixture or device. A support facility must be specially designed and necessary for the proper functioning of the industrial fixture or device and must perform a function beyond being a building or a structure or an improvement. It must have a function relative to an industrial fixture or a device. To determine if some portion of a building is a support facility the parts of the building are examined. For example, a highly specialized structure, like a vibration reduction slab under a microchip clean room, is a support facility. Without the slab, the delicate instruments in the clean room would not function properly. The ceiling and walls of the clean room are not support facilities if they only serve to define the space and do not have a function relative to an industrial fixture or a device.

(l) "Tangible personal property" has its ordinary meaning.

(m) "Testing" means activities performed to establish or determine the properties, qualities, and limitations of tangible personal property.

(n) "Testing operation" means the testing of tangible personal property for a manufacturer or processor for hire. A testing operation begins at the point where the tangible personal property enters the testing site and ends at the point where the tangible personal property leaves the testing site. The term also includes that portion of a cogeneration project that is used to generate power for consumption within the site of which the cogeneration project is an integral part. The term does not include the production of electricity by a light and power business as defined in RCW 82.16.010 or the preparation of food products on the premises of a person selling food products at retail.

(4) Sales and use tax exemption. The M&E exemption provides a retail sales and use tax exemption for machinery and equipment used directly in a manufacturing operation or research and development operation, or to sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving the machinery and equipment. On and after July 25, 1999, the exemption may be taken for qualifying machinery and equipment used directly in a testing operation by a person engaged in testing for a manufacturer or processor for hire.

Sellers remain subject to the retailing B&O tax on all sales of machinery and equipment to consumers if delivery is made within the state of Washington, notwithstanding that the sale may qualify for an exemption from the retail sales tax.

(a) Sales tax. The purchaser must provide the seller with an exemption certificate. The exemption certificate must be completed in its entirety. The seller must retain a copy of the certificate as a part of its records. This certificate may be issued for each purchase or in blanket form certifying all future purchases as being exempt from sales tax. Blanket forms must be renewed every four years.

The form must contain the following information:

(i) Name, address, and registration number of the buyer;

(ii) Name of the seller;

(iii) Name and title of the authorized agent of the buyer/user;

(iv) Authorized signature;

(v) Date; and

(vi) Whether the form is a single use or blanket-use form.

You may obtain a copy of a M&E certificate form from the Department of Revenue on the Internet at http://www.dor.wa.gov/, under "Other forms and schedules" or by contacting the Department's Taxpayer Services Division at: Department of Revenue, Taxpayer Services, P.O. Box 47478, Olympia, WA 98504-7478.

(b) Use tax. The use tax complements the retail sales tax by imposing a tax of like amount upon the use within this state as a consumer of any tangible personal property purchased at retail, where the user has not paid retail sales tax with respect to the purchase of the property used. (See also RCW 82.12 RCW and WAC 458-20-178.) If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the retail sales tax (commonly referred to as deferred sales tax) or use tax directly to the department unless the purchase and/or use is exempt from the retail sales and/or use tax. A qualifying person using eligible machinery and equipment in Washington is exempt from the use tax.

(5) Who may take the exemption. The exemption may be taken by a manufacturer or processor for hire who manufactures articles, substances, or commodities, for sale as tangible personal property. The exemption is for M&E used directly in a manufacturing operation or research and development operation. A processor for hire who does not sell tangible personal property is eligible for the exemption if the processor for hire manufactures articles, substances, or commodities that will be sold by the manufacturer. See WAC 458-20-136 and RCW 82.04.110 for more information. On and after July 25th, 1999, persons who engage in testing for manufacturers or processors for hire are eligible for the exemption.

(6) What is eligible for the exemption. Machinery and equipment used directly in a qualifying operation by a qualifying person is eligible for the exemption. See subsection (9) for a discussion of the "used directly" criteria.

There are three classes of eligible machinery and equipment: industrial fixtures; devices; and support facilities. Also eligible is tangible personal property that becomes an ingredient or component of the machinery and equipment, including repair parts and replacement parts. "Machinery and equipment" also includes pollution control equipment installed and used in a manufacturing operation, testing operation, or research and development operation to prevent air pollution, water pollution, or contamination that might otherwise result from the manufacturing operation, testing operation, or research and development operation.

(7) What is not eligible for the exemption. In addition to items that are not eligible because they do not meet the used directly test, there are four categories of items that are statutorily excluded from eligibility, regardless of whether they are used directly in a qualifying operation. The following property is not eligible for the M&E exemption:

(a) Hand-powered tools. Screw drivers, hammers, and wrenches are examples of hand-powered tools. Electric, including cordless-powered tools, are not hand-powered tools.

(b) Property with a useful life of less than one year. All eligible machinery and equipment must satisfy the useful life criteria, including repair parts and replacement parts. For example, items such as blades and bits are generally not eligible for the exemption because while they may become component parts of eligible machinery and equipment they generally have a useful life of less than one year. Blades generally having a useful life of more than one year, such as certain sawmill blades, are eligible. See subsection (8) for thresholds to determine useful life.

(c) Buildings, other than machinery and equipment that is permanently affixed to or becomes a physical part of a building. Buildings provide work space for people or shelter machinery and equipment. The building itself is not eligible for the exemption but the industrial fixtures and support facilities that become affixed to or part of the building might be eligible. The subsequent real property status of industrial fixtures does not affect eligibility for the exemption.

(d) Building fixtures that are not integral to the manufacturing operation, testing operation, or research and development operation that are permanently affixed to and become a physical part of a building, such as utility systems for heating, ventilation, air conditioning, communications, plumbing, or electrical. Examples of nonqualifying fixtures are: fire sprinklers, building electrical systems, or washroom fixtures.

(8) The "useful life" threshold. The following steps should be used in making a determination whether an item meets the "useful life" threshold. The series of questions progress from simple documentation to complex documentation. In order to substantiate qualification under any step, a taxpayer must maintain adequate records. Tangible personal property that is acquired for a one-time use does not qualify for the M&E exemption, e.g. a mold or form that is discarded upon use. Catastrophic loss, damage, or destruction of an item does not affect eligibility of machinery and equipment that otherwise qualifies. Assuming the machinery and equipment meets all of the other M&E requirements, the useful life criteria can be determined by answering the following questions for each individual piece of machinery and equipment:

(a) Is the machinery and equipment eligible to be and actually capitalized for either federal tax purposes or accounting purposes?

- If the answer is "yes," it qualifies for the exemption.

- If the answer is "no,"

(b) Is the machinery and equipment warranted by the manufacturer to last at least one year?

- If the answer is "yes," it qualifies for the exemption.

- If the answer is "no,"

(c) Is the machinery and equipment normally replaced at intervals of one year or more, as established by industry or business practice? (This is commonly based on the actual experience of the person claiming the exemption.)

- If the answer is "yes," it qualifies for the exemption.

- If the answer is "no,"

(d) Is the machinery and equipment expected at the time of purchase to last at least one year, as established by industry or business practice? (This is commonly based on the actual experience of the person claiming the exemption.)

-If the answer is yes," it qualifies for the exemption.

-If the answer is "no," it does not qualify for the exemption.

(9) The "used directly" criteria. Items that are not used directly in a qualifying operation are not eligible for the exemption. The statute provides eight descriptions of the phrase "used directly." The manner in which a person uses an item of machinery and equipment must match one or more of these descriptions. If M&E is not "used directly" it is not eligible for the exemption. Examples of items that are not used directly in a qualifying operation are cafeteria furniture, safety equipment not a part or component of an eligible item of machinery and equipment, packaging materials, shipping materials, or administrative equipment. Machinery and equipment is "used directly" in a manufacturing operation, testing operation, or research and development operation, if the machinery and equipment meets any one of the following criteria:

(a) Acts upon or interacts with an item of tangible personal property. Examples of this are drill presses, cement mixers (agitators), ready-mix concrete trucks, hot steel rolling machines, rock crushers, and band saws. Also included is machinery and equipment used to repair, maintain, or install tangible personal property. Computers qualify under this criteria if: (i) they direct or control machinery or equipment that acts upon or interacts with tangible personal property or (ii) if they act upon or interact with an item of tangible personal property.

(b) Conveys, transports, handles, or temporarily stores an item of tangible personal property at the manufacturing site or the testing site. Examples of this are wheelbarrows, handcarts, storage racks, forklifts, tanks, vats, robotic arms, piping, and concrete storage pads. Floor space in buildings does not qualify under this criteria. Not eligible under this criteria are items that are used to ship the product or in which the product is packaged, as well as materials used to brace or support an item during transport.

(c) Controls, guides, measures, verifies, aligns, regulates, or tests tangible personal property at the site or away from the site. Examples of "away from the site" are road testing of trucks, air testing of planes, or water testing of boats, with the machinery and equipment used off site in the testing eligible under this criteria. Machinery and equipment used to take readings or measurements, such as devices that take readings or probe with sensors, is eligible under this criteria.

(d) Provides physical support for or access to tangible personal property. Examples of this are catwalks adjacent to production equipment, scaffolding around tanks, braces under vats, and ladders near controls. Machinery and equipment used for access to the building or to provide a work space for people or a space for tangible personal property or machinery and equipment, such as stairways, is not eligible under this criteria.

(e) Produces power for, or lubricates machinery and equipment. A generator providing power to a sander is an example of machinery and equipment that produces power for machinery and equipment. An electrical generating plant that provides power for a building is not eligible under this criteria. Lubricating devices such as hoses, oil guns, pumps, and meters, whether or not attached to machinery and equipment, are eligible under this criteria.

(f) Produces another item of tangible personal property for use in the manufacturing operation, testing operation, or research and development operation. Machinery and equipment that makes dies, jigs, or molds, and printers that produce camera ready images are examples of this.

(g) Places tangible personal property in the container, package, or wrapping in which the tangible personal property is normally sold or transported; or

(h) Is integral to research and development as defined in RCW 82.63.010. There is no requirement that the research and development operation produce tangible personal property for sale.

[]

© Washington State Code Reviser's Office