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Chapter 458-20 WAC

Last Update: 10/17/24

EXCISE TAX RULES

WAC Sections

HTMLPDF458-20-100Informal administrative reviews.
HTMLPDF458-20-10001Adjudicative proceedings—Brief adjudicative proceedings—Certificate of registration (tax registration endorsement) revocation.
HTMLPDF458-20-10002Adjudicative proceedings—Formal adjudicative proceedings—Log export enforcement actions pursuant to chapter 240-15 WAC—Orders to county officials issued to pursuant to RCW 84.08.120 and 84.41.120—Converted brief adjudicative proceedings.
HTMLPDF458-20-10003Brief adjudicative proceedings for matters related to suspension, nonrenewal, and nonissuance of licenses to sell spirits.
HTMLPDF458-20-10004Brief adjudicative proceedings for matters related to assessments and warrants for unpaid fees issued under chapter 59.30 RCW for manufactured and mobile home communities.
HTMLPDF458-20-10005Written determinations as precedents—Criteria for publication.
HTMLPDF458-20-101Tax registration and tax reporting.
HTMLPDF458-20-102Reseller permits.
HTMLPDF458-20-10201Application process and eligibility requirements for reseller permits.
HTMLPDF458-20-10202Brief adjudicative proceedings for matters related to reseller permits.
HTMLPDF458-20-102AResale certificates.
HTMLPDF458-20-103Gift certificates—Sale deemed to occur and retail sales tax collected at time of redemption.
HTMLPDF458-20-104Small business tax relief based on income of business.
HTMLPDF458-20-105Employees distinguished from persons engaging in and operating a business.
HTMLPDF458-20-106Casual or isolated sales—Business reorganizations.
HTMLPDF458-20-107Requirement to separately state sales tax—Advertised prices including sales tax.
HTMLPDF458-20-108Selling price—Credit card service fees, foreign currency, discounts, patronage dividends.
HTMLPDF458-20-109Finance charges, carrying charges, interest, penalties.
HTMLPDF458-20-110Delivery charges.
HTMLPDF458-20-111Advances and reimbursements.
HTMLPDF458-20-112Value of products.
HTMLPDF458-20-113Ingredients or components, chemicals used in processing new articles for sale.
HTMLPDF458-20-115Sales of packing materials and containers.
HTMLPDF458-20-116Sales and/or use of labels, name plates, tags, premiums, and advertising material.
HTMLPDF458-20-117Sales and/or use of dunnage.
HTMLPDF458-20-118Sale or rental of real estate, license to use real estate.
HTMLPDF458-20-119Sales by caterers and food service contractors.
HTMLPDF458-20-120Sales of ice.
HTMLPDF458-20-121Sales of heat or steam—Including production by cogeneration.
HTMLPDF458-20-124Restaurants, cocktail bars, taverns and similar businesses.
HTMLPDF458-20-12401Special stadium sales and use tax.
HTMLPDF458-20-126Sales of motor vehicle fuel, special fuel, and nonpolluting fuel.
HTMLPDF458-20-127Sales of newspapers, magazines and periodicals.
HTMLPDF458-20-128Real estate brokers and salesmen.
HTMLPDF458-20-129Gasoline service stations.
HTMLPDF458-20-131Gambling activities.
HTMLPDF458-20-132Automobile dealers/demonstrator and executive vehicles.
HTMLPDF458-20-133Frozen food lockers.
HTMLPDF458-20-134Commercial or industrial use.
HTMLPDF458-20-135Extracting natural products.
HTMLPDF458-20-13501Timber harvest operations.
HTMLPDF458-20-136Manufacturing, processing for hire, fabricating.
HTMLPDF458-20-13601Manufacturers and processors for hire—Sales and use tax exemptions for machinery and equipment.
HTMLPDF458-20-138Personal services rendered to others.
HTMLPDF458-20-139Trade shops—Printing plate makers, typesetters, and trade binderies.
HTMLPDF458-20-140Photofinishers and photographers.
HTMLPDF458-20-141Duplicating activities and mailing bureaus.
HTMLPDF458-20-142Photographic equipment and supplies.
HTMLPDF458-20-143Printers and publishers of newspapers, magazines, and periodicals.
HTMLPDF458-20-144Printing industry.
HTMLPDF458-20-145Sourcing retail sales for business and occupation tax and state and local retail sales tax—Sourcing of use tax for purchasers.
HTMLPDF458-20-146National and state banks, mutual savings banks, savings and loan associations and other financial institutions.
HTMLPDF458-20-14601Financial institutions—Income apportionment.
HTMLPDF458-20-148Barber and beauty shops.
HTMLPDF458-20-150Optometrists, ophthalmologists, and opticians.
HTMLPDF458-20-151Dentists, audiologists, and other health care providers—Dental laboratories and dental technicians.
HTMLPDF458-20-153Funeral establishments.
HTMLPDF458-20-154Cemeteries, crematories, columbaria.
HTMLPDF458-20-15501Taxation of computer systems and hardware.
HTMLPDF458-20-15502Taxation of computer software.
HTMLPDF458-20-15503Digital products.
HTMLPDF458-20-156Abstract, title insurance and escrow businesses.
HTMLPDF458-20-158Florists and nurserymen.
HTMLPDF458-20-159Consignees, bailees, factors, agents and auctioneers.
HTMLPDF458-20-160Agricultural commission agents.
HTMLPDF458-20-162Stockbrokers and security houses.
HTMLPDF458-20-163Insurance companies, including surety companies, fraternal benefit societies, fraternal fire insurance associations, beneficiary corporations or societies and Washington state health insurance pool.
HTMLPDF458-20-164Insurance producers, adjusters—Title insurance agents—Surplus line brokers.
HTMLPDF458-20-165Laundry, dry cleaning, linen and uniform supply, and self-service and coin-operated laundry services.
HTMLPDF458-20-166Hotels, motels, boarding houses, rooming houses, resorts, hostels, trailer camps, short-term rentals and similar lodging businesses.
HTMLPDF458-20-167Educational institutions, school districts, student organizations, and private schools.
HTMLPDF458-20-168Hospitals, nursing homes, assisted living facilities, adult family homes, and similar health care facilities.
HTMLPDF458-20-169Nonprofit organizations.
HTMLPDF458-20-170Constructing and repairing of new or existing buildings or other structures upon real property.
HTMLPDF458-20-17001Government contracting—Construction, installations, or improvements to government real property.
HTMLPDF458-20-171Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic.
HTMLPDF458-20-172Clearing land, moving earth, cleaning, fumigating, razing or moving existing buildings, and janitorial services.
HTMLPDF458-20-173Installing, cleaning, repairing or otherwise altering or improving personal property of consumers.
HTMLPDF458-20-174Sales of motor vehicles, trailers, and parts to motor carriers operating in interstate or foreign commerce.
HTMLPDF458-20-17401Use tax liability for motor vehicles, trailers, and parts used by motor carriers operating in interstate or foreign commerce.
HTMLPDF458-20-175Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce.
HTMLPDF458-20-176Commercial deep sea fishing—Commercial passenger fishing—Diesel fuel.
HTMLPDF458-20-177Sales of motor vehicles, campers, and trailers to nonresident consumers.
HTMLPDF458-20-178Use tax and the use of tangible personal property.
HTMLPDF458-20-17802Collection of use tax by county auditors and department of licensing—Measure of tax.
HTMLPDF458-20-17803Use tax on promotional material.
HTMLPDF458-20-179Public utility tax.
HTMLPDF458-20-17902Brokered natural gas—Use tax.
HTMLPDF458-20-180Motor carriers.
HTMLPDF458-20-181Vessels, including log patrols, tugs and barges, operating upon waters in the state of Washington.
HTMLPDF458-20-182Warehouse and other storage businesses.
HTMLPDF458-20-18201Warehouse and grain elevators and distribution centers exemption—Remittance.
HTMLPDF458-20-183Recreational services and activities.
HTMLPDF458-20-185Tax on tobacco products.
HTMLPDF458-20-186Tax on cigarettes.
HTMLPDF458-20-187Tax responsibility of vending machine owners and operators.
HTMLPDF458-20-18801Medical substances, devices, and supplies for humans—Drugs prescribed for human use—Medically prescribed oxygen—Prosthetic devices—Mobility enhancing equipment—Durable medical equipment.
HTMLPDF458-20-189Sales to and by the state of Washington and municipal corporations, including counties, cities, towns, school districts, and fire districts.
HTMLPDF458-20-190Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments.
HTMLPDF458-20-192Indians—Indian country.
HTMLPDF458-20-193Interstate sales of tangible personal property.
HTMLPDF458-20-19301Multiple activities tax credits.
HTMLPDF458-20-193CImports and exports—Sales of goods from or to persons in foreign countries.
HTMLPDF458-20-193DTransportation, communication, public utility activities, or other services in interstate or foreign commerce.
HTMLPDF458-20-194Doing business inside and outside the state.
HTMLPDF458-20-19401Minimum nexus thresholds for apportionable activities and selling activities.
HTMLPDF458-20-19402Single factor receipts apportionment—Generally.
HTMLPDF458-20-19403Apportionable royalty receipts attribution.
HTMLPDF458-20-19404Financial institutions—Income apportionment.
HTMLPDF458-20-19404AFinancial institutions—Income apportionment.
HTMLPDF458-20-195Taxes, deductibility.
HTMLPDF458-20-196Bad debts.
HTMLPDF458-20-197When tax liability arises.
HTMLPDF458-20-198Installment sales, method of reporting.
HTMLPDF458-20-199Accounting methods.
HTMLPDF458-20-200Leased departments.
HTMLPDF458-20-201Interdepartmental charges.
HTMLPDF458-20-202Pool purchases.
HTMLPDF458-20-203Corporations, Massachusetts trusts.
HTMLPDF458-20-204Outdoor advertising and advertising display services.
HTMLPDF458-20-205Sales of utility services by building companies.
HTMLPDF458-20-207Legal, arbitration, and mediation services.
HTMLPDF458-20-208Exemptions for wholesale sales of new motor vehicles between new car dealers and for accommodation sales.
HTMLPDF458-20-209Farming for hire and horticultural services performed for farmers.
HTMLPDF458-20-210Sales of tangible personal property for farming—Sales of agricultural products by farmers.
HTMLPDF458-20-211Leases or rentals of tangible personal property, bailments.
HTMLPDF458-20-214Cooperative marketing associations and independent dealers acting as agents of others with respect to the sale of fruit and produce.
HTMLPDF458-20-216Successors, quitting business.
HTMLPDF458-20-217Lien for taxes.
HTMLPDF458-20-21701Enhanced collection tools.
HTMLPDF458-20-218Advertising agencies.
HTMLPDF458-20-221Collection of use tax by retailers and selling agents.
HTMLPDF458-20-222Veterinarians.
HTMLPDF458-20-223Persons performing contracts on the basis of time and material, or cost-plus-fixed-fee.
HTMLPDF458-20-224Service and other business activities.
HTMLPDF458-20-226Landscape and horticultural services.
HTMLPDF458-20-227Subscriber television services.
HTMLPDF458-20-228Returns, payments, penalties, extensions, interest, stays of collection.
HTMLPDF458-20-22801Tax reporting frequency.
HTMLPDF458-20-22802Electronic filing and payment.
HTMLPDF458-20-229Refunds.
HTMLPDF458-20-230Statutory limitations on assessments.
HTMLPDF458-20-233Tax liability of medical and hospital service bureaus and associations and similar health care organizations.
HTMLPDF458-20-235Effect of rate changes on prior contracts and sales agreements.
HTMLPDF458-20-238Sales of watercraft to nonresidents—Use of watercraft in Washington by nonresidents.
HTMLPDF458-20-23801Watercraft excise tax—Watercraft depreciation schedule.
HTMLPDF458-20-239Sales to nonresidents of farm machinery or implements, and related services.
HTMLPDF458-20-240Manufacturer's new employee tax credits—Applications filed after June 30, 2010.
HTMLPDF458-20-24001Sales and use tax deferral—Manufacturing and research/development activities in high unemployment counties—Applications filed after June 30, 2010.
HTMLPDF458-20-24001ASales and use tax deferral—Manufacturing and research/development activities in rural counties—Applications filed prior to July 1, 2010.
HTMLPDF458-20-24003Tax incentives for high technology businesses.
HTMLPDF458-20-240AManufacturer's new employee tax credits—Applications filed prior to July 1, 2010.
HTMLPDF458-20-241Radio and television broadcasting.
HTMLPDF458-20-242APollution control exemption and/or credits for single purpose facilities added to existing production plants to meet pollution control requirements and which are separately identifiable equipment principally for pollution control.
HTMLPDF458-20-242BPollution control exemption and/or credits for dual purpose facilities which are constructed to meet pollution control requirements and which achieve pollution control in the process of production of the plant's products.
HTMLPDF458-20-243Litter tax.
HTMLPDF458-20-244Food and food ingredients.
HTMLPDF458-20-245Taxation of competitive telephone service, telecommunications service, and ancillary service.
HTMLPDF458-20-246Sales to or through a direct seller's representative.
HTMLPDF458-20-247Trade-ins, selling price, sellers' tax measures.
HTMLPDF458-20-248Sales of precious metal bullion and monetized bullion.
HTMLPDF458-20-249Artistic or cultural organizations.
HTMLPDF458-20-250Solid waste collection tax.
HTMLPDF458-20-251Sewerage collection and other related activities.
HTMLPDF458-20-252Hazardous substance tax.
HTMLPDF458-20-254Recordkeeping.
HTMLPDF458-20-255Carbonated beverage syrup tax.
HTMLPDF458-20-256Trade shows, conventions and seminars.
HTMLPDF458-20-257Tangible personal property warranties and service contracts.
HTMLPDF458-20-258Travel agents and tour operators.
HTMLPDF458-20-260Oil spill response and administration tax.
HTMLPDF458-20-261Commute trip reduction incentives.
HTMLPDF458-20-262Retail sales and use tax exemptions for farmworker housing.
HTMLPDF458-20-263Exemptions from retail sales and use taxes for qualifying electric generating systems using renewable energy sources.
HTMLPDF458-20-264National Uniform Tobacco Settlement.
HTMLPDF458-20-265Sales and use tax exemption—Airplane maintenance repair stations.
HTMLPDF458-20-267Annual tax performance reports for certain tax preferences.
HTMLPDF458-20-267AAnnual reports for certain tax preferences.
HTMLPDF458-20-268Annual surveys for certain tax preferences.
HTMLPDF458-20-269Waiver of public disclosure of certain new tax preferences.
HTMLPDF458-20-270Telephone program excise tax rates.
HTMLPDF458-20-272Tire fee—Studded tire fee—Core deposits or credits.
HTMLPDF458-20-274Staffing services.
HTMLPDF458-20-277Certified service provider—Compensation.
HTMLPDF458-20-27701Model 2 volunteer sellers—Compensation.
HTMLPDF458-20-278Returned goods, defective goods—Motor vehicle lemon law.
HTMLPDF458-20-279Clean alternative fuel vehicles and high gas mileage vehicles.
HTMLPDF458-20-27901Clean alternative fuel vehicles and plug-in hybrid vehicles.
GENERAL RULE: TAX AVOIDANCE
HTMLPDF458-20-280Introduction.
HTMLPDF458-20-28001Construction joint ventures and similar arrangements described in RCW 82.32.655 (3)(a).
HTMLPDF458-20-28002Disguised income arrangements described in RCW 82.32.655 (3)(b).
HTMLPDF458-20-28003Sales and use tax avoidance arrangements described in RCW 82.32.655 (3)(c).
HTMLPDF458-20-281Petroleum product tax.
HTMLPDF458-20-282Marketplace tax collection and reporting.
HTMLPDF458-20-285Working families tax credit.
HTMLPDF458-20-290Workforce education investment surcharge—Select advanced computing businesses.
HTMLPDF458-20-300Capital gains excise tax—Overview and administration.
HTMLPDF458-20-301Capital gains excise tax—Definitions, deductions, exemptions, and allocation of gains and losses.
DISPOSITION OF SECTIONS FORMERLY CODIFIED IN THIS TITLE
458-20-10101Business licensing service—Total fee payable—Handling of fees. [Statutory Authority: 2013 c 4, 2011 c 298, RCW 19.02.030 and 19.02.075. WSR 13-17-048, § 458-20-10101, filed 8/13/13, effective 10/1/13. Statutory Authority: 2011 c 298 and RCW 19.02.075. WSR 12-04-060, amended and recodified as § 458-20-10101, filed 1/30/12, effective 3/1/12. Statutory Authority: RCW 19.02.030(3). WSR 10-13-039, § 308-300-160, filed 6/8/10, effective 7/9/10; Order 476-DOL, § 308-300-160, filed 12/30/77.] Repealed by WSR 14-08-010, filed 3/20/14, effective 4/20/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2).
458-20-114Nonbusiness income—Bona fide initiation fees, dues, contributions, tuition fees and endowment funds. [Statutory Authority: RCW 82.32.300. WSR 86-02-039 (Order ET 85-8), § 458-20-114, filed 12/31/85; WSR 84-08-012 (Order 84-1), § 458-20-114, filed 3/27/84; Order ET 70-3, § 458-20-114 (Rule 114), filed 5/29/70, effective 7/1/70.] Repealed by WSR 95-22-099, filed 11/1/95, effective 12/2/95. Statutory Authority: RCW 82.32.300.
458-20-122Sales of feed, seed, fertilizer, spray materials, and other tangible personal property for farm use. [Statutory Authority: RCW 82.32.300. WSR 94-07-049, § 458-20-122, filed 3/10/94, effective 4/10/94; WSR 86-21-085 (Order ET 86-18), § 458-20-122, filed 10/17/86; WSR 86-09-058 (Order ET 86-7), § 458-20-122, filed 4/17/86; Order ET 70-3, § 458-20-122 (Rule 122), filed 5/29/70, effective 7/1/70.] Repealed by WSR 03-18-024, filed 8/25/03, effective 9/25/03. Statutory Authority: RCW 82.01.060(2), 82.32.300, and 34.05.230. Later promulgation, see WAC 458-20-210.
458-20-123Public and lending libraries. [Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-123, filed 3/15/83; Order ET 70-3, § 458-20-123 (Rule 123), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-167 and 458-20-189.
458-20-125Miscellaneous sales for farm use. [Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-125, filed 3/15/83; Order ET 70-3, § 458-20-125 (Rule 125), filed 5/29/70, effective 7/1/70.] Repealed by WSR 94-07-051, filed 3/10/94, effective 4/10/94. Statutory Authority: RCW 82.32.300.
458-20-130Sales of real property, standing timber, minerals, natural resources. [Statutory Authority: RCW 82.32.300. WSR 87-19-007 (Order ET 87-5), § 458-20-130, filed 9/8/87; WSR 83-07-034 (Order ET 83-17), § 458-20-130, filed 3/15/83; Order ET 70-3, § 458-20-130 (Rule 130), filed 5/29/70, effective 7/1/70.] Repealed by WSR 00-22-034, filed 10/25/00, effective 11/25/00. Statutory Authority: RCW 82.32.300.
458-20-137Articles manufactured and installed. [Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-137, filed 3/15/83; Order ET 70-3, § 458-20-137 (Rule 137), filed 5/29/70, effective 7/1/70.] Repealed by WSR 98-01-111, filed 12/18/97, effective 1/18/98. Statutory Authority: RCW 82.32.300.
458-20-147Public stenographers. [Order ET 73-1, § 458-20-147, filed 11/2/73; Order ET 70-3, § 458-20-147 (Rule 147), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-138 and 458-20-224.
458-20-149Jewelry repair shops. [Order ET 70-3, § 458-20-149 (Rule 149), filed 5/29/70, effective 7/1/70.] Repealed by WSR 93-03-005, filed 1/8/93, effective 2/8/93. Statutory Authority: RCW 82.32.300.
458-20-152Shoe repairmen and shoe shiners. [Order ET 70-3, § 458-20-152 (Rule 152), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-173.
458-20-155Information and computer services. [Statutory Authority: RCW 82.32.300. WSR 85-20-012 (Order ET 85-4), § 458-20-155, filed 9/20/85; Order ET 70-3, § 458-20-155 (Rule 155), filed 5/29/70, effective 7/1/70.] Repealed by WSR 13-06-015, filed 2/25/13, effective 3/28/13. Statutory Authority: RCW 82.32.200 and 82.01.060.
458-20-157Producers of poultry and hatching eggs. [Statutory Authority: RCW 82.32.300. WSR 86-21-085 (Order ET 86-18), § 458-20-157, filed 10/17/86. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-157, filed 6/27/78; Order ET 70-3, § 458-20-157 (Rule 157), filed 5/29/70, effective 7/1/70.] Repealed by WSR 99-08-005, filed 3/25/99, effective 4/25/99. Statutory Authority: RCW 82.32.300.
458-20-161Persons buying or producing wheat, oats, dry peas, corn, barley, dry beans, lentils and triticale and making sales thereof. [Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-161, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-161, filed 6/27/78; Order ET 70-3, § 458-20-161 (Rule 161), filed 5/29/70, effective 7/1/70.] Repealed by WSR 00-22-035, filed 10/25/00, effective 11/25/00. Statutory Authority: RCW 82.32.300.
458-20-17901Public utility tax—Energy conservation and cogeneration deductions. [Statutory Authority: RCW 82.32.300. WSR 93-07-066, § 458-20-17901, filed 3/17/93, effective 4/17/93; WSR 86-01-077 (Order 85-7), § 458-20-17901, filed 12/18/85.] Repealed by WSR 13-14-121, filed 7/3/13, effective 8/3/13. Statutory Authority: RCW 82.32.300, 82.01.060(2) and chapter 82.16 RCW. Later promulgation, see WAC 458-20-179.
458-20-184Tax on conveyances repealed. [Statutory Authority: RCW 82.32.300. WSR 87-19-007 (Order ET 87-5), § 458-20-184, filed 9/8/87; WSR 83-07-033 (Order ET 83-16), § 458-20-184, filed 3/15/83; Order ET 70-3, § 458-20-184 (Rule 184), filed 5/29/70, effective 7/1/70.] Repealed by WSR 97-21-022, filed 10/7/97, effective 11/7/97. Statutory Authority: RCW 82.32.300.
458-20-18601Wholesale and retail cigarette vendor licenses. [Statutory Authority: RCW 82.32.300. WSR 95-07-068, § 458-20-18601, filed 3/14/95, effective 4/14/95; WSR 92-06-081, § 458-20-18601, filed 3/4/92, effective 4/4/92.] Repealed by WSR 05-02-035, filed 12/30/04, effective 1/30/05. Statutory Authority: RCW 82.24.235, 82.32.300, and 82.01.060(1).
458-20-188Slot machines, pinball machines and other mechanical devices wherein an element of skill or of chance involves a pay-out to the player. [Order ET 70-3, § 458-20-188 (Rule 188), filed 5/29/70, effective 7/1/70.] Repealed by Order ET 73-1, filed 11/2/73. See chapter 218, Laws of 1973 1st ex. sess. for taxability of persons operating the machines or devices previously covered by this rule. See WAC 458-20-187.
458-20-191Federal reservations. [Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-191, filed 3/15/83; Order ET 75-1, § 458-20-191, filed 5/2/75; Order ET 70-3, § 458-20-191 (Rule 191), filed 5/29/70, effective 7/1/70.] Repealed by WSR 05-03-002, filed 1/5/05, effective 2/5/05. Statutory Authority: RCW 82.32.300, 82.01.060(1), and 34.05.230. Later promulgation, see WAC 458-20-190.
458-20-193ASales of goods originating in Washington to persons in other states. [Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-193A, filed 3/15/83; Order ET 70-3, § 458-20-193A (Rule 193 Part A), filed 5/29/70, effective 7/1/70.] Repealed by WSR 91-24-020, filed 11/22/91, effective 1/1/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-193.
458-20-193BSales of goods originating in other states to persons in Washington. [Statutory Authority: RCW 82.32.300. WSR 89-06-015 (Order 89-3), § 458-20-193B, filed 2/23/89; WSR 83-07-033 (Order ET 83-16), § 458-20-193B, filed 3/15/83; Order ET 74-1, § 458-20-193B, filed 5/7/74; Order ET 70-3, § 458-20-193B (Rule 193 Part B), filed 5/29/70, effective 7/1/70.] Repealed by WSR 91-24-020, filed 11/22/91, effective 1/1/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-193.
458-20-19405CPI-U adjustments to minimum nexus thresholds for apportionable activities. [Statutory Authority: RCW 82.04.067, 82.32.300, and 82.01.060(2). WSR 13-22-044, § 458-20-19405, filed 10/31/13, effective 12/1/13.] Repealed by WSR 15-04-004, filed 1/22/15, effective 2/22/15. Statutory Authority: RCW 82.32.300 and 82.01.060(2) and RCW 82.04.067, 82.04.460, and 82.04.462.
458-20-206Use tax, fuel oil, oil products, other extracted products. [Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-206, filed 3/30/83; Order ET 70-3, § 458-20-206 (Rule 206), filed 5/29/70, effective 7/1/70.] Repealed by WSR 99-08-005, filed 3/25/99, effective 4/25/99. Statutory Authority: RCW 82.32.300.
458-20-212Insurance adjusters. [Order ET 70-3, § 458-20-212 (Rule 212), filed 5/29/70, effective 7/1/70.] Repealed by WSR 12-11-006, filed 5/3/12, effective 6/3/12. Statutory Authority: RCW 82.32.300 and 82.01.060(2).
458-20-213Oil company bulk station agents. [Order ET 70-3, § 458-20-213 (Rule 213), filed 5/29/70, effective 7/1/70.] Repealed by WSR 00-22-034, filed 10/25/00, effective 11/25/00. Statutory Authority: RCW 82.32.300.
458-20-215Auditing out-of-state business. [Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-215, filed 3/30/83; Order ET 70-3, § 458-20-215 (Rule 215), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-254.
458-20-219Patronage dividends of cooperative associations, not deductible. [Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-219, filed 3/30/83; Order ET 70-3, § 458-20-219 (Rule 219), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300.
458-20-220Painting, paper hanging, and sign painting. [Order ET 70-3, § 458-20-220 (Rule 220), filed 5/29/70, effective 7/1/70.] Repealed by WSR 92-23-021, filed 11/10/92, effective 12/11/92. Statutory Authority: RCW 82.32.300. Later promulgation, see WAC 458-20-170, 458-20-17001, 458-20-171 and 458-20-173.
458-20-225Pattern makers. [Order ET 70-3, § 458-20-225 (Rule 225), filed 5/29/70, effective 7/1/70.] Repealed by WSR 99-08-005, filed 3/25/99, effective 4/25/99. Statutory Authority: RCW 82.32.300.
458-20-231Tax on internal distribution. [Statutory Authority: RCW 82.32.300. WSR 99-02-055, § 458-20-231, filed 1/5/99, effective 2/5/99; WSR 90-23-020, § 458-20-231, filed 11/14/90, effective 12/15/90; WSR 83-08-026 (Order ET 83-1), § 458-20-231, filed 3/30/83; Order ET 70-3, § 458-20-231 (Rule 231), filed 5/29/70, effective 7/1/70.] Repealed by WSR 03-09-062, filed 4/14/03, effective 5/15/03. Statutory Authority: RCW 82.32.300 and 82.01.060(2).
458-20-232Sales of intoxicating liquor. [Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-232, filed 3/30/83; Order ET 73-1, § 458-20-232, filed 11/2/73; Order ET 71-1, § 458-20-232, filed 7/22/71; Order ET 70-3, § 458-20-232 (Rule 232), filed 5/29/70, effective 7/1/70.] Repealed by WSR 96-21-142, filed 10/23/96, effective 11/23/96. Statutory Authority: RCW 82.32.300 and 34.05.354.
458-20-234Business tax on flour millers, manufacturers of soybean or sunflower oil. [Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-234, filed 3/30/83; Order ET 70-3, § 458-20-234 (Rule 234), filed 5/29/70, effective 7/1/70.] Repealed by WSR 00-22-035, filed 10/25/00, effective 11/25/00. Statutory Authority: RCW 82.32.300.
458-20-236Baseball clubs and other sport organizations. [Order ET 70-3, § 458-20-236 (Rule 236), filed 5/29/70, effective 7/1/70.] Repealed by WSR 19-15-114, filed 7/23/19, effective 8/23/19. Statutory Authority: RCW 82.32.300.
458-20-237Retail sales tax collection schedules. [Statutory Authority: RCW 82.32.300. WSR 91-05-038, § 458-20-237, filed 2/13/91, effective 3/16/91; WSR 83-09-028 (Order ET 83-2), § 458-20-237, filed 4/15/83; WSR 82-16-061 (Order ET 82-7), § 458-20-237, filed 7/30/82. Statutory Authority: RCW 82.32.300 and 82.08.060. WSR 82-06-020 (Order 82-1), § 458-20-237, filed 2/24/82. Statutory Authority: RCW 82.08.060 and 82.14.070. WSR 81-01-099 (Order 80-5), § 458-20-237, filed 12/23/80. Statutory Authority: RCW 82.08.060, 82.14.070 and 82.32.300. WSR 79-06-036 (Order ET 79-1), § 458-20-237, filed 5/17/79, effective 7/1/79; Order ET 76-2, § 458-20-237, filed 5/19/76; Order ET 72-3, § 458-20-237, filed 11/30/72; Order ET 70-3, § 458-20-237 (Rule 237), filed 5/29/70, effective 7/1/70.] Repealed by WSR 00-22-034, filed 10/25/00, effective 11/25/00. Statutory Authority: RCW 82.32.300.
458-20-24002Sales and use tax deferral—New manufacturing and research/development facilities. [Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-24002, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 88-17-047 (Order 88-5), § 458-20-24002, filed 8/16/88; WSR 87-19-007 (Order ET 87-5), § 458-20-24002, filed 9/8/87; WSR 86-14-019 (Order ET 86-13), § 458-20-24002, filed 6/24/86; WSR 85-21-013 (Order ET 85-5), § 458-20-24002, filed 10/7/85.] Repealed by WSR 10-23-057, filed 11/10/10, effective 12/11/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2).
458-20-242Pollution control exemption and/or credits. (Rule 242) [Recodified as § 458-20-242A and 458-20-242B.]
458-20-253Mobile homes and mobile home park fee. [Statutory Authority: RCW 82.32.300. WSR 89-21-002, § 458-20-253, filed 10/5/89, effective 11/5/89; WSR 89-01-033 (Order 88-8), § 458-20-253, filed 12/13/88.] Repealed by WSR 98-01-111, filed 12/18/97, effective 1/18/98. Statutory Authority: RCW 82.32.300.
458-20-259Small timber harvesters—Business and occupation tax exemption. [Statutory Authority: RCW 82.32.300. WSR 98-16-107, § 458-20-259, filed 8/5/98, effective 9/5/98; WSR 90-17-007, § 458-20-259, filed 8/3/90, effective 9/3/90.] Repealed by WSR 01-15-072, filed 7/17/01, effective 8/17/01. Statutory Authority: RCW 82.32.300.
458-20-273Renewable energy system cost recovery. [Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-273, filed 6/6/16, effective 7/7/16. Statutory Authority: RCW 82.32.300, 82.01.060, 82.16.110, 82.16.120, and 82.16.130. WSR 14-03-081, § 458-20-273, filed 1/15/14, effective 2/15/14. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 10-17-004, § 458-20-273, filed 8/5/10, effective 9/5/10; WSR 06-16-097, § 458-20-273, filed 7/31/06, effective 8/31/06.] Repealed by WSR 19-02-057, filed 12/27/18, effective 1/27/19. Statutory Authority: RCW 82.32.300 and 82.01.060(2).
458-20-27702Taxpayer relief—Sourcing compliance—One thousand dollar credit and certified service provider compensation for small businesses. [Statutory Authority: RCW 82.32.300, 82.32.760, and 82.01.060(2). WSR 08-14-083, § 458-20-27702, filed 6/26/08, effective 7/27/08.] Repealed by WSR 21-01-061, filed 12/9/20, effective 1/9/21. Statutory Authority: RCW 82.32.300, 82.01.060 and 2020 c 139 § 64(15).
458-20-99999Appendix—The Buck Act. Repealed by WSR 05-03-002, filed 1/5/05, effective 2/5/05. Statutory Authority: RCW 82.32.300, 82.01.060(1), and 34.05.230.

PDF458-20-100

Informal administrative reviews.

(1) Introduction. RCW 82.01.060(4) requires that the department "provide by general regulations for an adequate system of departmental review of the actions of the department or of its officers and employees in the assessment or collection of taxes." RCW 82.32.160 allows taxpayers to petition for correction of taxes, interest, or penalties assessed by the department. RCW 82.32.170 allows taxpayers to petition for a determination as to whether a refund request was properly denied. Under authority of these statutes, the department provides an informal, nonadversarial administrative review of these actions. The department will make such determination and resolve matters as may appear to the department to be just and lawful under its statutory authority. The department's administrative review is designed to be an expeditious and less costly means of review as compared to the costs of an independent review by the board of tax appeals (BTA) or a refund action in superior court.
Before requesting review, taxpayers are encouraged to request a supervisor's conference when they disagree with an action proposed by the department. Taxpayers should make their request for the conference with the division of the department that proposes to issue an assessment or take some other action in dispute. Supervisor's conferences can frequently resolve issues prior to the informal administrative review explained in this rule.
(a) Departmental actions subject to informal administrative review under this rule. Actions subject to the department's informal administrative review include, but are not limited to:
(i) An assessment of tax, interest, or penalties;
(ii) The denial of a refund, credit, or deferral request;
(iii) The issuance of a balance due notice or a notice of delinquent taxes, including a notice of collection action; and
(iv) The issuance of an adverse ruling on future liability from the taxpayer information and education (TI&E) section.
(b) Departmental actions subject to formal administrative appeal. The informal review provided under this rule should be distinguished from a formal administrative appeal subject to the Administrative Procedure Act (chapter 34.05 RCW). A person may submit a formal administrative appeal of certain actions by the department. Refer to the following rules for information regarding the actions for which the department conducts formal administrative appeal proceedings:
(i) WAC 458-20-10001 for information regarding an appeal of:
• A revocation of a certificate of registration (tax registration endorsement) under RCW 82.32.215;
(ii) WAC 458-20-10002 for information regarding an appeal of:
• Log export enforcement actions pursuant to chapter 240-15 WAC; or
• Orders to county officials issued under RCW 84.08.120 and 84.41.120;
(iii) WAC 458-20-10003 for information regarding an appeal of:
• A departmental request to the liquor and cannabis board to suspend, not renew, or not issue a spirits license as defined in RCW 66.24.010 (3)(c);
(iv) WAC 458-20-10004 for information regarding an appeal of the assessment of:
• The one-time business license application fee or annual renewal application fee in RCW 59.30.050 (3)(a);
• The annual registration assessment fee in RCW 59.30.050 (3)(b); or
• The delinquency fee in RCW 59.30.050(4);
(v) WAC 458-20-10202 for information regarding an appeal of:
• Matters relating to the denial or revocation of reseller permits; or
(vi) WAC 458-20-273 for information regarding an appeal of:
• The denial or revocation of a renewable energy system certification; or
• The denial or revocation of a manufacturer's certification of a solar inverter, solar module, wind generator blade, or stirling converter qualifying as made in Washington state.
(2) How are informal reviews started? A taxpayer starts a review of a departmental action by filing a written petition. A petition must be sent to one of the following:
DORARHDadmin@dor.wa.gov
or
Administrative Review and Hearings Division
Washington State Department of Revenue
6400 Linderson Way S.W.
P.O. Box 47460
Olympia, Washington 98504-7460
or
(a) Information required in a petition. A form petition is available on the department's website at http://dor.wa.gov or upon request from the administrative review and hearings division. Taxpayers may use the form petition or prepare one of their own. The taxpayer or its authorized representative must sign the petition, which must contain the following information:
(i) The taxpayer's name, address, registration/UBI number, telephone number, fax number, email address, and contact person;
(ii) If represented, the representative's name, address, telephone number, fax number, and email address;
(iii) Identifying information from the assessment notice, balance due notice, or other document related to the action being reviewed;
(iv) The amount of tax, interest, or penalties in controversy, and the time period at issue, however, if, in the case of a denied refund request, the amount of interest or penalties is not known, the amount of the tax in controversy;
(v) The type of review requested (see subsection (4) of this rule);
(vi) Whether the taxpayer requests an in-person hearing in Olympia or Seattle, a telephone hearing, or no hearing; and
(vii) A description of each issue or area of dispute and an explanation why each issue or area of dispute should be resolved as the taxpayer requests. To the extent known or available, a taxpayer should cite applicable statutes, rules, other public guidance issued by the department, and case law that support the taxpayer's position. The taxpayer should also submit with the petition documents supporting the taxpayer's position, including:
• Contracts and invoices previously requested and not provided; or
• Documents not previously provided that the taxpayer believes substantiate the taxpayer's claims.
(b) Incomplete petition. If a petition does not provide the required information identified in subsection (2)(a) of this rule, the department will notify the taxpayer in writing that the petition is incomplete and not accepted for review. The notice will provide a period of time for the taxpayer to provide the required petition information. If the requested information is timely provided, the petition will be treated as timely filed and accepted for review.
(c) Authorization required for taxpayer's representative. If a taxpayer is represented, the taxpayer must have on file with the department a confidential tax information authorization (CTIA) for that representative. Without a CTIA on file, the department cannot share confidential taxpayer information with the representative.
(3) To be timely, when must a petition be filed or an extension requested? A taxpayer must file a petition with the department within thirty days after the date the departmental action has occurred.
(a) The department may grant an extension of time to file a petition if the taxpayer's request is made within the thirty-day filing period. Requests for extensions must be in writing. A petition or request for extension is timely if it is postmarked or received within the thirty-day period.
Requests must be in writing to either the email or mailing address noted in subsection (2) of this rule.
(b) The department will not grant an extension of time to file a petition for review of a denied refund that would exceed the time limits in WAC 458-20-229 (Refunds). As explained in WAC 458-20-229, a request for a refund of taxes paid must be filed within four years after the close of the calendar year in which the taxes were paid.
(c) The department will notify taxpayers in writing when a petition is rejected as not timely.
(4) What are the different types of informal reviews? The agency conducts four different types of informal reviews.
(a) Mainstream review. This is the most common type of review. A review is treated as a mainstream review unless it fits within (b) through (d) of this subsection.
(b) Small claims review. When the tax at issue in the review is twenty-five thousand dollars or less and the total amount of the tax plus penalties and interest at issue is fifty thousand dollars or less, the review will normally be assigned as a small claims review, unless the complexity of the issues requires assignment to another category.
The department will issue an abbreviated written determination in a small claims review. This determination is the final action of the department.
(c) Executive level review.
(i) If a review involves an issue of first impression (one for which no agency precedent has been established) or an issue that has industry-wide significance or impact, a taxpayer may request that the review be considered at the executive level. The request must specify the reasons why an executive level review is appropriate. The department will grant or deny the request and will notify the taxpayer of that decision in writing. If granted, the director or the director's designee and a tax review officer will conduct an executive level hearing. The department, on its own initiative, may also choose to consider a review at the executive level.
(ii) Following the executive level hearing, the department will issue a proposed determination, which becomes final thirty days from the date of issuance unless the taxpayer files an objection to the proposed determination within that thirty-day period. Objections must specify mistakes in law or fact contained in the proposed determination, and should also provide legal authority as to why those mistakes necessitate a change to the proposed determination. Unless an extension is granted, objections must be postmarked or received by the department within thirty days from the date the proposed determination was issued. The department will issue the final determination, which may or may not reflect changes based on the objections. Although rare, the tax review officer and the director's designee, in consultation with the director, may grant a second executive level hearing on the objections. The determination in an executive level review is the final action of the department.
(d) Tax rulings issued by TI&E section. Review of a tax ruling is limited to the documents and records reviewed by TI&E and any written statements included with the petition. This review is limited to correcting an error that occurred in the course of the tax ruling process. A written determination will be issued following review of all timely submissions without a hearing. The determination is the final decision of the department. It is not eligible for reconsideration and not appealable to the board of tax appeals under RCW 82.03.130 (1)(a) or 82.03.190.
(5) The review process. The department will acknowledge receipt of the petition and identify the tax review officer assigned to the review.
(a) Role and responsibility of tax review officers. Tax review officers are attorneys trained in the interpretation of the Revenue Act, public guidance issued by the department, and precedents established by prior rulings and court decisions. The department's tax review officers are employed by the department to determine whether the appropriate departmental procedures and interpretations of law have been correctly applied to the issue(s). They are responsible for providing a departmental (not independent) review. This responsibility includes additional research about the taxpayer's activities related to the tax issue under review when necessary.
(b) Scheduling. The department will notify the taxpayer or taxpayer's representative of the time and place for the review hearing, if any, and establish timelines for the submission of additional documents and written arguments. Before a submission date has passed, the taxpayer may request an extension, which the tax review officer may grant at the tax review officer's discretion. If a taxpayer fails to comply with a scheduling letter or any extension, the tax review officer may dismiss the petition or decline to consider arguments or documents submitted after the scheduled timelines. A tax review officer may also contact the taxpayer to clarify or narrow issues or request more information as needed for the orderly resolution of the case.
(c) Taxpayer requests to provide additional materials. If a taxpayer asks to submit additional documents or written arguments after the deadlines established in the scheduling letter, or any extension thereof, the taxpayer must explain why they could not have been submitted in a timely manner. The tax review officer has the discretion to allow late submissions by the taxpayer. If additional documents or written argument is allowed by the tax review officer after the hearing, they must be submitted within thirty days of the hearing. The tax review officer has the discretion to allow additional time for submitting additional documents or further fact-finding, including scheduling an additional hearing, as necessary in a particular case.
(d) Informal review hearings. The hearing is an opportunity to discuss the documents and arguments submitted and to clarify the reasons why the taxpayer believes it is entitled to receive the requested relief. No record is made of the hearing. The hearing is not open to the general public. Any person attending the hearing is not placed under oath. The tax review officer has the discretion to decide the case without a hearing if legal or factual issues are not in dispute, or the taxpayer fails to appear at a scheduled hearing or otherwise fails to respond to inquiries from the department. The taxpayer may appear personally or may be represented by an attorney, accountant, or any other authorized person. All hearings before a tax review officer are conducted informally and in a nonadversarial manner.
(e) Issuing a determination. Following the hearing, if any, and review of all materials, the department will issue a determination consistent with the applicable statutes, rules, other public guidance issued by the department, case law, and department precedents. The tax review officer will notify the taxpayer of this decision in writing.
(f) Additional information or research identified by the department. The tax review officer may identify additional facts or novel legal arguments not previously communicated to the taxpayer. In this event, the tax review officer will provide the taxpayer with an opportunity to respond.
(g) Determination is final decision by the department. The determination is the final decision of the department and is binding upon the taxpayer unless a petition for reconsideration is timely filed by the taxpayer and accepted by the department. All determinations issued by the department, except those issued for a review of a TI&E tax ruling (subsection (4)(d) of this rule), are appealable to the board of tax appeals (BTA) or, alternatively, the Thurston County superior court. See subsections (8) and (9) of this rule for additional information.
(6) Request for reconsideration. If a taxpayer believes that an error has been made in a mainstream determination, the taxpayer may, within thirty days of the issuance of the determination, petition in writing for reconsideration of the decision. Only determinations issued from mainstream reviews are subject to reconsideration. The request for reconsideration must specify mistakes in law or fact contained in the determination and should also provide legal authority as to why those mistakes necessitate the reconsideration of the determination. Any new documents and explanations must be included with the petition.
The department may grant or deny the request for reconsideration. If the request is denied, the department will send to the taxpayer written notice of the denial and the reason for the denial. The denial is then the final action of the department. If the request is granted, although rare, the tax review officer may hold a reconsideration hearing or a determination may be issued without a hearing. A reconsideration determination is the final action of the department.
A taxpayer may request an executive level reconsideration when the determination decided an issue of first impression or an issue that has industry-wide impact or significance. The request for executive reconsideration must also specify the reasons why executive level review is appropriate. Any new documents and explanations must be included with the petition. The department will grant or deny the request and will notify the taxpayer of that decision in writing.
(7) Settlements. At any time during the department's review process, the taxpayer or the department may propose to compromise the matter by settlement. A taxpayer interested in proposing settlement of a dispute must submit a written offer to the department to the address noted in subsection (2) of this rule. The taxpayer or its authorized representative must sign the offer. A settlement offer may be made with the review petition or at any time during the review process. All documents needed to evaluate the offer must be submitted with the offer.
(a) When will the department consider an offer? Settlement may be appropriate when:
(i) The issue is nonrecurring. An issue is nonrecurring when the law has changed so future periods are treated differently than the periods under appeal; or the taxpayer's position or business activity has changed so that in future periods the issue under consideration is changed or does not exist; or the taxpayer agrees to a prospective change;
(ii) A conflict exists between precedents, such as statutes, rules, other public guidance issued by the department, or specific written instructions to the taxpayer;
(iii) A strict application of the law would have unduly harsh consequences which may be only relieved by an equitable doctrine; or
(iv) There is uncertainty of the outcome if the matter were presented to a court.
(b) When will the department not consider an offer? Settlement is not appropriate when:
(i) The same issue raised by the taxpayer is being litigated by the department;
(ii) The taxpayer presents issues that have no basis upon which relief for the taxpayer can be granted or given. Settlement will not be considered if the taxpayer's offer of settlement is simply to eliminate the inconvenience or cost of further negotiation or litigation, and is not based upon the merits of the case;
(iii) The taxpayer's only argument is that a statute is unconstitutional; or
(iv) The taxpayer's only argument is financial hardship. If a taxpayer claims financial hardship, the tax review officer may refer the matter to the department's compliance division.
(c) The closing agreement. If the taxpayer and the department reach agreement, a settlement is concluded by a closing agreement signed by both the department and the taxpayer as provided by RCW 82.32.350. A closing agreement is binding on both parties as provided in RCW 82.32.360. A closing agreement has no precedential value.
(8) Appeals to board of tax appeals. A taxpayer may appeal a denial of a petition for correction of an assessment under RCW 82.32.160 or a denial of a petition for refund under RCW 82.32.170 to the board of tax appeals. The BTA also has jurisdiction to hear appeals taken from department decisions rendered under RCW 82.34.110 (relating to pollution control facilities tax exemptions and credits) and RCW 82.49.060 (relating to watercraft excise tax). The BTA does not have jurisdiction to hear appeals from determinations involving rulings of future tax liability issued by TI&E. See RCW 82.03.130 (1)(a) and 82.03.190. A taxpayer filing an appeal with the BTA must pay the tax by the due date, unless arrangements are made with the department for a stay of collection under RCW 82.32.200. See WAC 458-20-228 (Returns, remittances, penalties, extensions, interest, stay of collection).
(9) Thurston County superior court. A taxpayer may also pay the tax in dispute and petition for a refund in Thurston County superior court. The taxpayer must comply with the requirements of RCW 82.32.180.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-08-002, § 458-20-100, filed 3/22/17, effective 4/22/17; WSR 16-06-013, § 458-20-100, filed 2/18/16, effective 4/1/16. Statutory Authority: RCW 82.32.300, 82.01.060 (2) and (4). WSR 05-20-036, § 458-20-100, filed 9/29/05, effective 11/1/05. Statutory Authority: RCW 82.32.300. WSR 90-24-049, § 458-20-100, filed 11/30/90, effective 1/1/91; WSR 83-07-032 (Order ET 83-15), § 458-20-100, filed 3/15/83; Order ET 75-1, § 458-20-100, filed 5/2/75; Order ET 70-3, § 458-20-100 (Rule 100), filed 5/29/70, effective 7/1/70.]


PDF458-20-10001

Adjudicative proceedings—Brief adjudicative proceedings—Certificate of registration (tax registration endorsement) revocation.

(1) Introduction. The department of revenue (department) has adopted the procedure for brief adjudicative proceedings provided in RCW 34.05.482 through 34.05.494, except for RCW 34.05.491(5), for actions involving revocation of a certificate of registration (tax registration endorsement) pursuant to RCW 82.32.215. This rule explains the procedure for these brief adjudicative proceedings. This rule does not apply to the following:
• Adjudicative proceedings under WAC 458-20-10002, which addresses converted brief adjudicative proceedings and formal adjudicative proceedings relating to log export enforcements;
• Nonadjudicative proceedings under RCW 82.32.160 and 82.32.170, and WAC 458-20-100;
• Enforcement proceedings under RCW 82.24.550 and 82.26.220; and
• Brief adjudicative proceedings for matters relating to the revocation of reseller permits under WAC 458-20-102.
The department has not adopted RCW 34.05.491(5), which provides that a request for administrative review is deemed to have been denied if the agency does not make a disposition of the matter within twenty days after the request is submitted.
(2) Brief adjudicative proceedings - Procedure. The following procedure applies to the department's brief adjudicative proceedings for actions involving revocation of a certificate of registration, unless the matter is converted to a formal proceeding as provided in subsection (8) of this rule.
(a) Notice. The department will set the time and place of the hearing. Written notice shall be served upon the taxpayer(s) at least seven days before the date of the hearing. Service is to be made pursuant to subsection (5)(a) of this rule. The notice must include:
(i) The names and addresses of each taxpayer to whom the proceedings apply and, if known, the names and addresses of the taxpayer's representative(s), if any;
(ii) The mailing address and the telephone number of the person or office designated to represent the department in the proceeding;
(iii) The official file or other reference number and the name of the proceeding;
(iv) The name, official title, mailing address and telephone number of the presiding officer, if known;
(v) A statement of the time, place and nature of the proceeding;
(vi) A statement of the legal authority and jurisdiction under which the hearing is to be held;
(vii) A reference to the particular sections of the statutes and/or rules involved;
(viii) A short and plain statement of the matters asserted by the department against the taxpayer and the potential action to be taken; and
(ix) A statement that if the taxpayer fails to attend or participate in a hearing, the hearing can proceed and that adverse action may be taken against the taxpayer.
(x) When the department is notified or otherwise made aware that a limited-English-speaking person is a person to whom the proceedings apply, all notices, including the notice of hearing, continuance and dismissal, must either be in the primary language of that person or must include a notice in the primary language of the person which describes the significance of the notice and how the person may receive assistance in understanding and responding to the notice. In addition, the notice must state that if a party or witness needs an interpreter, a qualified interpreter will be appointed at no cost to the party or witness. The notice must include a form to be returned to the department to indicate whether such person, or a witness, needs an interpreter and to identify the primary language or hearing impaired status of the person.
(b) Appearance and practice at a brief adjudicative proceeding. The right to practice before the department in a brief adjudicative proceeding is limited to:
(i) Persons who are natural persons representing themselves;
(ii) Attorneys at law duly qualified and entitled to practice in the courts of the state of Washington;
(iii) Attorneys at law entitled to practice before the highest court of record of any other state, if attorneys licensed in Washington are permitted to appear before the courts of such other state in a representative capacity, and if not otherwise prohibited by state law;
(iv) Public officials in their official capacity;
(v) Certified public accountants entitled to practice in the state of Washington;
(vi) A duly authorized director, officer, or full-time employee of an individual firm, association, partnership, or corporation who appears for such firm, association, partnership, or corporation;
(vii) Partners, joint venturers or trustees representing their respective partnerships, joint ventures, or trusts; and
(viii) Other persons designated by a person to whom the proceedings apply with the approval of the presiding officer.
In the event a proceeding is converted from a brief adjudicative proceeding to a formal proceeding, representation is limited to the provisions of law and RCW 34.05.428.
(c) Hearings by telephone. With the concurrence of the presiding officer and all persons involved in the proceedings, a hearing may be conducted telephonically. The conversation will be recorded and will be made a part of the record of the hearing.
(d) Presiding officer.
(i) The presiding officer must be an assistant director of the department's compliance division, or such other person as the director of the department may designate.
(ii) The presiding officer shall conduct the proceeding in a just and fair manner and before taking action, the presiding officer shall provide the taxpayer an opportunity to be informed of the department's position on the pending matter.
(iii) The presiding officer has all authority granted under chapter 34.05 RCW.
(e) Entry of orders.
(i) When the presiding officer issues a decision, the presiding officer shall briefly state the basis and legal authority for the decision. Within ten days of issuing the decision, the presiding officer shall serve upon the parties, the initial order and information regarding any departmental administrative review that may be available.
(ii) The decision and the brief written statement of the basis and legal authority for it is an initial order. The initial order will become a final order if no review is requested as provided in subsection (3) of this rule.
(3) Review of initial orders from brief adjudicative proceeding. The following procedure applies to the department's review of a brief adjudicative proceeding conducted pursuant to subsection (2) of this rule, unless the matter is converted to a formal proceeding as provided in subsection (8) of this rule.
(a) Request for review of the initial order. A party to a brief adjudicative proceeding under subsection (2) of this rule may request review of the initial order by filing a written petition for review, or making an oral request for review, with the department's administrative review and hearings division within twenty-one days after service of the initial order is received by the party. The address and telephone number of the administrative review and hearings division is:
Administrative Review and Hearings Division
Washington State Department of Revenue
P.O. Box 47460
Olympia, Washington 98504-7460
Telephone Number: 360-534-1335
(i) When a petition of review of the initial order is made, the taxpayer must submit to the administrative review and hearings division at the time the petition is filed any evidence or written material relevant to the matter that the party wishes the reviewing officer to consider. If the petition for review is made by oral request, the taxpayer must also submit any evidence or written material to the administrative review and hearings division on the same day that the oral request is made.
(ii) The department may, on its own motion, conduct an administrative review of the initial order as provided for in RCW 34.05.491.
(b) Reviewing officer. The administrative review and hearings division shall appoint a reviewing officer who shall make such determination as may appear to be just and lawful. The reviewing officer shall provide the taxpayer and the department an opportunity to explain their positions on the matter and shall make any inquiries necessary to ascertain whether the proceeding should be converted to a formal adjudicative proceeding. The review by the administrative review and hearings division shall be governed by the brief adjudicative procedures of chapter 34.05 RCW and this rule; or WAC 458-20-10002 in the event a brief adjudicative hearing is converted to a formal adjudicative proceeding, and not by the processes and procedures of WAC 458-20-100. The reviewing officer shall have the authority of a presiding officer as provided in this rule.
(c) Record review. Review of an initial order is limited to the evidence considered by the presiding officer, the initial order, the recording of the initial proceeding, and any records and written evidence submitted by the parties to the reviewing officer. However, the agency record need not constitute the exclusive basis for the reviewing officer's decision.
(i) The reviewing officer may request additional evidence from either party at any time during its review of the initial order. Once the reviewing officer requests evidence from a party, that party has seven days after service of the request to supply the evidence to the reviewing officer, unless the reviewing officer, in his or her discretion, allows additional time to submit the evidence.
(ii) In addition to requesting additional evidence, the reviewing officer may review any records of the department necessary to confirm that the tax warrant upon which the initial order of revocation was based remains unpaid. In the event that the tax warrant has been satisfied subsequent to the entry of the initial order, but before the issuance of the final order, the reviewing officer shall reinstate the taxpayer's certificate of registration.
(iii) If the reviewing officer determines that oral testimony is needed, he/she may schedule a time for both parties to present oral testimony. Notice of the oral testimony must be given to the parties in the same manner as the notice provided in subsection (2)(a) of this rule. Oral statements before the reviewing officer shall be by telephone, unless specifically scheduled by the reviewing officer in his or her discretion to be in person.
(iv) The department will have an opportunity to respond to the taxpayer's request for review and may also submit any other relevant evidence and written material to the reviewing officer. The department must submit its material within seven days of service of the material submitted by the party requesting review of the initial order. The department must also serve a copy of all evidence and written material provided to the reviewing officer to the taxpayer requesting review according to subsection (5) of this rule. Proof of service is required under subsection (5)(h) of this rule when the department submits material to the taxpayer under this subsection.
(d) Failure to participate. If a party requesting review of an initial order under this subsection fails to participate in the proceeding or fails to provide documentation to the reviewing officer upon his or her request, the reviewing officer may uphold the initial order based upon the record.
(e) The final orders.
(i) The reviewing officer may issue two final orders. The first final order (the "final order") must include the decision of the reviewing officer and a brief statement of the basis and legal authority for the decision. This order may contain confidential taxpayer information under RCW 82.32.330, and, therefore, cannot be disclosed by the department, except to the taxpayer.
(ii) The reviewing officer may issue a second final order (the "posting order"). The posting order will be issued when the reviewing officer has ordered the revocation of the tax registration certificate. The posting order will state what certificate of registration is being revoked, the listing of the tax warrants involved, and what jurisdictions the tax warrants were filed in.
(iii) Unless specifically indicated otherwise, the term "final order" as used throughout this rule shall refer to both the final order and the posting order.
(iv) The parties can expect that, absent continuances, the final order and posting order will be entered within twenty days of the petition for review.
(f) Reconsideration. Unless otherwise provided in the reviewing officer's order, the reviewing officer's order represents the final position of the department. A reconsideration of the reviewing officer's order may be sought only if the right to a reconsideration is contained in the final order.
(g) Judicial review. Judicial review of the final order of the department is available under Part V, chapter 34.05 RCW. However, judicial review may be available only if a review of the initial decision has been requested under this subsection and all other administrative remedies have been exhausted. See RCW 34.05.534.
(4) Rules of evidence - Record of the proceeding.
(a) Evidence is admissible if in the judgment of the presiding or reviewing officer it is the kind of evidence on which reasonably prudent persons are accustomed to rely on in conducting their affairs. The presiding and reviewing officer should apply RCW 34.05.452 when ruling on evidentiary issues in the proceeding.
(b) All oral testimony must be recorded manually, electronically, or by another type of recording device. The agency record must consist of the documents regarding the matters that were considered or prepared by the presiding officer, or by the reviewing officer in any review, and the recording of the hearing. These records must be maintained by the department as its official record.
(5) Service. All notices and other pleadings or papers filed with the presiding or reviewing officer must be served on the taxpayer, their representatives/agents of record, and the department.
(a) Service is made by one of the following methods:
• In person;
• By first-class, registered, or certified mail;
• By fax and same-day mailing of copies;
• By commercial parcel delivery company; or
• By electronic delivery pursuant to RCW 82.32.135.
(b) Service by mail is regarded as completed upon deposit in the United States mail properly stamped and addressed.
(c) Service by electronic fax is regarded as completed upon the production by the fax machine of confirmation of transmission.
(d) Service by commercial parcel delivery is regarded as completed upon delivery to the parcel delivery company, properly addressed with charges prepaid.
(e) Service by electronic delivery is regarded as completed on the date that the department electronically sends the information to the parties or electronically notifies the parties that the information is available to be accessed by them.
(f) Service to a taxpayer, their representative/agent of record, the department, and presiding officer must be to the address shown on the notice described in subsection (3)(a) of this rule.
(g) Service to the reviewing officer must be to the administrative review and hearings division at the address shown in subsection (3) of this rule.
(h) Where proof of service is required, the proof of service must include:
• An acknowledgment of service;
• A certification, signed by the person who served the document(s), stating the date of service; that the person did serve the document(s) upon all or one or more of the parties of record in the proceeding by delivering a copy in person to (names); and that the service was accomplished by a method of service as provided in this subsection.
(6) Interpreters. When a party or witness requires an interpreter, chapters 2.42 and 2.43 RCW will apply. When those statutes are silent on an issue before the presiding or reviewing officer, the provisions regarding interpreters in WAC 10-08-150 apply.
(7) Informal settlements. The department encourages informal settlement of issues in proceedings under its jurisdiction. The presiding or reviewing officer may not order settlement of the proceedings. Settlement is at the discretion of the parties. Settlement of a proceeding may be concluded by:
(a) A stipulation signed by the taxpayer and the department, or their respective representatives, and/or recited into the record of the proceedings. If the stipulation provides for a payment agreement, the presiding or reviewing officer may order a continuance of the proceedings during the period of repayment and dismissal when all payments have been made. An order providing for the reconvening of the proceedings if the payment agreement is breached is allowed so long as the proceeding is not held less than seven days after notice of the reconvening is provided. Except as provided in this subsection, the presiding or reviewing officer must enter an order in conformity with the terms of the stipulation; or
(b) The entry of an order dismissing the proceedings if the department withdraws the revocation of the certificate of registration.
(8) Conversion of a brief adjudicative proceeding to a formal proceeding. The presiding or reviewing officer may at any time, on motion of the taxpayer, the department, or the officer's own motion, convert the brief adjudicative proceeding to a formal proceeding.
(a) The presiding or reviewing officer may convert the proceeding if the officer finds that use of the brief adjudicative proceeding:
• Violates any provision of law,
• The protection of the public interest requires the agency to give notice to and an opportunity to participate to persons other than the parties, or
• The issues and interests involved warrant the use of procedures governed by RCW 34.05.413 through 34.05.476 or 34.05.479.
(b) WAC 458-20-10002 applies to formal proceedings. In proceedings to revoke a taxpayer's certificate of registration, the converted proceeding is itself the independent administrative review by the department of revenue as provided in RCW 82.32A.020(6).
(9) Computation of time. In computing any period of time prescribed by this rule, the day of the act or event after which the designated period is to run is not included. The last day of the period is included, unless it is a Saturday, Sunday, or a state legal holiday, in which event the period runs until the next day which is not a Saturday, Sunday, or state legal holiday. When the period of time prescribed is less than seven days, intermediate Saturdays, Sundays, and holidays will be excluded in the computation.
(10) Posting of a final order of revoking a tax registration endorsement - Revocation not a substitute for other collection methods or processes available to the department. When an order revoking a tax registration endorsement is a final order of the department, the department shall post a copy of the posting order in a conspicuous place at the main entrance to the taxpayer's place of business and it must remain posted until such time as the warrant amount has been paid.
(a) It is unlawful to engage in business after the revocation of a tax registration endorsement. A person engaging in the business after a revocation may be subject to criminal sanctions as provided in RCW 82.32.290. RCW 82.32.290(2) provides that a person violating the prohibition against such engaging in business is guilty of a Class C felony in accordance with chapter 9A.20 RCW.
(b) Any certificate of registration revoked shall not be reinstated, nor a new certificate of registration issued until:
(i) The amount due on the warrant has been paid, or provisions for payment satisfactory to the department of revenue have been entered; and
(ii) The taxpayer has deposited with the department of revenue as security for taxes, increases and penalties due or which may become due under such terms and conditions as the department of revenue may require, but the amount of the security may not be greater than one-half the estimated average annual tax liability of the taxpayer.
(c) Revocation proceedings will not substitute for, or in any way curtail, other collection methods or processes available to the department.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-10001, filed 6/6/16, effective 7/7/16; WSR 11-17-094, § 458-20-10001, filed 8/22/11, effective 9/22/11. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 11-04-056, § 458-20-10001, filed 1/26/11, effective 2/26/11. Statutory Authority: RCW 82.32.300 and 34.05.410. WSR 95-07-070, § 458-20-10001, filed 3/14/95, effective 4/14/95.]


PDF458-20-10002

Adjudicative proceedings—Formal adjudicative proceedings—Log export enforcement actions pursuant to chapter 240-15 WAC—Orders to county officials issued to pursuant to RCW 84.08.120 and 84.41.120—Converted brief adjudicative proceedings.

(1) Introduction. The department conducts adjudicative proceedings pursuant to chapter 34.05 RCW, the Administrative Procedure Act (APA). This section explains the procedure and process for formal adjudicative proceedings conducted by the department. These formal proceedings include, but are not limited to, log export enforcement actions pursuant to chapter 240-15 WAC, orders to county officials issued pursuant to RCW 84.08.120 and 84.41.120, and converted brief adjudicative proceedings. This section does not apply to wholesale and retail cigarette license revocation/suspension of RCW 82.24.550, certificate of registration (tax registration endorsement) revocation of RCW 82.32.215, or other proceedings which are brief adjudicative proceedings and are explained in WAC 458-20-10001. This section also does not apply to the nonadjudicative proceedings as provided in RCW 82.32.160, 82.32.170 and WAC 458-20-100.
(2) Formal adjudicative proceedings - procedure and process. RCW 34.05.413 through 34.05.479 and chapter 10-08 WAC shall apply to formal adjudicative proceedings conducted by the department of revenue.
(a) Presiding officer - final order - review. The presiding officer of a formal adjudicative proceeding shall be the director, department of revenue, or such person as the director shall designate. The presiding officer, whether the director of the department of revenue, or such person as the director shall have designated, shall make the final decision and shall enter a final order as provided in RCW 34.05.461 (1)(b). No further administrative review is available from a decision of the presiding officer.
(b) Petitions for reconsideration. RCW 34.05.470 provides that petitions for reconsideration shall be filed within ten days of the final order. A petition for reconsideration shall be filed with the presiding officer at the address of the presiding officer provided in the notice of the proceedings, or at such other address as may be provided in the final order, and shall be in the form of other pleadings in the matter. As with all other pleadings, a copy of the petition shall be served upon all other parties to the proceeding.
[Statutory Authority: RCW 82.32.300 and 34.05.410. WSR 95-07-069, § 458-20-10002, filed 3/14/95, effective 4/14/95.]


PDF458-20-10003

Brief adjudicative proceedings for matters related to suspension, nonrenewal, and nonissuance of licenses to sell spirits.

(1) Introduction. The department of revenue (department) conducts adjudicative proceedings pursuant to chapter 34.05 RCW, the Administrative Procedure Act (APA). The department adopts in this rule, the procedures as provided in RCW 34.05.482 through 34.05.494 for the administration of brief adjudicative proceedings to review the department notice explained in subsection (2) of this rule. The department must provide the notice before it may proceed in requesting that the Washington liquor control board (board) suspend, not renew, or not issue a taxpayer's spirits license(s) as defined in RCW 66.24.010 (3)(c), referred to in this rule as "agency action."
This rule explains the procedure pertaining to the adopted brief adjudicative proceedings.
(2) Department notice. If a taxpayer is more than 30 days delinquent in reporting or remitting spirits taxes on a tax return or assessed by the department, including applicable penalties and interest, the department may request that the board suspend the taxpayer's spirits license or licenses and refuse to renew any existing spirits license held by the taxpayer or issue any new spirits license to the taxpayer. Before the department may take agency action, the department must provide the taxpayer with at least seven calendar days prior written notice of the delinquency and inform the taxpayer that the department intends to make the request to the board. The department notice must include:
(a) A listing of any unfiled tax returns;
(b) The amount of unpaid spirits taxes as applicable, including any applicable penalties and interest;
(c) Who to contact to inquire about payment arrangements; and
(d) Information that the taxpayer may seek administrative review of the department notice, including the deadline for seeking such review.
A taxpayer may seek an administrative review of the department notice as explained under subsection (3) of this rule. Brief adjudicative proceedings under this rule do not include the right to challenge the amount of any spirits taxes assessed by the department.
(3) Conduct of brief adjudicative proceedings. To initiate an appeal of a department notice, the taxpayer has seven calendar days from the date on the department notice to request a review of that notice. The taxpayer must file a written notice of appeal explaining why the taxpayer disagrees with the notice of delinquency.
A form notice of appeal is available at dor.wa.gov or by calling 360-705-6705. The completed form should be mailed or faxed to the department at:
Washington State Department of Revenue
Compliance Administration
Spirits License Suspension Petition
P.O. Box 47473
Olympia, WA 98504-7473
(a) A presiding officer, who will be either the assistant director of the compliance division or such other person as designated by the director of the department (director), will conduct brief adjudicative proceedings. The presiding officer for brief adjudicative proceedings will have agency expertise in the subject matter but will not otherwise have participated in the specific matter. The presiding officer's review is limited to the written record.
(b) As part of the notice of appeal, the taxpayer or the taxpayer's representative may include written documentation explaining the taxpayer's view of the matter. The presiding officer may also request additional documentation from the taxpayer or the department and will designate the date by which the documents must be submitted.
(c) In addition to the record, the presiding officer for brief adjudicative proceedings may employ agency expertise as a basis for decision.
(d) Within 10 days of receipt of the taxpayer's notice of appeal, the presiding officer will enter an initial order including a brief explanation of the decision under RCW 34.05.485. All orders in these brief adjudicative proceedings will be in writing. The initial order will become the department's final order unless a petition for review is made to the department's administrative review and hearings division under subsection (4) of this rule. If the presiding officer's order invalidates the department notice, the department may in its discretion start new proceedings by sending a new department notice.
(4) Review of initial order from brief adjudicative proceeding. A taxpayer that has received an initial order upholding a department notice under subsection (3) of this rule may request a review by the department by filing a written petition for review or by making an oral request for review with the department's administrative review and hearings division within 21 days after the service of the initial order on the taxpayer as described in subsection (8) of this rule.
A form petition of review is available at dor.wa.gov. A request for review should state the reasons for the review.
The address, telephone number, and fax number of the administrative review and hearings division are:
Administrative Review and Hearings Division
Spirits License Petition for Review/Spirits Taxes
Washington State Department of Revenue
P.O. Box 47460
Olympia, WA 98504-7460
Telephone Number: 360-534-1335
(a) A reviewing officer, who will be either the assistant director of the administrative review and hearings division or such other person as designated by the director, will conduct a brief adjudicative proceeding and determine whether the initial order was correctly decided. The reviewing officer's review is limited to the written record.
(b) The agency record need not constitute the exclusive basis for the reviewing officer's decision. The reviewing officer will have the authority of a presiding officer.
(c) The order of the reviewing officer will be in writing and include a brief statement of the reasons for the decision, and it must be entered within 20 days of the petition for review. The order will include a notice that judicial review may be available. The order of the reviewing officer represents a final order of the department. If a final order invalidates the department notice, the department may in its discretion start new proceedings by sending a new department notice.
(d) A request for review is deemed denied if the department does not issue an order on review within 20 days after the petition for review is filed.
(5) Record in brief adjudicative proceedings. The record with respect to the brief adjudicative proceedings under RCW 34.05.482 through 34.05.494 related to department notice will consist of:
(a) The record before the presiding officer: The record before the presiding officer consists of the department notice; the taxpayer's appeal of the department notice; all records relied upon by the department or submitted by the taxpayer related to the department notice; and all correspondence between the taxpayer and the department regarding the department notice.
(b) The record before the reviewing officer: The record before the reviewing officer consists of all documents included in the record before the presiding officer; the taxpayer's petition for review; and all correspondence between the taxpayer and the department regarding the taxpayer's petition for review.
(6) Court appeal. Court appeal from the final order of the department is available pursuant to Part V, chapter 34.05 RCW. However, court appeal may be available only if a review of the initial decision has been requested under subsection (4) of this rule and all other administrative remedies have been exhausted. See RCW 34.05.534.
(7) Computation of time. In computing any period of time prescribed by this rule or by the presiding officer or reviewing officer, the day of the act or event after which the designated period is to run is not to be included. The last day of the period is to be included, unless it is a Saturday, Sunday or a legal holiday, in which event the period runs until the next day which is not a Saturday, Sunday or legal holiday. This subsection does not apply with respect to computation of the seven calendar days required for the department notice.
(8) Service. All notices and other pleadings or papers filed with the presiding or reviewing officer must be served on the taxpayer, their representatives/agents of record, and the department.
(a) Service is made by one of the following methods:
(i) In person;
(ii) By first-class, registered or certified mail;
(iii) By fax and same-day mailing of copies;
(iv) By commercial parcel delivery company; or
(v) By electronic delivery pursuant to RCW 82.32.135.
(b) Service by mail is regarded as completed upon deposit in the United States mail properly stamped and addressed.
(c) Service by electronic fax is regarded as completed upon the production by the fax machine of confirmation of transmission.
(d) Service by commercial parcel delivery is regarded as completed upon delivery to the parcel delivery company, properly addressed with charges prepaid.
(e) Service by electronic delivery is regarded as completed on the date that the department electronically sends the information to the parties or electronically notifies the parties that the information is available to be accessed by them.
(f) Service to a taxpayer, their representative/agent of record, the department, and presiding officer must be to the address shown on the notice described in subsection (3)(a) of this rule.
(g) Service to the reviewing officer must be to the administrative review and hearings division at the address shown in subsection (4) of this rule.
(h) Where proof of service is required, the proofs of service must include:
(i) An acknowledgment of service;
(ii) A certificate, signed by the person who served the document(s), stating the date of service; that the person did serve the document(s) upon all or one or more of the parties of record in the proceeding by delivering a copy in person to (names); and that the service was accomplished by a method of service as provided in this subsection.
(9) Continuance. The presiding officer or reviewing officer may grant, in their sole discretion, a request for a continuance by motion of the taxpayer, the department, or on its own motion.
(10) Conversion of a brief adjudicative proceeding to a formal proceeding. The presiding officer or reviewing officer, in their sole discretion, may convert a brief adjudicative proceeding to a formal proceeding at any time on motion of the taxpayer, the department, or the presiding/reviewing officer's own motion.
(a) The presiding/reviewing officer will convert the proceeding when it is found that the use of the brief adjudicative proceeding violates any provision of law, when the protection of the public interest requires the agency to give notice to and an opportunity to participate to persons other than the parties, and when the issues and interests involved warrant the use of the procedures of RCW 34.05.413 through 34.05.479.
(b) When a proceeding is converted from a brief adjudication to a formal proceeding, the director may become the presiding officer or may designate a replacement presiding officer to conduct the formal proceedings upon notice to the taxpayer and the department.
(c) In the conduct of the formal proceedings, WAC 458-20-10002 will apply to the proceedings.
(11) Taking agency action. The department may initiate agency action as follows:
(a) If the taxpayer does not file a timely appeal under subsection (3) of this rule, the department may proceed with agency action the day following the end of the period for requesting such appeal;
(b) If the taxpayer does not make a petition for review consistent with subsection (4) of this rule, the department may proceed with agency action the day following the end of the period for making such petition of review;
(c) If the department makes a final order adverse to the taxpayer under subsection (4) of this rule, the department may proceed with agency action the day following the date the department issues its final order.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-10003, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-10003, filed 6/6/16, effective 7/7/16; WSR 12-24-008, § 458-20-10003, filed 11/27/12, effective 12/28/12.]


PDF458-20-10004

Brief adjudicative proceedings for matters related to assessments and warrants for unpaid fees issued under chapter 59.30 RCW for manufactured and mobile home communities.

(1) Introduction. The department of revenue (department) conducts adjudicative proceedings pursuant to chapter 34.05 RCW, the Administrative Procedure Act (APA). The department adopts in this rule, the procedures as provided in RCW 34.05.482 through 34.05.494 for the administration of brief adjudicative proceedings to review the department's actions described in subsection (2) of this rule.
This rule explains the procedure pertaining to the adopted brief adjudicative proceedings.
(2) Department's action. The following actions taken by the department are subject to the brief adjudicative proceeding process described in this rule:
(a) Assessment of the one-time business license application fee or annual renewal application fee in RCW 59.30.050 (3)(a);
(b) Assessment of the annual registration assessment fee in RCW 59.30.050 (3)(b); and
(c) Assessment of the delinquency fee in RCW 59.30.050(4).
The assessment of more than one type of fee against a manufactured/mobile home community owner or landlord in RCW 59.30.050 does not result in the creation of more than one adjudicative proceeding if those fees are issued in the same document, on the same date.
As explained in RCW 59.30.020(4), the terms "landlord" and "community owner" both refer to the owner of the mobile home park or manufactured home community or their agents. For purposes of this rule, the department refers to such persons as "community owners."
(3) Conduct of brief adjudicative proceedings. To initiate an appeal of the department's action, the community owner has 21 calendar days from the date on the department's action to request a review of that action. The community owner must file a written notice of appeal explaining why the community owner disagrees with the action.
A notice of appeal form is available at dor.wa.gov or by calling 360-705-6705. The completed form should be mailed or faxed to the department at:
Washington State Department of Revenue
Special Programs
Review of Annual Registration for Manufactured/Mobile Home Communities
P.O. Box 47472
Olympia, WA 98504-7472
(a) A presiding officer, who will be a person designated by the director of the department (director) or the assistant director of special programs division, will conduct brief adjudicative proceedings. The presiding officer for brief adjudicative proceedings will have agency expertise in the subject matter but will not otherwise have participated in the specific matter. The presiding officer's review is limited to the written record.
(b) As part of the notice of appeal, the community owner or the community owner's representative may include written documentation explaining the community owner's view of the matter. The presiding officer may also request additional documentation from the community owner or the department and will designate the date by which the documents must be submitted.
(c) In addition to the record, the presiding officer for brief adjudicative proceedings may employ agency expertise as a basis for decision.
(d) Within 21 calendar days of receipt of the community owner's notice of appeal, the presiding officer will enter an initial order including a brief explanation of the decision under RCW 34.05.485. All orders in these brief adjudicative proceedings will be in writing. The initial order will become the department's final order unless a petition for review is made to the department's administrative review and hearings division under subsection (4) of this rule. If the presiding officer's order invalidates the department action, the department may in its discretion initiate another action that corrects the defects in the prior action.
(4) Review of initial order from brief adjudicative proceeding. A community owner that has received an initial order upholding a department action under subsection (3) of this rule may request a review by the department by filing a written petition for review or by making an oral request for review with the department's administrative review and hearings division within 21 calendar days after the service of the initial order on the community owner as described in subsection (8) of this rule.
A form petition of review is available at dor.wa.gov. A request for review should state the reasons for the review.
The address, telephone number, and fax number of the administrative review and hearings division are:
Administrative Review and Hearings Division
Manufactured/Mobile Home Community Appeals
Washington State Department of Revenue
P.O. Box 47460
Olympia, WA 98504-7460
Telephone Number: 360-534-1335
(a) A reviewing officer, who will be either the assistant director of the administrative review and hearings division or such other person as designated by the director, will conduct a brief adjudicative proceeding and determine whether the initial order was correctly decided. The reviewing officer's review is limited to the written record.
(b) The agency record need not constitute the exclusive basis for the reviewing officer's decision. The reviewing officer will have the authority of a presiding officer.
(c) The order of the reviewing officer will be in writing and include a brief statement of the reasons for the decision, and it must be entered within 30 calendar days of the petition for review. The order will include a notice that judicial review may be available. The order of the reviewing officer represents a final order of the department. If a final order invalidates the department's action, the department may in its discretion initiate another action that corrects the defects in the prior action.
(5) Record in brief adjudicative proceedings. The record with respect to the brief adjudicative proceedings under RCW 34.05.482 through 34.05.494 will consist of:
(a) The record before the presiding officer: The record before the presiding officer consists of the notice of the department action; the community owner's appeal of the department action; all records relied upon by the department or submitted by the community owner related to the department's action; and all correspondence between the community owner and the department regarding the department's action.
(b) The record before the reviewing officer: The record before the reviewing officer consists of all documents included in the record before the presiding officer; the community owner's petition for review; and all correspondence between the community owner and the department regarding the community owner's petition for review.
(6) Court appeal. Court appeal from the final order of the department is available pursuant to Part V, chapter 34.05 RCW. However, court appeal may be available only if a review of the initial decision has been requested under subsection (4) of this rule and all other administrative remedies have been exhausted. See RCW 34.05.534.
(7) Computation of time. In computing any period of time prescribed by this rule or by the presiding officer or reviewing officer, the day of the act or event after which the designated period is to run is not to be included. The last day of the period is to be included, unless it is a Saturday, Sunday, or a legal holiday, in which event the period runs until the next day which is not a Saturday, Sunday, or legal holiday.
(8) Service. All notices and other pleadings or papers filed with the presiding or reviewing officer must be served on the community owner, their representatives/agents of record, and the department.
(a) Service is made by one of the following methods:
(i) In person;
(ii) By first-class, registered or certified mail;
(iii) By fax and same-day mailing of copies;
(iv) By commercial parcel delivery company; or
(v) By electronic delivery pursuant to RCW 82.32.135.
(b) Service by mail is regarded as completed upon deposit in the United States mail properly stamped and addressed.
(c) Service by electronic fax is regarded as completed upon the production by the fax machine of confirmation of transmission.
(d) Service by commercial parcel delivery is regarded as completed upon delivery to the parcel delivery company, properly addressed with charges prepaid.
(e) Service by electronic delivery is regarded as completed on the date that the department electronically sends the information to the parties or electronically notifies the parties that the information is available to be accessed by them.
(f) Service to a community owner, their representative/agent of record, the department, and presiding officer must be to the address shown on the form notice of appeal described in subsection (3) of this rule.
(g) Service to the reviewing officer must be to the administrative review and hearings division at the address shown in subsection (4) of this rule.
(h) Where proof of service is required, the proofs of service must include:
(i) An acknowledgment of service;
(ii) A certificate, signed by the person who served the document(s), stating the date of service; that the person did serve the document(s) upon all or one or more of the parties of record in the proceeding by delivering a copy in person to (names); and that the service was accomplished by a method of service as provided in this subsection.
(9) Continuance. The presiding officer or reviewing officer may grant, in their sole discretion, a request for a continuance by motion of the community owner, the department, or on its own motion.
(10) Conversion of a brief adjudicative proceeding to a formal proceeding. The presiding officer or reviewing officer, in their sole discretion, may convert a brief adjudicative proceeding to a formal proceeding at any time on motion of the community owner, the department, or the presiding/reviewing officer's own motion.
(a) The presiding/reviewing officer will convert the proceeding when it is found that the use of the brief adjudicative proceeding violates any provision of law, when the protection of the public interest requires the agency to give notice to and an opportunity to participate to persons other than the parties, and when the issues and interests involved warrant the use of the procedures of RCW 34.05.413 through 34.05.479.
(b) When a proceeding is converted from a brief adjudication to a formal proceeding, the director may become the presiding officer or may designate a replacement presiding officer to conduct the formal proceedings upon notice to the community owner and the department.
(c) In the conduct of the formal proceedings, WAC 458-20-10002 will apply to the proceedings.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-10004, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-10004, filed 6/6/16, effective 7/7/16. Statutory Authority: RCW 84.33.096, 82.32.300, and 82.01.060(2) and RCW 34.05.482 through 34.05.494. WSR 14-13-098, § 458-20-10004, filed 6/17/14, effective 7/18/14.]


PDF458-20-10005

Written determinations as precedents—Criteria for publication.

(1) Introduction. A determination is a department decision issued pursuant to WAC 458-20-100. This rule provides criteria the department uses to decide whether a determination is precedential, as required by RCW 82.32.410.
(2) Criteria. The department may publish a determination, and therefore designate the determination as precedential, when all of the following criteria are met:
(a) The determination is a well-reasoned application of the law to a specific set of facts.
(b) The determination addresses only the law and facts necessary to resolve the case.
(c) The determination is needed to:
(i) Provide guidance on a previously unaddressed area of the law and articulate the department's current policy;
(ii) Apply the law to a significantly different set of facts;
(iii) Overrule a published determination; or
(iv) Provide a better or more current articulation on how the law should be interpreted.
(d) The determination can be effectively sanitized, or the taxpayer has granted a waiver of the secrecy clause. For purposes of this subsection, "effectively sanitized" means that information that could identify the taxpayer is removed without affecting the analysis or precedential value of the determination.
[Statutory Authority: RCW 82.32.410 and 82.32.300. WSR 23-11-008, § 458-20-10005, filed 5/4/23, effective 6/4/23.]


PDF458-20-101

Tax registration and tax reporting.

(1) Introduction. This rule explains tax registration and tax reporting requirements for the Washington state department of revenue (department) as established in RCW 82.32.030 and 82.32.045. This rule discusses who is required to be registered, and who must file excise tax returns. This rule also discusses changes in ownership requiring a new registration, the administrative closure of taxpayer accounts, and the revocation and reinstatement of a tax account with the department. Persons required to file tax returns should also refer to WAC 458-20-104 (Small business tax relief based on income of business). Persons with certain ownership structures (e.g., corporations, limited liability companies, limited partnerships, limited liability partnerships, and limited liability limited partnerships) must also register with the office of the secretary of state.
Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Persons required to obtain tax registration endorsements. Except as provided in (a) of this subsection, every person who is engaged in any business activity for which the department is responsible for administering and/or collecting a tax or fee, must apply for and obtain a tax registration endorsement with the department. (See RCW 82.32.030.) This endorsement is printed on the face of the business person's business license document. The tax registration endorsement is nontransferable, and valid for as long as that person continues in business.
(a) When registration is not required. Registration under this rule is not required if all of the following conditions are met:
(i) The person's value of products, gross proceeds of sales, or gross income of the business, from all business activities taxable under chapter 82.04 RCW (business and occupation (B&O) tax), is less than $12,000 per year;
(ii) A person's gross income from all business activities taxable under chapter 82.16 RCW (public utility tax), is less than $12,000 per year;
(iii) The person is not required to collect or pay to the department retail sales tax or any other tax or fee which the department is authorized to administer and/or collect; and
(iv) The person is not otherwise required to obtain a business license subject to the business license application procedure provided in chapter 19.02 RCW. For the purposes of this rule, the term "business license" means any agency permit, license, certificate, approval, registration, charter, or any form or permission required by law, including agency rule, to engage in any activity.
(b) Tax registration endorsement. The term "tax registration endorsement," as used in this rule, has the same meaning as the term "tax registration" or "certificate of registration" used in Title 82 RCW and other rules in chapter 458-20 WAC.
(c) Person. The term "person" has the meaning given in RCW 82.04.030 and WAC 458-20-203.
(d) Tax account ID. The term "tax account ID" as used in this rule, is the ID number used to identify persons registered with the department.
(3) Requirement to file tax returns. Persons registered with the department must file tax returns and remit the appropriate taxes to the department, unless they are placed on an "active nonreporting" status by the department.
(a) Active nonreporting status requirements. The department may relieve any person of the requirement to file returns by placing the person in an active nonreporting status if all of the following conditions are met:
(i) The person's value of products (RCW 82.04.450), gross proceeds of sales (RCW 82.04.070), or gross income of the business (RCW 82.04.080), from all business activities taxable under chapter 82.04 RCW (B&O tax), is less than $125,000;
(ii) The person's gross income (RCW 82.16.010) from all business activities taxable under chapter 82.16 RCW (public utility tax) is less than $24,000 per year; and
(iii) The person is not required to collect or pay to the department retail sales tax or any other tax or fee the department is authorized to collect.
(b) Notification of active nonreporting status. The department will notify those persons it places on an active nonreporting status. A person may request to be placed on an active nonreporting status if the conditions of (a) of this subsection are met.
(c) Responsibility to notify department about change in status. Persons placed on an active nonreporting status by the department are required to timely notify the department if their business activities do not meet any of the conditions explained in (a) of this subsection. These persons will be removed from an active nonreporting status, and must file tax returns and remit appropriate taxes to the department, beginning with the first period in which they do not qualify for an active nonreporting status.
(d) Obligation to file a tax return. Persons that have not been placed on an active nonreporting status by the department must continue to file tax returns and remit the appropriate taxes.
(4)(a) Example 1. Bob Brown is starting a bookkeeping service. Income generated from this activity is taxable under the service and other activities B&O tax classification. The gross income of the business is expected to be less than $12,000 per year. Bob's only income is earned from his bookkeeping activity. Due to the nature of the business activities, Bob is not required to pay or collect any other tax or fee which the department is authorized to collect. Bob has no other need to file a business license application.
Bob Brown is not required to apply for and obtain a tax registration endorsement with the department. The conditions under which a business person may engage in business activities without obtaining the tax registration endorsement have been met. However, if Bob Brown in some future period has gross income exceeding $12,000 per year, he will be required to obtain a tax registration endorsement. If Bob's gross income exceeds $125,000 per year, he will be required to file tax returns and remit the appropriate taxes.
(b) Example 2. Cindy Smith is opening a business to sell children's books to local customers at retail. The gross proceeds of sales are expected to be less than $12,000 per year.
Cindy Smith must apply for and obtain a tax registration endorsement with the department. While gross income is expected to be less than $12,000 per year, Cindy Smith is required to collect and remit retail sales tax.
(c) Example 3. Alice Smith operates a taxicab service with an average gross income of $18,000 per year. She also owns a management consulting service with an average gross income of $15,000 per year. Assume that Alice is not required to collect or pay to the department any other tax or fee the department is authorized to collect. Alice qualifies for an active nonreporting status because her taxicab income is less than the $24,000 threshold for the public utility tax and her consulting income is less than the $125,000 threshold for the B&O tax. If the department does not first place her on an active nonreporting status, she may request the department to do so.
(5) Out-of-state businesses. Out-of-state businesses may have to obtain a tax registration endorsement with the department.
(a) B&O and public utility taxes. The B&O and public utility taxes are imposed on the act or privilege of engaging in business activity within Washington. RCW 82.04.220 and 82.16.020. Out-of-state persons who have established sufficient nexus in Washington to be subject to Washington's B&O or public utility taxes must obtain a tax registration endorsement with this department if they do not satisfy the conditions expressed in subsection (2)(a) of this rule.
(b) Retail sales and use taxes. Out-of-state persons required to collect Washington's retail sales or use tax under RCW 82.04.067 must obtain a tax registration endorsement. Out-of-state persons who are not statutorily required to collect Washington's use tax, may elect to obtain a tax registration endorsement.
(c) Other relevant rules for out-of-state persons. Out-of-state persons making sales into or doing business within Washington should also refer to the following rules in chapter 458-20 WAC for a discussion of their tax reporting responsibilities:
(i) WAC 458-20-193 Interstate sales of tangible personal property;
(ii) WAC 458-20-193D Transportation, communication, public utility activities, or other services in interstate or foreign commerce;
(iii) WAC 458-20-194 Doing business inside and outside the state;
(iv) WAC 458-20-19401 Minimum nexus thresholds for apportionable activities; and
(v) WAC 458-20-221 Collection of use tax by retailers and selling agents.
(6) Registration procedure. The state of Washington initiated the combined licensing program of the business licensing service, and later the unified business identifier (UBI) program to simplify the registration and licensing requirements imposed on the state's business community. Completion of the business license application and payment of the applicable fee(s) enables a person to register or license with several state agencies and cities, including the department of revenue, using a single form. The person will be assigned one unified business identifier number, which is used by all state agencies and cities participating in the UBI program. The department may use the unified business identifier number as the taxpayer's department of revenue tax account ID, or it may assign a different or additional ID as the revenue tax account ID.
(a) Business license application. Persons completing the business license application will be issued a business license document if at least one registration or license endorsement was issued. The face of this document will list the registrations and licenses (endorsements) which have been obtained.
(b) Fees. The department does not charge a separate registration fee for issuing a tax registration endorsement. Persons required to complete a business license application are subject to other fees.
(c) Forms and submission. Business license applications are available online from the department's business licensing service website at bls.dor.wa.gov.
(7) Registration application. The department requires the following items to be provided on a business license application in order to obtain a tax registration endorsement:
(a) Purpose or reason for application.
(b) The registration endorsement(s) that are needed, including any information required by the respective regulating agency specific to the endorsement requested.
(c) Business information which includes, but is not limited to:
(i) Type of business entity ownership structure;
(ii) Business activities;
(iii) Business name and open date;
(iv) Business contact information, including the physical and mailing address of the business;
(v) Estimated gross annual income of business;
(vi) Business identification number as follows:
(A) Social Security number of the business owner(s) if the business ownership structure is a sole proprietorship or general partnership; or
(B) Federal employer identification number (FEIN) for all other business ownership structures other than those listed in (c)(vi)(A) of this subsection including, but not limited to, corporations, limited liability companies, limited liability partnerships, and joint ventures; or
(C) For those business entities that have not been issued a Social Security number or FEIN, the department may request the business entity provide an alternative federally issued identification number.
(vii) Full legal name(s) and contact information of all governing persons of the business entities identified in (c)(vi)(B) of this subsection.
(d) All license and administrative fees due for the application filing and endorsements requested.
(e) Additional information other than the items identified in this subsection may also be required to satisfy the specific licensing requirements of other agencies.
(8) Temporary revenue registration certificate. A temporary revenue registration certificate may be issued to any person who operates a business of a temporary nature.
(a) Temporary businesses, for the purposes of registration, are those with definite, predetermined dates of operation for no more than two events each year with each event lasting no longer than one month.
(b) Each temporary registration certificate is valid for a single event. Persons that subsequently make sales into Washington may incur additional tax liability. Refer to WAC 458-20-193 (Interstate sales of tangible personal property) for additional information on tax reporting requirements. It may be required that a tax registration endorsement be obtained, in lieu of a temporary registration certificate. See subsection (2) of this rule.
(c) Temporary revenue registration certificates may be obtained by following registration instructions on the department's website at dor.wa.gov.
(9) Display of business license document. The taxpayer is required to display the business license document in a conspicuous place at the business location for which it is issued.
(10) Multiple locations. A business license document is required for each place of business where a taxpayer engages in business activities for which the department is responsible for administering and/or collecting a tax or fee, and any main office or principal place of business from which excise tax returns are to be filed. This requirement applies to locations both within and without the state of Washington.
(a) Place of business. For the purposes of this subsection, the term "place of business" means:
(i) Any separate establishment, office, stand, cigarette vending machine, or other fixed location; or
(ii) Any vessel, train, or the like, where the taxpayer solicits or makes sales of tangible personal property, or contracts for or renders services in this state or otherwise transacts business with customers.
(b) Multiple locations with a single excise tax return. A taxpayer may report all tax liability for multiple business locations on a single excise tax return, but must maintain a separate business license document for each location. All business license documents will reflect the same tax account ID.
(c) Multiple locations with separate excise tax returns. A taxpayer desiring to file a separate excise tax return covering a branch location, or a specific construction contract, may request on the business license application a separate department of revenue tax account ID for each location to be reported separately.
(d) Application required for each location. A business license application must be completed for each business location to obtain a separate business license document.
(11) Change in ownership. When a change in ownership of a business occurs, the new owner must submit a business license application(s) to receive a new business license document for each business location acquired that is endorsed with the appropriate licenses needed for the business. If the new owner has never been registered for business, it will be issued a new unified business identifier number. The previous business owner's license document must be destroyed, and any further use of the previous owner's tax account ID for tax purposes is prohibited.
(a) Change in ownership. A "change in ownership," for purposes of registration, occurs when, but is not limited to:
(i) The sale of a business by one individual, firm or corporation to another individual, firm or corporation;
(ii) The dissolution of a partnership;
(iii) The withdrawal, substitution, or addition of one or more partners where the general partnership continues as a business organization and the change in the partners is equal to or greater than 50 percent. For example, a general partnership currently has two partners and a third partner is added. The addition of one partner is considered a "change in ownership" for purposes of registration because it is equal to or greater than a 50 percent change in the original number of partners;
(iv) Incorporation of a business previously operated as a partnership or sole proprietorship;
(v) Changing from a corporation to a partnership or sole proprietorship; or
(vi) Changing from a corporation, partnership or sole proprietorship to a limited liability company or a limited liability partnership.
(b) Situations that are not a change in ownership. For the purposes of registration, a "change in ownership" does not occur upon:
(i) The sale of all or part of the common stock of a corporation;
(ii) The transfer of assets to an assignee for the benefit of creditors or upon the appointment of a receiver or trustee in bankruptcy;
(iii) The death of a sole proprietor where there will be a continuous operation of the business by the executor, administrator, or trustee of the estate or, where the business was owned by a marital community or registered domestic partnership, by the surviving spouse or surviving domestic partner of the deceased owner;
(iv) The withdrawal, substitution, or addition of one or more partners where the general partnership continues as a business organization and the change in the partners is less than 50 percent. For example, a general partnership currently has three partners. One partner is removed and immediately replaced by another partner. The removal and replacement of one partner is not considered a "change in ownership" for purposes of registration because it results in less than a 50 percent change in the original number of partners; or
(v) A change in the trade name under which the business is conducted.
(c) Situations where a new business license application may still be required. While changes in a business entity may not result in a "change in ownership," the completion of a new business license application may be required to reflect the changes in the registered account.
(12) Change in location. Whenever the place of business is moved to a new location, the taxpayer must notify the department of the change. Although a new business license application may not be required to notify the department of a location change, some endorsements and licenses will require a new business license and reapproval of the license endorsements at the new location. A new business license document will be issued to reflect the change in location.
(13) Lost business license documents. If any business license document is lost, destroyed or defaced as a result of accident or of natural wear and tear, a new document will be issued upon request.
(14) Administrative closure of taxpayer accounts. The department may, upon written notification to the taxpayer, close the taxpayer's tax account and rescind its tax registration endorsement whenever the taxpayer has reported no gross income and there is no indication of taxable activity for two consecutive years.
The taxpayer may request, within 30 days of notification of closure, that the account remain open. A taxpayer may also request that the account remain open on an "active nonreporting" status if the requirements of subsection (3)(a) of this rule are met. The request will be reviewed by the department and if found to be warranted, the department will immediately reopen the account. The following are acceptable reasons for continuing as an active account:
(a) The taxpayer is engaging in business activities in Washington which may result in tax liability.
(b) The taxpayer is required to collect or pay to the department a tax or fee which the department is authorized to administer and/or collect.
(c) The taxpayer has in fact been liable for excise taxes during the previous two years.
(15) Reopening of taxpayer accounts. A business person choosing to resume business activities where the department is responsible for administering and/or collecting a tax or fee, may request a previously closed account be reopened. The business person must complete a new business license application. When an account is reopened a new business license document, reflecting a current tax registration endorsement, will be issued. Persons requesting the reopening of an account that had previously been closed due to a revocation action should refer to subsection (16) of this rule.
(16) Revocation and reinstatement of tax registration endorsements. Actions to revoke tax registration endorsements must be conducted by the department pursuant to the provisions of chapter 34.05 RCW, the Administrative Procedure Act, and the taxpayers bill of rights of chapter 82.32A RCW. Persons should refer to WAC 458-20-10001 Adjudicative proceedings—Brief adjudicative proceedings—Wholesale and retail cigarette license revocation/suspension—Certificate of registration (tax registration endorsement) revocation, for an explanation of the procedures and processes pertaining to the revocation of tax registration endorsements.
(a) The department may, by order, revoke a tax registration endorsement if:
(i) Any tax warrant issued under the provisions of RCW 82.32.210 is not paid within 30 days after it has been filed with the clerk of the superior court; or
(ii) The taxpayer is delinquent, for three consecutive reporting periods, in the transmission to the department of retail sales tax collected by the taxpayer; or
(iii) Either:
(A) The taxpayer was convicted of violating RCW 82.32.290(4) and continues to engage in business without fully complying with RCW 82.32.290 (4)(b)(i) through (iii); or
(B) A person convicted of violating RCW 82.32.290(4) is an owner, officer, director, partner, trustee, member, or manager of the taxpayer, and the person and taxpayer have not fully complied with RCW 82.32.290 (4)(b)(i) through (iii).
For purposes of (a)(iii) of this subsection, the terms "manager," "member," and "officer" mean the same as defined in RCW 82.32.145.
(b) The revocation order will be, if practicable, posted in a conspicuous place at the main entrance to the taxpayer's place of business. The department may also post a copy of the revocation order in any public facility, as may be allowed by the public entity that owns or occupies the facility. The revocation order posted at the taxpayer's place of business must remain posted until the tax registration endorsement has been reinstated or the taxpayer has abandoned the premises. A revoked endorsement will not be reinstated until:
(i) The amount due on the warrant has been paid, or satisfactory arrangements for payment have been approved by the department, and the taxpayer has posted with the department a bond or other security in an amount not exceeding one-half the estimated average annual liability of the taxpayer; or
(ii) The taxpayer and, if applicable, the owner, officer, director, partner, trustee, member, or manager of the taxpayer who was convicted of violating RCW 82.32.290(4) are in full compliance with RCW 82.32.290 (4)(b)(i) through (iii), if the tax registration endorsement was revoked as described in (a)(iii) of this subsection.
(c) It is unlawful for any taxpayer to engage in business after its tax registration endorsement has been revoked, regardless of whether other licensing endorsements may exist on the business license document.
(17) Penalties for noncompliance. The law provides that any person engaging in any business activity, for which registration with the department is required, must obtain a tax registration endorsement.
(a) The failure to obtain a tax registration endorsement prior to engaging in any taxable business activity constitutes a gross misdemeanor.
(b) Engaging in business after a tax registration endorsement has been revoked by the department constitutes a Class C felony.
(c) Any tax found to have been due, but delinquent, and any tax unreported as a result of fraud or misrepresentation, may be subject to penalty as provided in chapter 82.32 RCW, WAC 458-20-228 and 458-20-230.
[Statutory Authority: RCW 82.32.045, 82.04.4451, and 82.01.060. WSR 23-08-081, § 458-20-101, filed 4/5/23, effective 5/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-22-027, § 458-20-101, filed 10/23/17, effective 11/23/17; WSR 16-10-104, § 458-20-101, filed 5/4/16, effective 6/6/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.24.550(2), and 82.26.220(2). WSR 15-15-025, § 458-20-101, filed 7/7/15, effective 8/7/15. Statutory Authority: RCW 82.32.300, 82.01.060(2) and 82.32.215. WSR 14-13-093, § 458-20-101, filed 6/17/14, effective 7/18/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 08-16-073, § 458-20-101, filed 7/31/08, effective 8/31/08; WSR 07-03-031, § 458-20-101, filed 1/8/07, effective 2/8/07. Statutory Authority: RCW 82.32.300. WSR 00-01-069, § 458-20-101, filed 12/13/99, effective 1/13/00; WSR 97-08-050, § 458-20-101, filed 3/31/97, effective 5/1/97; WSR 95-07-089, § 458-20-101, filed 3/17/95, effective 4/17/95; WSR 93-13-126, § 458-20-101, filed 6/22/93, effective 7/23/93; WSR 86-12-015 (Order ET 86-11), § 458-20-101, filed 5/27/86; WSR 83-07-032 (Order ET 83-15), § 458-20-101, filed 3/15/83; Order ET 73-1, § 458-20-101, filed 11/2/73; Order ET 71-1, § 458-20-101, filed 7/22/71; Order ET 70-3, § 458-20-101 (Rule 101), filed 5/29/70, effective 7/1/70.]


PDF458-20-102

Reseller permits.

(1) Introduction. This rule provides information about reseller permits issued by the department of revenue (department). The department issues reseller permits to businesses that make wholesale purchases, such as retailers, wholesalers, manufacturers, and qualified contractors. The permits allow the businesses to purchase certain items or services without paying retail sales tax.
(a) Other rules that may apply. Readers may want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-101 (Tax registration and tax reporting) for information on who is required to register and file returns;
(ii) WAC 458-20-10201 (Application process and eligibility requirements for reseller permits) for information about the application process and eligibility requirements for obtaining a reseller permit;
(iii) WAC 458-20-10202 (Brief adjudicative proceedings for matters related to reseller permits) for information about the procedures for appealing the denial of an application for a reseller permit;
(iv) WAC 458-20-102A (Resale certificates) for information about resale certificate documentation requirements for wholesale sales occurring before January 1, 2010; and
(v) WAC 458-20-192 (Indian-Indian country) for information on the extent of the state's authority to regulate and impose tax in Indian country.
(b) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) What is a reseller permit? A reseller permit is a document issued to a business by the department that the business provides to a seller to substantiate a wholesale purchase. Each reseller permit contains a unique identifying number. Businesses should keep the original permit and make and distribute copies of the permit to sellers from whom they make wholesale purchases as described in subsection (6) of this rule. Sellers may store copies of reseller permits in either paper or electronic format.
The reseller permit document issued by the department contains an optional, blank "Notes" section in which the permit holder may provide additional information, such as a description of the items or services the permit holder wishes to purchase at wholesale.
(3) Who may use a reseller permit? The buyer may authorize any person in its employ to use a copy of the buyer's reseller permit on the buyer's behalf. However, misuse of the reseller permit subjects the buyer to:
• Revocation of the reseller permit;
• Penalties as provided in RCW 82.32.290 and 82.32.291; and
• Tax, interest, and any other penalties imposed by law.
The buyer is responsible for educating all persons authorized to use the reseller permit on the proper use of the buyer's reseller permit.
(4) How long is a reseller permit effective? Except as otherwise provided in this subsection, a reseller permit is generally valid for a period of forty-eight months from the date of issuance, renewal, or reinstatement.
(a) Conditions when permit is effective for twenty-four months. A reseller permit is valid for an initial period of twenty-four months and may be renewed for a period of forty-eight months, if the permit is issued to a taxpayer who:
(i) Is not required to be registered with the department under RCW 82.32.030;
(ii) Has been registered with the department under RCW 82.32.030 for a continuous period of less than one year as of the date that the department received the taxpayer's application for a reseller permit;
(iii) Was on nonreporting status as authorized under RCW 82.32.045 at the time the department received the taxpayer's application for a reseller permit or to renew or reinstate a reseller permit;
(iv) Has filed excise tax returns reporting no business activity for purposes of retail sales and business and occupation (B&O) taxes for the twelve-month period immediately preceding the date that the department received the taxpayer's application for a reseller permit or to renew or reinstate a reseller permit; or
(v) Has failed to file excise tax returns covering any part of the twelve-month period immediately preceding the department's receipt of the taxpayer's application for a reseller permit or to renew or reinstate a reseller permit.
(b) Federally recognized Indian tribe. The provisions of (a) of this subsection do not apply to reseller permits issued to any business owned by a federally recognized Indian tribe or by an enrolled member of a federally recognized Indian tribe, if the business does not engage in any business activity that subjects the business to the B&O tax (chapter 82.04 RCW). A permit issued to such business is valid for forty-eight months from the date of issuance, renewal, or reinstatement.
(c) Contractors. A reseller permit issued, renewed, or reinstated to a "contractor" as defined in WAC 458-20-10201(101) is valid for a period of twenty-four months from the date of issuance, renewal, or reinstatement.
(d) Renewal of reseller permit. An application to renew a reseller permit cannot be made more than ninety days before the expiration of the reseller permit.
(e) Business ownership change. A new reseller permit is required whenever a change in the ownership of the buyer's business requires a new tax registration. The new business may not make purchases under the authority of the reseller permit issued to the business before the change in ownership.
(f) Revoked or invalid reseller permit. Purchases may not be made under the authority of a reseller permit that has been revoked by the department or is otherwise invalid. For more information about reseller permit revocation or other invalidation of reseller permits, see subsection (14) of this rule.
(5) Sales at wholesale. All sales are treated as retail sales unless the seller takes from the buyer a copy of a reseller permit, a uniform exemption certificate authorized by RCW 82.04.470, or obtains the data elements described in subsection (7) of this rule. Reseller permits may only be used for sales at wholesale and generally may not be used as proof of entitlement to retail sales tax exemptions otherwise provided by law.
(6) When may a buyer use a reseller permit? The buyer may use a reseller permit only when making wholesale purchases. (See RCW 82.04.060 for additional information.) The reseller permit may not be used when making tax-exempt retail purchases.
(7) Seller's responsibilities. The seller has the burden of proving that the buyer had a reseller permit at the time of sale. A seller may meet that burden by taking from the buyer, at the time of sale or within one hundred twenty days after the sale, a copy of the reseller permit issued to the buyer by the department under RCW 82.32.780 or 82.32.783.
(a) Registered buyer. In lieu of a copy of a reseller permit issued by the department, pursuant to RCW 82.04.470 a seller may accept from a buyer that is required to be registered with the department under RCW 82.32.030:
(i) A properly completed uniform exemption certificate approved by the streamlined sales and use tax agreement governing board; or
(ii) Any other exemption certificate authorized by the department and properly completed by the buyer.
(b) Inclusion of reseller permit number. Certificates authorized in (a) of this subsection must include the reseller permit number issued by the department to the buyer.
(c) Seller not required to verify buyer's registration. A seller that accepts exemption certificates authorized in (a) of this subsection is not required to verify with the department whether the buyer is required to be registered with the department under RCW 82.32.030. Nothing in (c) of this subsection may be construed to modify any of the provisions of RCW 82.08.050.
(d) Buyer not required to be registered. In lieu of a copy of a reseller permit issued by the department, pursuant to RCW 82.04.470 a seller may accept from a buyer that is not required to be registered with the department under RCW 82.32.030:
(i) A properly completed uniform sales and use tax exemption certificate developed by the multistate tax commission;
(ii) A properly completed uniform exemption certificate approved by the streamlined sales and use tax agreement governing board; or
(iii) Any other exemption certificate authorized by the department and properly completed by the buyer.
The Streamlined Sales and Use Tax Agreement Certificate of Exemption and the Multistate Tax Commission Uniform Sales and Use Tax Exemption Certificate may each be obtained on the department's website at dor.wa.gov.
(e) Seller not required to verify buyer's requirement to be registered. A seller that accepts a uniform exemption certificate authorized in (d) of this subsection is not required to verify with the department whether the buyer is required to be registered with the department under RCW 82.32.030. Nothing in this subsection (7)(e) may be construed to modify any of the provisions of RCW 82.08.050.
(f) Data elements. In lieu of obtaining a reseller permit or the documentation in (a) or (d) of this subsection, RCW 82.08.050 authorizes a seller to capture the relevant data elements as allowed under the streamlined sales and use tax agreement. "Data elements" are the information required to be supplied on the actual Streamlined Sales and Use Tax Agreement Certificate of Exemption including: Name, address, type of business, reason for exemption, reseller permit number as applicable in this rule, identification number required by the state to which the sale is sourced, state and country issuing identification number, and if a paper form is used, the signature of the purchaser. See Streamlined Sales Tax Governing Board, Inc. Rule 317.1 for more information.
(g) The term "reseller permit." For purposes of this rule, unless otherwise specified, the term "reseller permit" hereinafter contemplates all of the following: A copy of a reseller permit, a uniform exemption certificate authorized by RCW 82.04.470 as described in (a) and (d) of this subsection, or data elements as described in (f) of this subsection.
(h) Seller must provide documentation or information. If the seller has not obtained a reseller permit or the documentation described in (a), (b), (d), or (f) of this subsection, the seller is liable for the tax due unless it proves by establishing facts and circumstances that show the sale was properly made at wholesale. The department will consider all evidence presented by the seller, including the circumstances of the sales transaction itself, when determining whether the seller has met its burden. It is the seller's responsibility to provide the information necessary to evaluate the facts and circumstances of all sales transactions for which reseller permits were not obtained. Facts and circumstances that should be considered include, but are not necessarily limited to, the following:
• The nature of the buyer's business. The items being purchased at wholesale must be consistent with the buyer's business. For example, a buyer having a business name of "Ace Used Cars" would generally not be expected to be in the business of selling furniture;
• The nature of the items sold. The items sold must be of a type that would normally be purchased at wholesale by the buyer; and
• Additional documentation. Other available documents, such as purchase orders and shipping instructions, should be considered in determining whether they support a finding that the sales are sales at wholesale.
(i) Annual electronic verification. Per RCW 82.04.470 a seller that maintains records establishing that it uses electronic means to verify, at least once per calendar year, the validity of its customers' reseller permits need not take a copy of a reseller permit or other documentation or the data elements as authorized in (a), (d), or (f) of this subsection for wholesale sales to those customers with valid reseller permits as confirmed by the department for all sales occurring within twelve months following the date that the seller last electronically verified the validity of its customers' reseller permits, using the department's reseller permit verification system. A seller that meets the requirements of this subsection will be deemed to have met its burden of proving a sale is a wholesale sale rather than a retail sale.
(j) May a seller request a refund for sales tax paid out-of-pocket after obtaining appropriate documentation? If the seller is required to make payment to the department, and later is able to prove through proper documentation or by facts and circumstances that the sales in question were wholesale sales, the seller may in writing request a refund of the taxes paid along with the applicable interest. Both the request and the documentation or proof that the sales in question were wholesale sales must be submitted to the department within the statutory time limitations provided by RCW 82.32.060. For information on requesting refunds see WAC 458-20-229. In the event of an audit, refer to (m) of this subsection.
(k) Timing requirements for single orders with multiple billings. If a single order or contract will result in multiple billings to the buyer, and a reseller permit was not obtained by the seller or on file with the seller at the time the order was placed or the contract entered, the seller may obtain a reseller permit within one hundred twenty days after the first billing. For example, a subcontractor entering into a construction contract for which it has not received a reseller permit must obtain it within one hundred twenty days of the initial construction draw request, even though the construction project may not be completed at that time and additional draw requests will follow.
(l) Proof of wholesale sales obtained, from a buyer not required to be registered, after one hundred twenty days have passed from sale date. If proof that a sale was a wholesale sale is obtained more than one hundred twenty days after the sale or sales in question, the nonregistered buyer must specifically identify the sale or sales to which it applies. Certificates, such as a uniform exemption certificate, must be accompanied by other documentation signed by the buyer specifically identifying the sales in question and stating that the provisions of the accompanying certificate apply. A nonspecific certificate that is not obtained within one hundred twenty days is generally not, in and of itself, acceptable proof of the wholesale nature of the sales in question. The certificate and/or required documentation must be obtained within the statutory time limitations provided by RCW 82.32.050.
(m) Additional time to secure documentation in an audit. If during an audit the department discovers that the seller has not secured, as described in this subsection, the necessary certificates and/or documentation, the seller will generally be allowed one hundred twenty days in which to obtain and present appropriate certificates and/or documentation, or prove by facts and circumstances the sales in question were wholesale sales. The time allotted to the seller will commence from the date the auditor initially provides the seller with the results of the auditor's wholesale sales review. The department will not delay processing the audit report as a result of the seller's failure within the allotted time to secure and present appropriate documentation, or its inability to prove by facts and circumstances that the sales in question were wholesale sales.
(8) Department's reseller permit verification system. Pursuant to RCW 82.32.785, the department has developed a system available on its website that allows sellers to voluntarily verify whether their customers' reseller permits are valid. Sellers are not obligated to use the verification system. The system is accessible at the department's website at dor.wa.gov. Information available on the system includes the name of the permit holder, the status of the reseller permit, and the expiration date of the permit.
(9) Penalty for improper use of reseller permit. If any buyer improperly uses a reseller permit number, reseller permit, or other documentation authorized under RCW 82.04.470 to purchase items or services at retail without payment of sales tax that is legally due on the purchase, the department must assess against that buyer a penalty of fifty percent of the tax due on the improperly purchased item or service. See RCW 82.32.291. This penalty is in addition to all other taxes, penalties, and interest due, and applies even if there was no intent to evade the payment of retail sales tax. The penalty will be assessed by the department and applies only to the buyer. However, see subsection (13) of this rule for situations in which the department must waive the penalty.
(a) Improper use of reseller permit. A buyer that purchases items or services at retail without payment of sales tax legally due on the purchase is deemed to have improperly used a reseller permit number, reseller permit, or other documentation authorized under RCW 82.04.470 to purchase the items or services without payment of sales tax and is subject to the penalty described above in this subsection if the buyer:
(i) Furnished to the seller a reseller permit number, a reseller permit or copy of a reseller permit, or other documentation authorized under RCW 82.04.470 to avoid payment of sales tax legally due on the purchase; or
(ii) Purchased from a seller that had previously used electronic means to verify the validity of the buyer's reseller permit with the department and, as a result, did not require the buyer to provide a copy of its reseller permit or furnish other documentation authorized under RCW 82.04.470 to document the wholesale nature of the purchase. In such cases, the buyer bears the burden of proving that the purchases made without payment of sales tax were qualified purchases or the buyer remitted deferred sales tax directly to the department. The buyer not realizing that sales tax was not paid at the time of purchase is not reason for waiving the penalty.
Persons purchasing articles or services for dual purposes (i.e., some for their own consumption and some for resale) should refer to subsection (12) of this rule to determine whether they may furnish a reseller permit to the seller.
(b) Examples.
(i) Example 1. During a routine audit examination of a jewelry store, the department discovers that a dentist has furnished a reseller permit for the purchase of a necklace. The "Notes" section of the reseller permit indicates that in addition to operating a dentistry practice, the dentist also sells jewelry. The jewelry store correctly accepted the reseller permit as appropriate documentation.
Upon further investigation, the department finds that the dentist is not engaged in selling jewelry. The department will impose the retail sales tax, interest, and the fifty percent penalty for improper use of the reseller permit against the dentist.
(ii) Example 2. M&M Plumbing Supply (M&M) has several regular customers that make purchases at wholesale. M&M uses the department's reseller permit verification system to find all regular customers that have a reseller permit. M&M keeps the required data elements in its system and begins to make wholesale sales to all customers the system shows have a reseller permit. While it is best for sellers to ensure customers intend to purchase at wholesale, in this case, M&M has satisfied its requirement to ensure that customers making wholesale purchases have reseller permits. It is the customer's responsibility to review purchase invoices to ensure that deferred sales tax is paid if the purchase is not a valid wholesale purchase. If the customer does not pay the tax due on the next tax return, the misuse penalty will be assessed.
(iii) Example 3. ABC Bank hired Sam's Clean-Up Services (Sam's) to provide a variety of services at properties they had foreclosed on and owned. Sam's has provided services such as securing the sites, winterizing, and making safety repairs. Other services provided included lawn and yard services, debris removal, cleaning fixtures, repairing walls and painting. These types of services on foreclosed properties are generally retail sales and the use of a reseller permit by ABC Bank is a misuse of it. The department will impose the retail sales tax, interest, and the fifty percent penalty for improper use of the reseller permit.
(10) Sales to nonresident buyers. If the buyer is a nonresident, not engaged in business in this state and is not required to be registered with the department under RCW 82.32.030 but buys articles here for the purpose of resale in the regular course of business outside this state, the seller may accept the following from the buyer in lieu of a reseller permit:
(a) A properly completed uniform sales and use tax exemption certificate developed by the multistate tax commission; or
(b) A properly completed uniform exemption certificate approved by the streamlined sales and use tax agreement governing board. Nonresident buyers who are not required to be registered with the department under RCW 82.32.030 also may apply for and receive a reseller permit. For more information about the application process and eligibility requirements for reseller permits, see WAC 458-20-10201.
(11) Sales to farmers. Farmers selling agricultural products only at wholesale are generally not required to register with the department. (See WAC 458-20-101 Tax registration and tax reporting.)
(a) Registered farmers. Farmers who are required to be registered with the department must obtain a reseller permit to substantiate wholesale purchases. In lieu of a copy of a reseller permit issued by the department, a seller may accept from a registered farmer a properly completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions as long as that certificate includes the reseller permit number issued by the department to the farmer. See RCW 82.04.470.
(b) Unregistered farmers. Farmers not required to be registered with the department may provide, and the seller may accept, any of the following documents to substantiate the wholesale nature of a purchase in lieu of a reseller permit:
(i) A Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions;
(ii) A properly completed uniform sales and use tax exemption certificate developed by the multistate tax commission; or
(iii) A properly completed uniform exemption certificate approved by the streamlined sales and use tax agreement governing board.
Farmers who are not required to be registered with the department may apply for and receive a reseller permit. For more information about the application process and eligibility requirements for reseller permits, see WAC 458-20-10201.
(12) Purchases for dual purposes. A buyer normally engaged in both consuming and reselling certain types of tangible personal property, and not able to determine at the time of purchase whether the particular property purchased will be consumed or resold, must purchase according to the general nature of the buyer's business. RCW 82.08.130. If the buyer principally consumes the articles in question, the buyer should not give a reseller permit for any part of the purchase. If the buyer principally resells the articles, the buyer may furnish a reseller permit for the entire purchase. For the purposes of this subsection, the term "principally" means greater than fifty percent.
(a) Deferred sales tax liability. If the buyer gives a reseller permit for all purchases and thereafter consumes some of the articles purchased, the buyer must remit the deferred sales tax on the value of the article used to the department. The deferred sales tax liability should be reported under the use tax classification on the buyer's excise tax return.
(i) Buyers making purchases for dual purposes under the provisions of a reseller permit must remit deferred sales tax on all products or services they consume. If the buyer fails to make a good faith effort to remit this tax liability, the penalty for the misuse of a reseller permit will be assessed on the unremitted portion of the deferred sales tax liability.
A buyer will generally be considered to be making a good faith effort to report its deferred sales tax liability if the buyer discovers a minimum of eighty percent of its deferred sales tax liability within one hundred twenty days of purchase, and remits the full amount of the discovered tax liability on the next excise tax return. However, the penalty will not be assessed if the buyer does not satisfy the eighty percent threshold but can show by other facts and circumstances that it made a good faith effort to report its tax liability. Likewise, if the department can show by other facts and circumstances that the buyer did not make a good faith effort in remitting its tax liability the penalty will be assessed, even if the eighty percent threshold is satisfied.
(ii) Example 4. This example illustrates the use of a reseller permit for dual-use purchases.
BC Contracting operates as both a prime contractor and speculative builder of residential homes. BC Contracting purchases building materials from seller that are principally incorporated into projects upon which BC acts as a prime contractor. BC provides seller with a reseller permit and purchases all building materials at wholesale. BC must remit deferred sales tax for all building materials incorporated into the speculative projects to be considered to be properly using its reseller permit.
(b) Tax paid at source deduction. If the buyer does not provide a reseller permit to the seller but pays retail sales tax on all articles of tangible personal property, and subsequently resells a portion of the articles, the buyer must collect retail sales tax from its retail customers as provided by law. When reporting these sales on the excise tax return, the buyer may then claim a deduction to recover the sales tax paid for the property resold.
(i) This deduction may be claimed under the retail sales tax classification only. It must be identified as a "taxable amount for tax paid at source" deduction on the deduction detail worksheet, which must be filed with the excise tax return. Failure to properly identify the deduction may result in the disallowance of the deduction. When completing the local sales tax portion of the tax return, the deduction must be computed at the local sales tax rate paid to the seller, and credited to the seller's tax location code.
(ii) Example 5. This example illustrates the tax paid at source deduction.
A seller is located in Spokane and purchases equipment parts for dual purposes from a supplier located in Seattle. The supplier ships the parts to Spokane. The seller does not furnish a reseller permit for the purchase, and remits retail sales tax to the supplier at the Spokane tax rate. A portion of these parts are sold and shipped to a customer in Kennewick, with retail sales tax collected at the Kennewick tax rate. The seller must report the amount of the sale to the customer on its excise tax return and compute the local sales tax liability using the Kennewick location code (0302) and rate. The seller then should claim the tax paid at source deduction for the cost of the parts resold to the customer, computing the local sales tax credit using the Spokane location code (3210) and rate.
(iii) The department will allow the claim for deduction only if the taxpayer keeps and preserves records in support of the deduction that include the names of the persons from whom it purchased such articles, the dates of the purchases, the types of articles, the amounts of the purchases and the amounts of tax it paid.
(iv) Should the buyer resell the articles at wholesale, or under other situations where retail sales tax is not to be collected, the claim for the tax paid at source deduction on a particular excise tax return may result in a credit. In such cases, the department will issue a credit notice that may be used against future tax liabilities. Alternatively, a taxpayer may request in writing a refund from the department.
(13) Waiver of penalty for misuse of reseller permits. The department will waive the penalty imposed for misuse of reseller permits if it finds that the use of the reseller permit number, reseller permit, or other documentation authorized under RCW 82.04.470 to purchase items or services by a person not entitled to use the reseller permit for that purpose was due to circumstances beyond the control of the buyer or if the reseller permit number, reseller permit, or other documentation authorized under RCW 82.04.470 was properly used for purchases for dual purposes and the buyer made a good faith effort to report deferred sales tax. The use of a reseller permit to purchase items or services for personal use outside of the business does not qualify for the waiver or cancellation of the penalty. The penalty also will not be waived merely because the buyer was not aware of either the proper use of the reseller permit or the penalty. In all cases the burden of proving the facts is on the buyer.
Example 6. During a routine audit examination of a computer dealer, the department discovers that a reseller permit was obtained from a bookkeeping service. On further investigation it is discovered that the bookkeeping service had no knowledge of the use of the reseller permit, and had made no payment to the computer dealer. The employee who furnished the reseller permit had purchased the computer for personal use, and had personally paid the computer dealer.
The fifty percent penalty for the misuse of the reseller permit will be waived for the bookkeeping service. The bookkeeping service had no knowledge of the purchase and unauthorized use of the reseller permit. However, the department will impose the taxes, interest, and the fifty percent penalty for the misuse of the reseller permit against the employee.
(14) Reseller permit revocation or other invalidation. A reseller permit is no longer valid if the permit holder's certificate of registration is revoked, the department closes the permit holder's tax reporting account, or the permit holder otherwise ceases to engage in business.
(a) Closing of an account. A taxpayer who ceases to engage in business will have its tax reporting account closed by the department. The account can be closed per the request of the taxpayer or administratively by the department. The department will administratively close a tax reporting account if a taxpayer has not reported any gross income or filed a return within the last two years. For more information about administrative closure and reopening of taxpayer accounts, see WAC 458-20-101.
(b) Reseller permit revocation. The department may revoke a reseller permit of a taxpayer for any of the following reasons:
(i) The taxpayer used or allowed or caused its reseller permit to be used to purchase any item or service without payment of sales tax, and the taxpayer or other purchaser was not entitled to use the reseller permit for the purchase;
(ii) The department issued the reseller permit to the taxpayer in error;
(iii) The department determines that the taxpayer is no longer entitled to make purchases at wholesale; or
(iv) The department determines that revocation of the reseller permit would be in the best interest of collecting taxes due under Title 82 RCW.
(c) Use of invalidated or revoked reseller permit. The department will provide written notice to a taxpayer whose reseller permit has been revoked or whose tax reporting account has been administratively closed by the department as discussed in (a) of this subsection. The revocation or invalidation is effective on the date specified in the revocation or invalidation notice. Use of a revoked or invalidated permit will result in the fifty percent penalty for improper use of a reseller permit as discussed in subsection (9) of this rule.
(d) Reinstatement of reseller permit. A taxpayer wishing to have its reseller permit reinstated after invalidation or revocation must apply to the department. For more information about the application process for reseller permits, see WAC 458-20-10201.
(e) Requests for reinstatement. The department may refuse to reinstate a reseller permit revoked under (b)(i) of this subsection until all taxes, penalties, and interest due on any improperly purchased item or service have been paid in full. In the event a taxpayer whose reseller permit has been revoked under (b)(i) of this subsection reorganizes, the new business resulting from the reorganization is not entitled to receive a reseller permit from the department until all taxes, penalties, and interest due on any improperly purchased item or service have been paid in full.
(f) Business reorganization. For purposes of this subsection, "reorganize" or "reorganization" means:
(i) The transfer of a majority of the assets of one business to another business, however affected, where any of the persons having an interest in the ownership or management in the former business maintain an ownership or management interest in the new business, either directly or indirectly;
(ii) A mere change in identity or form of ownership, however affected; or
(iii) The new business is a mere continuation of the former business based on significant shared features such as owners, personnel, assets, or general business activity.
(15) Request for copies. A person must, upon request of the department, provide paper or electronic copies of all reseller permits, or other documentation as authorized in RCW 82.04.470, accepted by that person during the period specified by the department to substantiate wholesale sales. If, instead of the documentation specified in this subsection, the seller has retained the relevant data elements from such permits or other documentation authorized in RCW 82.04.470, as allowed under the streamlined sales and use tax agreement, the seller must provide such data elements to the department.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-058, § 458-20-102, filed 2/25/16, effective 3/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.780, and 82.32.783. WSR 11-12-021, § 458-20-102, filed 5/24/11, effective 6/24/11. Statutory Authority: RCW 82.32.300, 82.32.291, and 82.01.060(2). WSR 08-21-103, § 458-20-102, filed 10/16/08, effective 11/16/08; WSR 04-17-024, § 458-20-102, filed 8/9/04, effective 9/9/04. Statutory Authority: RCW 82.32.300. WSR 94-13-031, § 458-20-102, filed 6/6/94, effective 7/7/94; WSR 86-09-058 (Order ET 86-7), § 458-20-102, filed 4/17/86; WSR 83-07-034 (Order ET 83-17), § 458-20-102, filed 3/15/83; Order ET 70-3, § 458-20-102 (Rule 102), filed 5/29/70, effective 7/1/70.]


PDF458-20-10201

Application process and eligibility requirements for reseller permits.

(1) Introduction. Reseller permits, issued by the department of revenue (department), replaced resale certificates as the documentation necessary to substantiate the wholesale nature of a sales transaction effective January 1, 2010. This rule explains the criteria under which the department will automatically issue a reseller permit, the application process for both contractors and taxpayers engaging in other business activities when the department does not automatically issue or renew a reseller permit, and the criteria that may result in the denial of an application for a reseller permit. Unique requirements and provisions apply to contractors. (See Part III of this rule.)
The information in this rule is organized into the following three parts:
(a) Part I: General Information.
(b) Part II: Businesses Other than Contractors.
(c) Part III: Contractors.
(2) Other rules that may apply. Readers may want to refer to other rules for additional information, including those in the following list:
(a) WAC 458-20-102 (Reseller permits) which explains taxpayers' responsibilities regarding the use of reseller permits, sellers' responsibilities for retaining copies of reseller permits, and the implications for taxpayers not properly using reseller permits and sellers not obtaining copies of reseller permits from taxpayers;
(b) WAC 458-20-10202 (Brief adjudicative proceedings for matters related to reseller permits) which explains the process a taxpayer must use to appeal the department's denial of an application for a reseller permit; and
(c) WAC 458-20-192 (Indian-Indian country) which explains the extent of the state's authority to regulate and impose tax in Indian country.
(3) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
Part I – General Information
(101) Definitions. For the purpose of this rule, the following terms will apply:
(a) Consumer. "Consumer" has the same meaning as under RCW 82.04.190.
(b) Contractor. A "contractor" is a person whose primary business activity is as a contractor as defined under RCW 18.27.010 or an electrical contractor as defined under RCW 19.28.006.
(c) Gross income. "Gross income" means gross proceeds of sales as defined in RCW 82.04.070 and value of products manufactured as determined under RCW 82.04.450.
(d) Labor. "Labor" is defined as the work of subcontractors (including personnel provided by temporary staffing companies) hired by a contractor to perform a portion of the construction services in respect to real property owned by a third party. In the case of speculative builders, labor includes the work of any contractor hired by the speculative builder. Labor does not include the work of taxpayer's employees. Nor does the term include architects, consultants, engineers, construction managers, or other independent contractors hired to oversee a project but who are not responsible for the construction of the project. However, for purposes of the percentage discussed in subsection (303)(a)(iii) of this rule, purchases of labor may include the wages of taxpayer's employees and amounts paid to consultants, engineers, construction managers or other independent contractors hired to oversee a project if all such purchases are commingled in the applicant's records and it would be impractical to exclude such purchases.
(e) Materials. "Materials" is defined as tangible personal property that becomes incorporated into the real property being constructed, repaired, decorated, or improved. Materials are the type of tangible personal property that contractors on retail construction projects purchase at wholesale, such as lumber, concrete, paint, wiring, pipe, roofing materials, insulation, nails, screws, drywall, and flooring material. Materials do not include consumable supplies, tools, or equipment, whether purchased or rented, such as bulldozers. However, for purposes of the percentage discussed in subsection (303)(a)(iii) of this rule, purchases of consumable supplies, tools, and equipment rentals may be included with material purchases if all such purchases are commingled in the applicant's records and it would be impractical to exclude such purchases.
(f) Material misstatement. "Material misstatement" is a false statement knowingly or purposefully made by the applicant with the intent to deceive or mislead the department.
(g) Outstanding tax liability. For the purpose of this rule, "outstanding tax liability" is any issued tax invoice that has not been paid in full on or before its stated due date. The definition excludes an invoice placed on hold by the department or where the department has executed a payment agreement with the taxpayer and the taxpayer is still in compliance with that agreement.
(h) Reseller permit. A "reseller permit" is the document issued to a taxpayer by the department, a copy of which the taxpayer provides to a seller to substantiate a wholesale purchase. A wholesale purchase is not subject to retail sales tax. RCW 82.04.060; 82.08.020.
(i) Retail construction activity. "Retail construction activity" means the constructing, repairing, decorating, or improving of new or existing buildings or other structures under, on, or above real property of or for consumers, including the installing or attaching of any article of tangible personal property therein or thereto, whether or not such personal property becomes a part of the realty by virtue of installation, and it also includes the sale of services or charges made for the clearing of land and the moving of earth except the mere leveling of land used in commercial farming or agriculture. Retail construction activity generally involves residential and commercial construction performed for others, including road construction for the state of Washington. It generally includes construction activities that are not specifically designated as speculative building, government contracting, public road construction, logging road construction, radioactive waste cleanup on federal lands, or designated hazardous site clean up jobs.
(j) Wholesale construction activity. "Wholesale construction activity" means labor and services rendered for persons who are not consumers in respect to real property, if such labor and services are expressly defined as a retail sale by RCW 82.04.050 when rendered to or for consumers.
(102) Can any business obtain a reseller permit? No. The legislature passed the act authorizing reseller permits to address the significant retail sales tax noncompliance problem resulting from both the intentional and unintentional misuse of resale certificates. The department will not issue a reseller permit unless the business substantiates that it is entitled to make wholesale purchases. Some businesses may not receive a reseller permit, and if they make wholesale purchases, they will need to pay retail sales tax to the seller and then claim a "taxable amount for tax paid at source" deduction on their excise tax return or request a refund from the department as discussed in subsection (205) of this rule.
Example 1. BC Interior Design (BC) arranges for its customers to order and pay for furniture, window treatments and other decorative items directly from vendors. As the customers purchase directly from the vendors, and BC does not purchase the items for resale to their customers, BC may not qualify for a reseller permit. BC must meet the criteria as discussed in subsection (203) of this rule, which includes reporting income from retailing, wholesaling, or manufacturing activities.
Part II - Businesses Other than Contractors
(201) How does a business obtain a reseller permit? The department may automatically issue a reseller permit to a business if it appears to the department's satisfaction, based on the nature of the business's activities and any other information available to the department, that the business is entitled to make purchases at wholesale.
Those businesses that do not receive an automatically issued reseller permit may apply to the department to obtain a reseller permit. Applications can be filed using the businesses' "My Account." If a paper application is needed, businesses can obtain one by calling 360-705-6705 (taxpayer services) or 360-902-7137 (taxpayer account administration). Completed paper applications should be mailed or faxed to the department at:
Taxpayer Account Administration
Washington State Department of Revenue
P.O. Box 47476
Olympia, WA 98504-7476
(202) When does a business apply for a reseller permit? A business may apply for a reseller permit at any time.
(203) What criteria will the department consider when deciding whether a business will receive a reseller permit?
(a) Except as provided in (b) of this subsection, a business other than a contractor will receive a reseller permit if it satisfies the following criteria (contractors should refer to subsection (303) of this rule for an explanation of the requirements unique to them):
(i) The business has an active tax reporting account with the department;
(ii) The business has reported gross income on its excise tax returns covering a monthly or quarterly period during the immediately preceding six months or, if the business reports on an annual basis, on the immediately preceding annual excise tax return; and
(iii) Five percent or more of the business's gross income reported during the applicable six- or 12-month period described in (a)(ii) of this subsection was reported under a retailing, wholesaling, or manufacturing business and occupation (B&O) tax classification.
(b) Notwithstanding (a) of this subsection, the department may deny an application for a reseller permit if:
(i) The department determines that an applicant is not entitled to make purchases at wholesale or is otherwise prohibited from using a reseller permit based on the nature of the applicant's business;
(ii) The applicant has been assessed the penalty for the misuse of a resale certificate or a reseller permit;
(iii) The application contains any material misstatement;
(iv) The application is incomplete;
(v) The applicant has an outstanding tax liability due to the department; or
(vi) The department determines that denial of the application is in the best interest of collecting the taxes due under Title 82 RCW.
(c) The department's decision to approve or deny an application may be based on excise tax returns previously filed with the department by the applicant, a current or previous examination of the applicant's books and records by the department, information provided by the applicant in the master application and the reseller permit application, and other information available to the department.
(d) In the event that a business has reorganized, the new business resulting from the reorganization may be denied a reseller permit if the former business would not have qualified for a reseller permit under (a) or (b) of this subsection. For purposes of this subsection, "reorganize" means:
(i) The transfer, however effected, of a majority of the assets of one business to another business where any of the persons having an interest in the ownership or management in the former business maintain an ownership or management interest in the new business, either directly or indirectly;
(ii) A mere change in identity or form of ownership, however effected; or
(iii) The new business is a mere continuation of the former business based on significant shared features such as owners, personnel, assets, or general business activity.
(204) What if I am a new business and don't have a past reporting history? New businesses will generally be issued permits if they indicate they will engage in activity taxable under a retailing, wholesaling, or manufacturing B&O tax classification.
(205) What if I don't get a reseller permit and some of my purchases qualify as wholesale purchases? Some taxpayers that do not qualify for a reseller permit make occasional wholesale purchases. In these circumstances, the taxpayer must pay retail sales tax on these purchases and then claim a "taxable amount for tax paid at source" deduction on its excise tax return. However, such a deduction in respect to the purchase of services is not permitted if the services are not of a type that can be sold at wholesale under the definition of wholesale sale in RCW 82.04.060.
Alternatively, the taxpayer may request a refund from the department of retail sales tax it paid on purchases that are later resold without being used (intervening use) by the taxpayer or for purchases that would otherwise have met the definition of wholesale sale if the taxpayer had provided the seller with a reseller permit or uniform exemption certificate as authorized in RCW 82.04.470. For instructions on requesting a refund see WAC 458-20-229.
Part III - Contractors
(301) How does a contractor obtain a reseller permit? The department may automatically issue a reseller permit to a contractor if the department is satisfied that the contractor is entitled to make purchases at wholesale and that issuing the reseller permit is unlikely to jeopardize collection of sales taxes due based on the criteria discussed in subsection (303) of this rule.
Contractors that do not receive an automatically issued reseller permit may apply to the department to obtain a reseller permit in the same manner as provided in subsection (201) of this rule. However, the application identifies information specific to contractors that must be provided.
(302) When does a contractor apply for a reseller permit? The same guidelines for business applicants as provided in subsection (202) of this rule also apply to contractor applicants.
(303) What are the criteria specific to contractors to receive a reseller permit?
(a) The department may issue a permit to a contractor that:
(i) Provides a completed application with no material misstatement as that term is defined in this rule;
(ii) Demonstrates it is entitled to make purchases at wholesale; and
(iii) Reported on its application at least 25 percent of its total dollar amount of material and labor purchases in the preceding 24 months were for retail and wholesale construction activities performed by the contractor.
The department may approve an application not meeting these criteria if the department is satisfied that approval is unlikely to jeopardize collection of the taxes due under Title 82 RCW.
(b) If the criteria in (a) of this subsection are satisfied, the department will then consider the following factors to determine whether to issue a reseller permit to a contractor:
(i) Whether the contractor has an active tax reporting account with the department;
(ii) Whether the contractor has reported gross income on its excise tax returns covering a monthly or quarterly period during the immediately preceding six months or, if the contractor reports on an annual basis, on the immediately preceding annual excise tax return;
(iii) Whether the contractor has the appropriate certification and licensing with the Washington state department of labor and industries;
(iv) Whether the contractor has been assessed the penalty for the misuse of a resale certificate or a reseller permit;
(v) Whether the contractor has an outstanding tax liability due to the department; and
(vi) Any other factor resulting in a determination by the department that denial of the contractor's application is in the best interest of collecting the taxes due under Title 82 RCW.
(c) The department's decision to approve or deny an application may be based on the same materials and information as discussed in subsection (203)(c) of this rule.
(d) The provisions of subsection (203)(d) of this rule apply equally to contractors.
Example 2. DC Contracting is a speculative homebuilder and also purchases houses to renovate and sell, sometimes referred to as flipping. A speculative builder is the consumer of all materials incorporated into the real estate including houses purchased for flipping. Retail sales tax is owed on all supplies and services DC Contracting purchases, unless there is an applicable exemption. DC Contracting would not qualify for a reseller permit under these facts.
(304) What if a contractor does not obtain a reseller permit and some of its purchases do qualify as wholesale purchases? The provisions of subsection (205) of this rule apply equally to contractors.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-10201, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-10201, filed 6/6/16, effective 7/7/16; WSR 16-01-155, § 458-20-10201, filed 12/21/15, effective 1/21/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.780, and 82.32.783. WSR 10-14-080, § 458-20-10201, filed 7/1/10, effective 8/1/10.]


PDF458-20-10202

Brief adjudicative proceedings for matters related to reseller permits.

(1) Introduction. The department of revenue (department) conducts adjudicative proceedings pursuant to chapter 34.05 RCW, the Administrative Procedure Act (APA). The department adopts in this rule the brief adjudicative procedures as provided in RCW 34.05.482 through 34.05.494 for the administration of brief adjudicative proceedings for the following matters related to reseller permits:
(a) A determination of whether an applicant for a reseller permit meets the criteria for a reseller permit per WAC 458-20-10201;
(b) On the administrative appeal of an initial order denying the taxpayer's application for a reseller permit, a determination as to whether the department's order denying the application was correctly based on the criteria for approving reseller permits as set forth in WAC 458-20-10201;
(c) A determination of whether a reseller permit should be revoked using the criteria per RCW 82.32.780 and WAC 458-20-102; and
(d) On the administrative appeal of an initial order revoking the taxpayer's reseller permit, a determination as to whether the department's order revoking the permit was correctly based on the criteria as set forth in RCW 82.32.780 and WAC 458-20-102.
This rule explains the procedure and process pertaining to the adopted brief adjudicative proceedings.
(2) Record in brief adjudicative proceedings.
(a) The record with respect to a taxpayer's appeal per RCW 34.05.482 through 34.05.485 of the department's denial of an application for a reseller permit will consist of:
(i) The taxpayer's application for the reseller permit, the taxpayer's notice of appeal, the taxpayer's written response, if any, to the reasons set forth in the department's notice of denial of a reseller permit, all records relied upon by the department or submitted by the taxpayer; and
(ii) All correspondence between the taxpayer requesting the reseller permit and the department regarding the application for the reseller permit.
(b) The record with respect to a taxpayer's appeal per RCW 34.05.482 through 34.05.485 of the department's initial order revoking a reseller permit will consist of the department's notice of intent to revoke the reseller permit, the taxpayer's written response to the department's notice of intent to revoke, the taxpayer's notice of appeal, and all records relied upon by the department, or submitted by the taxpayer.
(3) Conduct of brief adjudicative proceedings.
(a) If the department denies an application for a reseller permit, it will notify the taxpayer of the denial in writing, stating the reasons for the denial. To initiate an appeal of the denial of the reseller permit application, the taxpayer must file a written appeal no later than 21 days after service of the department's written notice that the taxpayer's application has been denied.
(b) If the department proposes to revoke a reseller permit, it will notify the taxpayer of the proposed revocation in writing, stating the reasons for the proposed revocation. To contest the proposed revocation of the reseller permit, the taxpayer must file a written response no later than 21 days after service of the department's written notice of the proposed revocation of the reseller permit.
(c) A Reseller Permit Appeal Petition form, or form for a response to the proposed revocation of a reseller permit is available at the department's website dor.wa.gov. The completed form may be sent by mail to the address provided in the form. Alternatively, an appeal for a denial of reseller permit can also be requested online using My DOR. For instructions to appeal online, visit Reseller Permit section on the department's website. For assistance, call 360-705-6217.
(d) A presiding officer, who will be either the assistant director of the taxpayer account administration division or such other person as designated by the director of the department (director), will conduct brief adjudicative proceedings. The presiding officer for brief adjudicative proceedings will have agency expertise in the subject matter but will not otherwise have participated in responding to the taxpayer's application for a reseller permit or in the decision to propose revocation of the taxpayer's reseller permit.
(e) As part of the appeal, the taxpayer or the taxpayer's representative may present written documentation and explain the taxpayer's view of the matter. The presiding officer may request additional documentation from the taxpayer or the department and will designate the date by which the documents must be submitted.
(f) No witnesses may appear to testify.
(g) In addition to the record, the presiding officer for brief adjudicative proceedings may employ agency expertise as a basis for decision.
(h) Within 21 days of receipt of the taxpayer's appeal of the denial of a reseller permit or proposed revocation of the reseller permit, the presiding officer will enter an initial order, including a brief explanation of the decision per RCW 34.05.485. All orders in these brief adjudicative proceedings will be in writing. The initial order will become the department's final order unless an appeal is filed with the department's administrative review and hearings division in subsection (4) of this rule.
(4) Review of initial orders from brief adjudicative proceeding. A taxpayer may request a review by the department of an initial order issued per subsection (3) of this rule by filing a petition for review or by making an oral request for review with the department's administrative review and hearings division within 21 days after the service of the initial order on the taxpayer. A form for an appeal of an initial order per subsection (3) of this rule is available at dor.wa.gov. A request for review should state the reasons the review is sought. A taxpayer making an oral request for review may at the same time mail a written statement to the address below stating the reasons for the appeal and its view of the matter. The address, telephone number, and fax number of the administrative review and hearings division are:
Administrative Review and Hearings Division, Reseller Permit Appeals
Washington State Department of Revenue
P.O. Box 47460
Olympia, WA 98504-7460
Telephone Number: 360-534-1335
(a) A reviewing officer, who will be either the assistant director of the administrative review and hearings division or such other person as designated by the director, will conduct brief adjudicative proceedings and determine whether the department's initial order issued per subsection (3) of this rule was correctly based on the criteria set forth in RCW 82.32.780, WAC 458-20-102, and 458-20-10201. The reviewing officer will review the record and, if needed, convert the proceeding to a formal adjudicative proceeding.
(b) The agency record need not constitute the exclusive basis for the reviewing officer's decision. The reviewing officer will have the authority of a presiding officer.
(c) The order of the reviewing officer will be in writing and include a brief statement of the reasons for the decision, and it must be entered within 20 days of the petition for review. The order will include a notice that judicial review may be available. The order of the reviewing officer represents the final decision of the department.
(d) A request for administrative review is deemed denied if the department does not issue an order on review within 20 days after the petition for review is filed or orally requested.
(5) Conversion of a brief adjudicative proceeding to a formal proceeding. The presiding officer or reviewing officer may convert the brief adjudicative proceeding to a formal proceeding at any time on motion of the taxpayer, the department, or the presiding/reviewing officer's own motion.
(a) The presiding/reviewing officer will convert the proceeding when it is found that the use of the brief adjudicative proceeding violates any provision of law, when the protection of the public interest requires the agency to give notice to and an opportunity to participate to persons other than the parties, and when the issues and interests involved warrant the use of the procedures of RCW 34.05.413 through 34.05.479.
(b) When a proceeding is converted from a brief adjudication to a formal proceeding, the director may become the presiding officer or may designate a replacement presiding officer to conduct the formal proceedings upon notice to the taxpayer and the department.
(c) In the conduct of the formal proceedings, WAC 458-20-10002 will apply to the proceedings.
(6) Court appeal. Court appeal from the final order of the department is available pursuant to Part V, chapter 34.05 RCW. However, court appeal may be available only if a review of the initial decision has been requested under subsection (4) of this rule and all other administrative remedies have been exhausted. See RCW 34.05.534.
(7) Computation of time. In computing any period of time prescribed by this rule or by the presiding officer, the day of the act or event after which the designated period is to run is not to be included. The last day of the period is to be included, unless it is a Saturday, Sunday or a legal holiday, in which event the period runs until the next day which is not a Saturday, Sunday or legal holiday. When the period of time prescribed is less than seven days, intermediate Saturdays, Sundays and holidays are excluded in the computation. Service as discussed in subsection (8) of this rule is deemed complete upon mailing.
(8) Service. All notices and other pleadings or papers filed with the presiding or reviewing officer must be served on the taxpayer, their representatives/agents of record, and the department.
(a) Service is made by one of the following methods:
(i) In person;
(ii) By first-class, registered or certified mail;
(iii) By fax and same-day mailing of copies;
(iv) By commercial parcel delivery company; or
(v) By electronic delivery pursuant to RCW 82.32.135.
(b) Service by mail is regarded as completed upon deposit in the United States mail properly stamped and addressed.
(c) Service by electronic fax is regarded as completed upon the production by the fax machine of confirmation of transmission.
(d) Service by commercial parcel delivery is regarded as completed upon delivery to the parcel delivery company, properly addressed with charges prepaid.
(e) Service by electronic delivery is regarded as completed on the date that the department electronically sends the information to the parties or electronically notifies the parties that the information is available to be accessed by them.
(f) Service to a taxpayer, their representative/agent of record, the department, and presiding officer must be to the address shown on the notice described in subsection (3)(a) of this rule.
(g) Service to the reviewing officer must be to the administrative review and hearings division at the address shown in subsection (4) of this rule.
(h) Where proof of service is required, the proofs of service must include:
(i) An acknowledgment of service;
(ii) A certificate, signed by the person who served the document(s), stating the date of service; that the person did serve the document(s) upon all or one or more of the parties of record in the proceeding by delivering a copy in person to (names); and that the service was accomplished by a method of service as provided in this subsection.
(9) Continuance. The presiding officer or reviewing officer may grant a request for a continuance by motion of the taxpayer, the department, or on its own motion.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-10202, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-029, § 458-20-10202, filed 6/6/16, effective 7/7/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.780 and 82.32.783. WSR 12-11-007, § 458-20-10202, filed 5/3/12, effective 6/3/12; WSR 10-14-080, § 458-20-10202, filed 7/1/10, effective 8/1/10.]


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PDF458-20-102A

Resale certificates.

(1) Introduction. This section provides information regarding the use of resale certificates, which were the documents used to substantiate the wholesale nature of a sales transaction occurring prior to January 1, 2010. Resale certificates cannot be used to substantiate wholesale sales made after December 31, 2009.
This section provides information that applies to periods prior to January 1, 2010. It explains the conditions under which a buyer may furnish a resale certificate to a seller, and explains the information and language required on the resale certificate. This section also provides tax reporting information to persons who purchase articles or services for dual purposes (i.e., for both resale and consumption).
(a) Legislation passed in 2009. Effective January 1, 2010, reseller permits issued by the department of revenue (department) replace resale certificates as the documentation necessary to substantiate the wholesale nature of a sales transaction (chapter 563, Laws of 2009).
Businesses should consult:
• WAC 458-20-102 (Reseller permits) for more information about the use of reseller permits to substantiate wholesale sales beginning January 1, 2010;
• WAC 458-20-10201 (Application process and eligibility requirements for reseller permits) for more information about the application process and eligibility requirements for obtaining a reseller permit; and
• WAC 458-20-10202 (Brief adjudicative proceedings for matters related to reseller permits) for more information about the procedures for appealing the denial of an application for a reseller permit.
(b) Legislation passed in 2003. In 2003, the legislature enacted legislation conforming state law to portions of the national Streamlined Sales and Use Tax Agreement (chapter 168, Laws of 2003), which eliminates the good faith requirement when the seller takes from the buyer a resale certificate and also eliminates signature requirements for certificates provided in a format other than paper. These changes apply to resale certificates taken on and after July 1, 2004.
(c) Legislation passed in 2007. Additional Streamlined Sales and Use Tax Agreement legislation was enacted in 2007 (chapter 6, Laws of 2007). It eliminates the provision that resale certificates are only valid for four years from the date they are issued to the seller, as long as there is a recurring business relationship between the buyer and seller. This change is effective on July 1, 2008.
(2) What is a resale certificate? The resale certificate is a document or combination of documents that substantiates the wholesale nature of a sale. The resale certificate cannot be used for purchases that are not purchases at wholesale, or where a more specific certificate, affidavit, or other documentary evidence is required by statute or other section of chapter 458-20 WAC. While the resale certificate may come in different forms, all resale certificates must satisfy the language and information requirements of RCW 82.04.470.
(a) What is the scope of a resale certificate? Depending on the statements made on the resale certificate, the resale certificate may authorize the buyer to purchase at wholesale all products or services being purchased from a particular seller, or may authorize only selected products or services to be purchased at wholesale. The provisions of the resale certificate may be limited to a single sales transaction, or may apply to all sales transactions as long as the seller has a recurring business relationship with the buyer. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months. Whatever its form and/or purpose, the resale certificate must be completed in its entirety and signed by a person who is authorized to make such a representation on behalf of the buyer.
(b) Who may issue and sign certificates? The buyer may authorize any person in its employ to issue and sign resale certificates on the buyer's behalf. The buyer is, however, responsible for the information contained on the resale certificate. A resale certificate is not required to be completed by every person ordering or making the actual purchase of articles or services on behalf of the buyer. For example, a construction company that authorizes only its bookkeeper to issue resale certificates on its behalf may authorize both the bookkeeper and a job foreman to purchase items under the provisions of the resale certificate. The construction company is not required to provide, nor is the seller required to obtain, a resale certificate signed by each person making purchases on behalf of the construction company.
The buyer is responsible for educating all persons authorized to issue and/or use the resale certificate on the proper use of the buyer's resale certificate privileges.
(3) Resale certificate renewal. Prior to July 1, 2008, resale certificates must be renewed at least every four years. As of July 1, 2008, the requirement to renew resale certificates at least every four years has been eliminated. The buyer must renew its resale certificate whenever a change in the ownership of the buyer's business requires a new tax registration. (See WAC 458-20-101 Tax registration and tax reporting.) The buyer may not make purchases under the authority of a resale certificate bearing a tax registration number that has been canceled or revoked by the department of revenue (department).
(4) Sales at wholesale. All sales are treated as retail sales unless the seller takes from the buyer a properly executed resale certificate. Resale certificates may only be used for sales at wholesale and may not be used as proof of entitlement to retail sales tax exemptions otherwise provided by law.
(a) When may a buyer issue a resale certificate? The buyer may issue a resale certificate only when the property or services purchased are:
(i) For resale in the regular course of the buyer's business without intervening use by the buyer;
(ii) To be used as an ingredient or component part of a new article of tangible personal property to be produced for sale;
(iii) A chemical to be used in processing an article to be produced for sale (see WAC 458-20-113 on chemicals used in processing);
(iv) To be used in processing ferrosilicon that is subsequently used in producing magnesium for sale;
(v) Provided to consumers as a part of competitive telephone service, as defined in RCW 82.04.065;
(vi) Feed, seed, seedlings, fertilizer, spray materials, or agents for enhanced pollination including insects such as bees for use in the federal conservation reserve program or its successor administered by the United States Department of Agriculture; or
(vii) Feed, seed, seedlings, fertilizer, spray materials, or agents for enhanced pollination including insects such as bees for use by a farmer for producing for sale any agricultural product. (See WAC 458-20-210 on sales to and by farmers.)
(b) Required information. All resale certificates, whether paper or nonpaper format, must contain the following information:
(i) The name and address of the buyer;
(ii) The uniform business identifier or tax registration number of the buyer, if the buyer is required to be registered with the department;
(iii) The type of business;
(iv) The categories of items or services to be purchased at wholesale, unless the buyer is in a business classification that may present a blanket resale certificate as provided by the department by rule;
(v) The date on which the certificate was provided;
(vi) A statement that the items or services purchased either are purchased for resale in the regular course of business or are otherwise purchased at wholesale; and
(vii) A statement that the buyer acknowledges that the buyer is solely responsible for purchasing within the categories specified on the certificate and that misuse of the resale certificate subjects the buyer to a penalty of 50 percent of the tax due, in addition to the tax, interest, and any other penalties imposed by law.
(c) Additional requirements for paper certificates. In addition to the requirements stated in (b) of this subsection, paper certificates must contain the following:
(i) The name of the individual authorized to sign the certificate, printed in a legible fashion;
(ii) The signature of the authorized individual; and
(iii) The name of the seller. RCW 82.04.470.
(5) Seller's responsibilities. When a seller receives and accepts from the buyer a resale certificate at the time of the sale, or has a resale certificate on file at the time of the sale, or obtains a resale certificate from the buyer within 120 days after the sale, the seller is relieved of liability for retail sales tax with respect to the sale covered by the resale certificate. The seller may accept a legible fax, a duplicate copy of an original resale certificate, or a certificate in a format other than paper.
(a) If the seller has not obtained an appropriate resale certificate or other acceptable documentary evidence (see subsection (8) of this section), the seller is personally liable for the tax due unless it can sustain the burden of proving through facts and circumstances that the property was sold for one of the purposes set forth in subsection (4)(a) of this section. The department will consider all evidence presented by the seller, including the circumstances of the sales transaction itself, when determining whether the seller has met its burden of proof. It is the seller's responsibility to provide the information necessary to evaluate the facts and circumstances of all sales transactions for which resale certificates are not obtained. Facts and circumstances that should be considered include, but are not necessarily limited to, the following:
(i) The nature of the buyer's business. The items being purchased at wholesale must be consistent with the buyer's business. For example, a buyer having a business name of "Ace Used Cars" would generally not be expected to be in the business of selling furniture;
(ii) The nature of the items sold. The items sold must be of a type that would normally be purchased at wholesale by the buyer; and
(iii) Additional documentation. Other available documents, such as purchase orders and shipping instructions, should be considered in determining whether they support a finding that the sales are sales at wholesale.
(b) If the seller is required to make payment to the department, and later is able to present the department with proper documentation or prove by facts and circumstances that the sales in question are wholesale sales, the seller may in writing request a refund of the taxes paid along with the applicable interest. Both the request and the documentation or proof that the sales in question are wholesale sales must be submitted to the department within the statutory time limitations provided by RCW 82.32.060. (See WAC 458-20-229 Refunds.) However, refer to (f) of this subsection in event of an audit situation.
(c) Timing requirements for single orders with multiple billings. If a single order or contract will result in multiple billings to the buyer, and the appropriate resale certificate was not obtained or on file at the time the order was placed or the contract entered, the resale certificate must be received by the seller within 120 days after the first billing. For example, a subcontractor entering into a construction contract for which it has not received a resale certificate must obtain the certificate within 120 days of the initial construction draw request, even though the construction project may not be completed at that time and additional draw requests will follow.
(d) Requirements for resale certificates obtained after 120 days have passed. If the resale certificate is obtained more than 120 days after the sale or sales in question, the resale certificate must be specific to the sale or sales. The certificate must specifically identify the sales in question on its face, or be accompanied by other documentation signed by the buyer specifically identifying the sales in question and stating that the provisions of the accompanying resale certificate apply. A nonspecific resale certificate that is not obtained within 120 days is generally not, in and of itself, acceptable proof of the wholesale nature of the sales in question. The resale certificate and/or required documentation must be obtained within the statutory time limitations provided by RCW 82.32.050.
(e) Examples. The following examples explain the seller's documentary requirements in typical situations when obtaining a resale certificate more than 120 days after the sale. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(i) Beginning in January of year 1, MN Company regularly makes sales to ABC Inc. In June of the same year, MN discovers ABC has not provided a resale certificate. MN requests a resale certificate from ABC and, as the resale certificate will not be received within 120 days of many of the past sales transactions, requests that the resale certificate specifically identify those past sales subject to the provisions of the certificate. MN receives a legible fax copy of an original resale certificate from ABC on July 1st of that year. Accompanying the resale certificate is a memo providing a list of the invoice numbers for all past sales transactions through May 15th of that year. This memo also states that the provisions of the resale certificate apply to all past and future sales, including those listed. MN Company has satisfied the requirement that it obtain a resale certificate specific to the sales in question.
(ii) XYZ Company makes three sales to MP Inc. in October of year 1 and does not charge retail sales tax. In the review of its resale certificate file in April of the following year, XYZ discovers it has not received a resale certificate from MP Inc. and immediately requests a certificate. As the resale certificate will not be received within 120 days of the sales in question, XYZ requests that MP provide a resale certificate identifying the sales in question. MP provides XYZ with a resale certificate that does not identify the sales in question, but simply states "applies to all past purchases." XYZ Company has not satisfied its responsibility to obtain an appropriate resale certificate. As XYZ failed to secure a resale certificate within a reasonable period of time, XYZ must obtain a certificate specifically identifying the sales in question or prove through other facts and circumstances that these sales are wholesale sales. (Refer to (a) of this subsection for information on how a seller can prove through other facts and circumstances that a sale is a wholesale sale.) It remains the seller's burden to prove the wholesale nature of the sales made to a buyer if the seller has not obtained a valid resale certificate within 120 days of the sale.
(f) Additional time to secure documentation in audit situation. If in event of an audit the department discovers that the seller has not secured, as described in this subsection (5), the necessary resale certificates and/or documentation, the seller will generally be allowed 120 days in which to obtain and present appropriate resale certificates and/or documentation, or prove by facts and circumstances the sales in question are wholesale sales. The time allotted to the seller shall commence from the date the auditor initially provides the seller with the results of the auditor's wholesale sales review. The processing of the audit report will not be delayed as a result of the seller's failure within the allotted time to secure and present appropriate documentation, or its inability to prove by facts and circumstances that the sales in question were wholesale sales.
(6) Penalty for improper use. Any buyer who uses a resale certificate to purchase items or services without payment of sales tax and who is not entitled to use the certificate for the purchase will be assessed a penalty of 50 percent of the tax due on the improperly purchased item or service. This penalty is in addition to all other taxes, penalties, and interest due, and can be imposed even if there was no intent to evade the payment of retail sales tax. The penalty will be assessed by the department and applies only to the buyer. However, see subsection (12) of this section for situations in which the department may waive the penalty.
Persons who purchase articles or services for dual purposes (i.e., some for their own consumption and some for resale) should refer to subsection (11) of this section to determine whether they may give a resale certificate to the seller.
(7) Resale certificate - suggested form. While there may be different forms of the resale certificate, all resale certificates must satisfy the language and information requirements provided by RCW 82.04.470. The resale certificate is available on the department's internet site at http://dor.wa.gov, or can be obtained by calling the department's telephone information center at 360-705-6705 or by writing:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
A resale certificate may be in any other form that contains substantially the same information and language, except that certificates provided in a format other than paper are not required to include the printed name of the person authorized to sign the certificate, the signature of the authorized individual, or the name of the seller.
Effective July 1, 2008, buyers also have the option of using a Streamlined Sales and Use Tax Agreement Certificate of Exemption, which has been modified for Washington state laws. It can also be found on the department's internet site at http://dor.wa.gov.
(a) Buyer's responsibility to specify products or services purchased at wholesale. RCW 82.04.470 requires the buyer making purchases at wholesale to specify the kinds of products or services subject to the provisions of the resale certificate. A buyer who will purchase some of the items at wholesale, and consume and pay tax on some other items being purchased from the same seller, must use terms specific enough to clearly indicate to the seller what kinds of products or services the buyer is authorized to purchase at wholesale.
(i) The buyer may list the particular products or services to be purchased at wholesale, or provide general category descriptions of these products or services. The terms used to describe these categories must be descriptive enough to restrict the application of the resale certificate provisions to those products or services that the buyer is authorized to purchase at wholesale. The following are examples of terms used to describe categories of products purchased at wholesale, and businesses that may be eligible to use such terms on their resale certificates:
(A) "Hardware" for use by a general merchandise or building material supply store, "computer hardware" for use by a computer retailer;
(B) "Paint" or "painting supplies" for use by a general merchandise or paint retailer, "automotive paint" for use by an automotive repair shop; and
(C) "Building materials" or "subcontract work" for use by prime contractors performing residential home construction, "wiring" or "lighting fixtures" for use by an electrical contractor.
(ii) The buyer must remit retail sales tax on any taxable product or service not listed on the resale certificate provided to the seller. If the buyer gave a resale certificate to the seller and later used an item listed on the certificate, or if the seller failed to collect the sales tax on items not listed on the certificate, the buyer must remit the deferred sales or use tax due directly to the department.
(iii) RCW 82.08.050 provides that each seller shall collect from the buyer the full amount of retail sales tax due on each retail sale. If the department finds that the seller has engaged in a consistent pattern of failing to properly charge sales tax on items not purchased at wholesale (i.e., not listed on the resale certificate), it may hold the seller liable for the uncollected sales tax.
(iv) Persons having specific questions regarding the use of terms to describe products or services purchased at wholesale may submit their questions to the department for ruling. The department may be contacted on the internet at http://dor.wa.gov/ or by writing:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
(b) Blanket resale certificates. A buyer who will purchase at wholesale all of the products or services being purchased from a particular seller will not be required to specifically describe the items or item categories on the resale certificate. If the certificate form provides for a description of the products or services being purchased at wholesale the buyer may specify "all products and/or services" (or make a similar designation). A resale certificate completed in this manner is often described as a blanket resale certificate.
(i) The resale certificate used by the buyer must, in all cases, be completed in its entirety. A resale certificate in which the section for the description of the items being purchased at wholesale is left blank by the buyer will not be considered a properly executed resale certificate.
(ii) As of July 1, 2008, renewal or updating of blanket resale certificates is not required as long as the seller has a recurring business relationship with the buyer. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months.
To effectively administer this provision during an audit, the department will accept a resale certificate as evidence for wholesale sales that occur within four years of the certificate's effective date without evidence of sales transactions being made once every 12 months. For sales transactions made more than four years after the date of the properly completed resale certificate, the seller must substantiate that a recurring business relationship with the buyer has occurred for any sales outside the period of more than four years after the effective date of the resale certificate.
(c) Resale certificates for single transactions. If the resale certificate is used for a single transaction, the language and information required of a resale certificate may be written or stamped upon a purchase order or invoice. The language contained in a "single use" resale certificate should be modified to delete any reference to subsequent orders or purchases.
(d) Examples. The following examples explain the proper use of types of resale certificates in typical situations. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.
(i) ABC is an automobile repair shop purchasing automobile parts for resale and tools for its own use from DE Supply. ABC must provide DE Supply with a resale certificate limiting the certificate's application to automobile part purchases. However, should ABC withdraw parts from inventory to install in its own tow truck, deferred retail sales tax or use tax must be remitted directly to the department. The buyer has the responsibility to report deferred retail sales tax or use tax upon any item put to its own use, including items for which it gave a resale certificate and later used for its own use.
(ii) X Company is a retailer selling lumber, hardware, tools, automotive parts, and household appliances. X Company regularly purchases lumber, hardware, and tools from Z Distributing. While these products are generally purchased for resale, X Company occasionally withdraws some of these products from inventory for its own use. X Company may provide Z Distributing with a resale certificate specifying "all products purchased" are purchased at wholesale. However, whenever X Company removes any product from inventory to put to its own use, deferred retail sales tax or use tax must be remitted to the department.
(iii) TM Company is a manufacturer of electric motors. When making purchases from its suppliers, TM issues a paper purchase order. This purchase order contains the information required of a resale certificate and a signature of the person ordering the items on behalf of TM. This purchase order includes a box that, if marked, indicates to the supplier that all or certain designated items purchased are being purchased at wholesale.
When the box indicating the purchases are being made at wholesale is marked, the purchase order can be accepted as a resale certificate. As TM Company's purchase orders are being accepted as resale certificates, they must be retained by the seller for at least five years. (See WAC 458-20-254 Recordkeeping.)
(8) Other documentary evidence. Other documentary evidence may be used by the seller and buyer in lieu of the resale certificate form described in this section. However, this documentary evidence must collectively contain the information and language generally required of a resale certificate. The conditions and restrictions applicable to the use of resale certificates apply equally to other documentary evidence used in lieu of the resale certificate form in this section. The following are examples of documentary evidence that will be accepted to show that sales were at wholesale:
(a) Combination of documentary evidence. A combination of documentation kept on file, such as a membership card or application, and a sales invoice or "certificate" taken at the point of sale with the purchases listed, provided:
(i) The documentation kept on file contains all information required on a resale certificate, including, for paper certificates, the names and signatures of all persons authorized to make purchases at wholesale; and
(ii) The sales invoice or "certificate" taken at the point of sale must contain the following:
(A) Language certifying the purchase is made at wholesale, with acknowledgment of the penalties for the misuse of resale certificate privileges, as generally required of a resale certificate; and
(B) The name and registration number of the buyer/business, and, if a paper certificate, an authorized signature.
(b) Contracts of sale. A contract of sale that within the body of the contract provides the language and information generally required of a resale certificate. The contract of sale must specify the products or services subject to the resale certificate privileges.
(c) Other preapproved documentary evidence. Any other documentary evidence that has been approved in advance and in writing by the department.
(9) Sales to nonresident buyers. If the buyer is a nonresident who is not engaged in business in this state, but buys articles here for the purpose of resale in the regular course of business outside this state, the seller must take from the buyer a resale certificate as described in this section. The seller may accept a resale certificate from an unregistered nonresident buyer with the registration number information omitted, provided the balance of the resale certificate is completed in its entirety. The resale certificate should contain a statement that the items are being purchased for resale outside Washington.
(10) Sales to farmers. Farmers selling agricultural products only at wholesale are not required to register with the department. (See WAC 458-20-101 Tax registration and tax reporting.) When making wholesale sales to farmers (including farmers operating in other states), the seller must take from the farmer a resale certificate as described in this section. Farmers not required to be registered with the department may provide, and the seller may accept, resale certificates with the registration number information omitted, provided the balance of the certificates are completed in full. Persons making sales to farmers should also refer to WAC 458-20-210 (Sales of tangible personal property for farming—Sales of agricultural products by farmers).
(11) Purchases for dual purposes. A buyer normally engaged in both consuming and reselling certain types of tangible personal property, and not able to determine at the time of purchase whether the particular property purchased will be consumed or resold, must purchase according to the general nature of his or her business. RCW 82.08.130. If the buyer principally consumes the articles in question, the buyer should not give a resale certificate for any part of the purchase. If the buyer principally resells the articles, the buyer may issue a resale certificate for the entire purchase. For the purposes of this subsection, the term "principally" means greater than 50 percent.
(a) Deferred sales tax liability. If the buyer gives a resale certificate for all purchases and thereafter consumes some of the articles purchased, the buyer must set up in his or her books of account the value of the article used and remit to the department the applicable deferred sales tax. The deferred sales tax liability should be reported under the use tax classification on the buyer's excise tax return.
(i) Buyers making purchases for dual purposes under the provisions of a resale certificate must remit deferred sales tax on all products or services they consume. If the buyer fails to make a good faith effort to remit this tax liability, the penalty for the misuse of resale certificate privileges may be assessed. This penalty will apply to the unremitted portion of the deferred sales tax liability.
A buyer will generally be considered to be making a good faith effort to report its deferred sales tax liability if the buyer discovers a minimum of 80 percent of the tax liability within 120 days of purchase, and remits the full amount of the discovered tax liability upon the next excise tax return. However, if the buyer does not satisfy this 80 percent threshold and can show by other facts and circumstances that it made a good faith effort to report the tax liability, the penalty will not be assessed. Likewise, if the department can show by other facts and circumstances that the buyer did not make a good faith effort in remitting its tax liability the penalty will be assessed, even if the 80 percent threshold is satisfied.
(ii) The following example illustrates the use of a resale certificate for dual-use purchases. This example should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances. BC Contracting operates both as a prime contractor and speculative builder of residential homes. BC Contracting purchases building materials from Seller D that are principally incorporated into projects upon which BC acts as a prime contractor. BC provides Seller D with a resale certificate and purchases all building materials at wholesale. BC must remit deferred sales tax upon all building materials incorporated into the speculative projects to be considered to be properly using its resale certificate privileges. The failure to make a good faith effort to identify and remit this tax liability may result in the assessment of the 50 percent penalty for the misuse of resale certificate privileges.
(b) Tax paid at source deduction. If the buyer has not given a resale certificate, but has paid retail sales tax on all articles of tangible personal property and subsequently resells a portion of the articles, the buyer must collect the retail sales tax from its retail customers as provided by law. When reporting these sales on the excise tax return, the buyer may then claim a deduction in the amount the buyer paid for the property resold.
(i) This deduction may be claimed under the retail sales tax classification only. It must be identified as a "taxable amount for tax paid at source" deduction on the deduction detail worksheet, which must be filed with the excise tax return. Failure to properly identify the deduction may result in the disallowance of the deduction. When completing the local sales tax portion of the tax return, the deduction must be computed at the local sales tax rate paid to the seller, and credited to the seller's tax location code.
(ii) The following example illustrates the tax paid at source deduction on or after July 1, 2008. This example should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances. Seller A is located in Spokane, Washington and purchases equipment parts for dual purposes from a supplier located in Seattle, Washington. The supplier ships the parts to Spokane. Seller A does not issue a resale certificate for the purchase, and remits retail sales tax to the supplier at the Spokane tax rate. A portion of these parts are sold and shipped to Customer B in Kennewick, with retail sales tax collected at the Kennewick tax rate. Seller A must report the amount of the sale to Customer B on its excise tax return, compute the local sales tax liability at the Kennewick rate, and code this liability to the location code for Kennewick (0302). Seller A would claim the tax paid at source deduction for the cost of the parts resold to Customer B, compute the local sales tax credit at the Spokane rate, and code this deduction amount to the location code for Spokane (3210).
(iii) Claim for deduction will be allowed only if the taxpayer keeps and preserves records in support of the deduction that show the names of the persons from whom such articles were purchased, the date of the purchase, the type of articles, the amount of the purchase and the amount of tax that was paid.
(iv) Should the buyer resell the articles at wholesale, or under other situations where retail sales tax is not to be collected, the claim for the tax paid at source deduction on a particular excise tax return may result in a credit. In such cases, the department will issue a credit notice that may be used against future tax liabilities. However, a taxpayer may request in writing a refund from the department.
(12) Waiver of penalty for resale certificate misuse. The department may waive the penalty imposed for resale certificate misuse upon finding that the use of the certificate to purchase items or services by a person not entitled to use the certificate for that purpose was due to circumstances beyond the control of the buyer. However, the use of a resale certificate to purchase items or services for personal use outside of the business does not qualify for the waiver or cancellation of the penalty. The penalty will not be waived merely because the buyer was not aware of either the proper use of the resale certificate or the penalty. In all cases the burden of proving the facts is upon the buyer.
(a) Considerations for waiver. Situations under which a waiver of the penalty will be considered by the department include, but are not necessarily limited to, the following:
(i) The resale certificate was properly used to purchase products or services for dual purposes; or the buyer was eligible to issue the resale certificate; and the buyer made a good faith effort to discover all of its deferred sales tax liability within 120 days of purchase; and the buyer remitted the discovered tax liability upon the next excise tax return. (Refer to subsection (11)(a)(i) of this section for an explanation of what constitutes "good faith effort.")
(ii) The certificate was issued and/or purchases were made without the knowledge of the buyer, and had no connection with the buyer's business activities. However, the penalty for the misuse of resale certificate privileges may be applied to the person actually issuing and/or using the resale certificate without knowledge of the buyer.
(b) One time waiver of penalty for inadvertent or unintentional resale certificate misuse. The penalty prescribed for the misuse of the resale certificate may be waived or canceled on a one time only basis if such misuse was inadvertent or unintentional, and the item was purchased for use within the business. If the department does grant a one time waiver of the penalty, the buyer will be provided written notification at that time.
(c) Examples. The following are examples of typical situations where the 50 percent penalty for the misuse of resale privileges will or will not be assessed. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.
(i) ABC Manufacturing purchases electrical wiring and tools from X Supply. The electrical wiring is purchased for dual purposes, i.e., for resale and for consumption, with more than 50 percent of the wiring purchases becoming a component of items that ABC manufactures for sale. ABC Manufacturing issues a resale certificate to X Supply specifying "electrical wiring" as the category of items purchased for resale. ABC regularly reviews its purchases and remits deferred sales tax upon the wiring it uses as a consumer.
ABC is subsequently audited by the department and it is discovered that ABC Manufacturing failed to remit deferred sales tax upon three purchases of wiring for consumption. The unreported tax liability attributable to these three purchases is less than five percent of the total deferred sales tax liability for wiring purchases made from X Supply. It is also determined that the failure to remit deferred sales tax upon these purchases was merely an oversight. The 50 percent penalty for the misuse of resale certificate privileges does not apply, even though ABC failed to remit deferred sales tax on these purchases. The resale certificate was properly issued, and ABC remitted to the department more than 80 percent of the deferred sales tax liability for wiring purchases from X Supply.
(ii) During a routine audit examination of a jewelry store, the department discovers that a dentist has provided a resale certificate for the purchase of a necklace. This resale certificate indicates that in addition to operating a dentistry practice, the dentist also sells jewelry. The resale certificate contains the information required under RCW 82.04.470.
Upon further investigation, the department finds that the dentist is not engaged in selling jewelry. The department will look to the dentist for payment of the applicable retail sales tax. In addition, the dentist will be assessed the 50 percent penalty for the misuse of resale certificate privileges. The penalty will not be waived or canceled as the dentist misused the resale certificate privileges to purchase a necklace for personal use.
(iii) During a routine audit examination of a computer dealer, it is discovered that a resale certificate was obtained from a bookkeeping service. The resale certificate was completed in its entirety and accepted by the dealer. Upon further investigation it is discovered that the bookkeeping service had no knowledge of the resale certificate, and had made no payment to the computer dealer. The employee who signed the resale certificate had purchased the computer for personal use, and had personally made payment to the computer dealer.
The 50 percent penalty for the misuse of the resale certificate privileges will be waived for the bookkeeping service. The bookkeeping service had no knowledge of the purchase or unauthorized use of the resale certificate. However, the department will look to the employee for payment of the taxes and the 50 percent penalty for the misuse of resale certificate privileges.
(iv) During an audit examination it is discovered that XYZ Corporation, a duplicating company, purchased copying equipment for its own use. XYZ Corporation issued a resale certificate to the seller despite the fact that XYZ does not sell copying equipment. XYZ also failed to remit either the deferred sales or use tax to the department. As a result of a previous investigation by the department, XYZ had been informed in writing that retail sales and/or use tax applied to all such purchases. The 50 percent penalty for the misuse of resale certificate privileges will be assessed. XYZ was not eligible to provide a resale certificate for the purchase of copying equipment, and had previously been so informed. The penalty will apply to the unremitted deferred sales tax liability.
(v) AZ Construction issued a resale certificate to a building material supplier for the purchase of "pins" and "loads." The "pins" are fasteners that become a component part of the finished structure. The "load" is a powder charge that is used to drive the "pin" into the materials being fastened together. AZ Construction is informed during the course of an audit examination that it is considered the consumer of the "loads" and may not issue a resale certificate for its purchase thereof. AZ Construction indicates that it was unaware that a resale certificate could not be issued for the purchase of "loads," and there is no indication that AZ Construction had previously been so informed.
The failure to be aware of the proper use of the resale certificate is not generally grounds for waiving the 50 percent penalty for the misuse of resale certificate privileges. However, AZ Construction does qualify for the "one time only" waiver of the penalty as the misuse of the resale certificate privilege was unintentional and the "loads" were purchased for use within the business.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-102A, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.780, and 82.32.783. WSR 11-12-021, § 458-20-102A, filed 5/24/11, effective 6/24/11.]


PDF458-20-103

Gift certificates—Sale deemed to occur and retail sales tax collected at time of redemption.

(1) Tax timing. A purchase of a product, as defined in RCW 82.32.023, or services made through the redemption of a gift certificate or gift card is deemed to occur for retail sales tax purposes at the time the certificate or card is actually redeemed for the product or services. Retail sales tax must be collected at the time of redemption.
(2) Tax measure. The measure of the tax is the total selling price of the product or services at the time of the redemption, including the redemption value of the certificate, or any part thereof, which is applied toward the selling price. See RCW 82.08.010 for the definition of selling price.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 20-14-092, § 458-20-103, filed 6/30/20, effective 7/31/20. Statutory Authority: RCW 82.32.300. WSR 82-12-021 (Order ET 82-2), § 458-20-103, filed 5/25/82; Order ET 70-3, § 458-20-103 (Rule 103), filed 5/29/70, effective 7/1/70.]


PDF458-20-104

Small business tax relief based on income of business.

(1) Introduction. This rule explains the business and occupation (B&O) tax credit for small businesses provided by RCW 82.04.4451. This credit is commonly referred to as the small business B&O tax credit or small business credit (SBC). The amount of small business B&O tax credit available on a tax return can increase or decrease, depending on the reporting frequency of the account and the net B&O tax liability for that return. This rule also explains the public utility tax income exemption provided by RCW 82.16.040. The public utility tax exemption is a fixed amount, or threshold, based on the reporting frequency assigned to the account. Readers should refer to WAC 458-20-22801 (Tax reporting frequency—Forms) for an explanation of how the department of revenue (department) assigns a particular reporting frequency to each account. Readers may also want to refer to WAC 458-20-101 for an explanation of Washington's tax registration and tax reporting requirements.
This rule provides examples that identify a number of facts and then state a conclusion regarding the applicability of the income exemption for the public utility tax or small business B&O tax credit. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) The public utility tax income exemption. Persons subject to public utility tax (PUT) are exempt from payment of this tax for any reporting period in which the gross taxable amount reported under the combined total of all public utility tax classifications does not equal or exceed the maximum exemption for the assigned reporting period. Per RCW 82.16.040, the public utility tax exemption amounts are:
for taxpayers reporting monthly. . . .
$2,000 per month
for taxpayers reporting quarterly. . . .
$6,000 per quarter
for taxpayers reporting annually. . . .
$24,000 per annum
(a) What if the taxable income equals or exceeds the maximum exemption? If the taxable income for a reporting period equals or exceeds the maximum exemption, tax must be remitted on the full taxable amount.
(b) How does the exemption apply if a business does not operate for the entire tax reporting period? The public utility tax maximum exemptions apply to the entire tax reporting period, even though the business may not have operated during the entire period.
(c) Do taxable amounts for B&O tax or other taxes affect this exemption? The public utility tax exemption is not affected by taxable amounts reported in the B&O tax section or any of the other tax sections of the tax return.
(d) Example - How is the public utility tax exemption applied? Taxpayer registers with the department and is assigned a quarterly tax reporting frequency. Taxpayer begins business activities on February 1st. During the two months of the first quarter that the taxpayer is in business, taxpayer's public utility gross income is $7,000. After deductions provided by chapter 82.16 RCW (Public utility tax) are computed, the total taxable amount is $5,000. In this case, the taxpayer does not owe any public utility tax because the taxable amount of $5,000 is less than the $6,000 exemption threshold for quarterly taxpayers. The fact that the taxpayer was in business during only two months out of the three months in the quarter has no effect on the threshold amount. However, if there were no deductions available to the taxpayer, the taxable amount would have been $7,000. The public utility tax would then have been due on the full taxable amount of $7,000.
(3) The small business B&O tax credit. Persons subject to the B&O tax may be eligible to claim a small business B&O tax credit against the amount of B&O tax otherwise due. The small business B&O tax credit operates completely independent of the public utility tax exemption described above in subsection (2) of this rule. RCW 82.04.4451 authorizes the department to create a tax credit table for use by all taxpayers when determining the amount of their small business B&O tax credit. Taxpayers must use the tax credit table to determine the appropriate amount of their small business B&O tax credit. A tax credit table for each of the monthly, quarterly, and annual reporting frequencies can be found on the department's internet site at dor.wa.gov.
The statute provides that taxpayers who use the tables will not owe any more tax than if they used the statutory credit formula to determine the amount of the credit. For taxpayers that file electronically, the department will automatically calculate the small business credit when the taxpayer completes the online return.
Effective January 1, 2023, section 1, chapter 295, Laws of 2022 amended RCW 82.04.4451. Prior to that amendment the small business credit was calculated at a maximum of $70 multiplied by the number of months in the reporting period for all eligible taxpayers. As a result of the amendment, taxpayers that report at least 50 percent (i.e., 50 percent or greater) of their total B&O taxable amount under RCW 82.04.255 (real estate brokers), RCW 82.04.290 (2)(a) (service and other activities), and RCW 82.04.285 (contests of chance) have their maximum credit increased to $160 multiplied by the number of months in the reporting period. (A few examples of businesses that generally have taxable amounts to report under RCW 82.04.290 (2)(a) are for-profit hospitals, for-profit research and development, accountants, attorneys, dentists, janitors, and landscape architects. Please see WAC 458-20-224, Service and other business activities for information and more examples of who should report under the service and other classification of the B&O tax.)
For taxpayers that do not report at least 50 percent of their B&O taxable amount under RCW 82.04.255, 82.04.290, and 82.04.285, prior to the amendment the small business credit was calculated at a maximum of $35 multiplied by the number of months in the reporting period. As a result of the amendment, the maximum credit increased to $55 multiplied by the number of months in the reporting period.
(a) How is the credit applied if a business does not operate during the entire tax reporting period? The small business B&O tax credit applies to the entire reporting period, even though the business may not have been operating during the entire period.
(b) Can a husband and wife or partners in a state registered domestic partnership both take the credit? Spouses or state registered domestic partners operating distinct and separate businesses are each eligible for the small business B&O tax credit. For both spouses or both domestic partners to qualify, each must have a separate tax reporting number and file his or her own business tax returns.
(c) How do I determine the amount of the credit? Taxpayers eligible for the small business B&O tax credit must follow the steps outlined in subsection (5) of this rule to determine the amount of credit available. Taxpayers who have other B&O tax credits to apply on a tax return, in addition to the small business B&O tax credit, may use the multiple B&O tax credit worksheet in subsection (4) of this rule before determining the amount of small business B&O tax credit available.
(d) Can I carryover the small business B&O tax credit to future tax reporting periods? Use of the small business B&O tax credit may not result in a B&O tax liability of less than zero, and thus there will be no unused credit.
(e) Do I have to report and pay retail sales tax even if I do not owe any B&O tax? Persons making retail sales must collect and pay all applicable retail sales taxes even if B&O tax is not due. There is no comparable retail sales tax exemption.
(4) Multiple business and occupation tax credit worksheet. The small business B&O tax credit should be computed after claiming any other B&O tax credits available under Title 82 RCW (Excise taxes). Examples of other B&O tax credits to be taken before computing the small business B&O tax credit include the multiple activities tax credit and commute trip reduction credit. The following multiple B&O tax credit worksheet describes the process taxpayers must follow to apply credits in the appropriate order. Refer to subsection (6) of this rule for an example illustrating the use of the multiple B&O tax credit worksheet.
MULTIPLE B&O TAX CREDIT WORKSHEET
 
1.
Determine the total Business and Occupation (B&O) tax due from the B&O section of your excise tax return.
 
$
 
2.
Add together the credit amounts taken for:
 
 
 
 
 
Multiple Activities Tax Credit from Schedule C (if applicable).
 
$
 
 
 
(Add any other B&O tax credits from Title 82 RCW that will be applied to this return period.)
+
$
 
 
 
Total (Enter 0 if none of these credits are being taken.)
 
$
 
3.
Subtract line 2 from line 1. This is the total B&O tax allowable for the Small Business Credit.
 
$
 
4.
Find the specific tax credit table (Table 1 or Table 2) appropriate for the business activities and B&O taxable amounts on your excise tax return. Next, find the tax credit table which matches the reporting frequency assigned to the account. Then find the range of amounts which includes your total B&O tax due (see line three above).
 
 
5.
Read across to the next column. This is the amount of the Small Business Credit to be used on the excise tax return.
$
 
(5) Using the tax credit table to determine your small business B&O tax credit. The following steps explain how to use the small business B&O tax credit table:
(a) Step one. Determine the total B&O tax amount due from the excise tax return. This amount will normally be the total of the tax amounts due calculated for each classification in the B&O tax section of the excise tax return. However, if additional B&O tax credits will be taken on the return, refer to subsection (4) of this rule and the multiple B&O tax credit worksheet before going to step two.
(b) Step two. Find the B&O taxable amounts on the return reported under RCW 82.04.255 (real estate brokers), RCW 82.04.290 (2)(a) (service and other activities), and RCW 82.04.285 (contests of chance) then add them together. Divide that sum result by the total amount of all B&O taxable amounts reported on the return. If the result indicates 50 percent or greater of the total of all B&O taxable amounts came from activities reported under RCW 82.04.255, 82.04.290 (2)(a), and 82.04.285 combined, use Table 1 of the small business B&O tax credit table. If the result indicates less than 50 percent of the total of all B&O taxable amounts came from activities reported under RCW 82.04.255, 82.04.290 (2)(a), and 82.04.285 combined, use Table 2 of the small business B&O tax credit table.
(c) Step three. Find the small business B&O tax credit table that matches the assigned reporting frequency, monthly, quarterly, or annual.
(d) Step four. Find the "If your net B&O tax is" column of the tax credit table and come down the column until you find the range of amounts which includes the total B&O tax due figure obtained from the excise tax return or multiple B&O tax credit worksheet.
(e) Step five. Read across to the "Your SBC is" column. The figure shown is the amount of the small business B&O tax credit that can be claimed on the "Small Business B&O Tax Credit" line in the "Credits" section of the excise tax return.
(6) Examples - Using the "Multiple B&O Tax Credit Worksheet" and the tax credit tables.
(a) Using the "Multiple B&O Tax Credit Worksheet." Assume that ABC reports quarterly. This quarter, ABC reports $190 under the wholesaling classification and $70 under the manufacturing classification for a total B&O tax liability of $260. ABC completes Schedule C, and determines it is entitled to a multiple activities tax credit (MATC) of $70. Using the multiple B&O tax credit worksheet, ABC enters $260 on line one, enters $70 on line two, and enters $190 on line three (line two subtracted from line one). Line three, $190 is the total B&O tax. ABC will use this amount to determine whether it is eligible for a small business B&O tax credit.
(b) Using the small business B&O tax credit tables. Assume the facts are the same as in the previous example in subsection (6)(a) of this rule. After completing the multiple B&O tax credit worksheet, ABC has $190 of B&O tax liability left for potential application of the small business B&O tax credit. ABC does not have any business activity taxable under RCW 82.04.255 (real estate brokers), RCW 82.04.290 (2)(a) (service and other activities), or RCW 82.04.285 (contests of chance), so the ratio of those combined taxable amounts compared to the total of all B&O taxable amounts on the return is not 50 percent or greater. ABC will refer to Table 2 of the quarterly small business B&O tax credit table to find the "If your net B&O tax is" column. Following down that column, ABC finds the tax range of at least $190 but less than $195 and follows the row to the "Your SBC is" column on the right, which indicates a credit in the amount of $140. Before calculating the total amount of tax due for the return, ABC enters its small business B&O tax credit of $140 in the "Credits" section of the return.
For taxpayers that file electronically, the department will automatically calculate the small business credit when the taxpayer completes the online return.
[Statutory Authority: RCW 82.32.045, 82.04.4451, and 82.01.060. WSR 23-08-081, § 458-20-104, filed 4/5/23, effective 5/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-23-058, § 458-20-104, filed 11/12/10, effective 12/13/10. Statutory Authority: 2009 c 521. WSR 10-09-050, § 458-20-104, filed 4/15/10, effective 5/16/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 04-14-052, § 458-20-104, filed 6/30/04, effective 7/31/04. Statutory Authority: RCW 82.32.300. WSR 98-16-019, § 458-20-104, filed 7/27/98, effective 8/27/98; WSR 97-08-050, § 458-20-104, filed 3/31/97, effective 5/1/97; WSR 95-07-088, § 458-20-104, filed 3/17/95, effective 4/17/95; WSR 83-07-034 (Order ET 83-17), § 458-20-104, filed 3/15/83; Order ET 70-3, § 458-20-104 (Rule 104), filed 5/29/70, effective 7/1/70.]


PDF458-20-105

Employees distinguished from persons engaging in and operating a business.

(1) Introduction. The Revenue Act imposes taxes on persons engaged in taxable business activity, which does not include persons acting solely in the capacity of employees. This rule states the conditions that serve to indicate whether a person is engaging in and operating a business or is an employee.
(2) Right to control. While no one factor definitely determines employee status, the most important consideration is the employer's right to control the employee. The right to control is not limited to controlling the result of the work to be accomplished, but includes controlling the details and means by which the work is accomplished. In cases of doubt about employee status the pertinent facts may be submitted to the department of revenue for a specific ruling.
(3) Persons engaging in and operating a business. A person operating a business is a business entity that is engaging in business. The term "engaging in business" includes commencing, conducting, or continuing in business and also the exercise of corporate or franchise powers as well as liquidating a business when the liquidators thereof hold themselves out to the public as conducting such business. RCW 82.04.150. Engaging in business also includes the act of transferring, selling or otherwise dealing in real or personal property, or the rendition of services, for consideration except as an employee. The following conditions will serve to indicate that a person is engaging in and operating a business.
If a person is:
(a) Holding oneself out to the public as engaging in business with respect to dealings in real or personal property, or in respect to the rendition of services;
(b) Entitled to receive the gross income of the business or any part thereof;
(c) Liable for business losses or the expense of conducting a business, even though such expenses may ultimately be reimbursed by a principal;
(d) Controlling and supervising others, and being personally liable for their payroll, as a part of engaging in business;
(e) Employing others to carry out duties and responsibilities related to the engaging in business and being personally liable for their pay;
(f) Filing a statement of business income and expenses (Schedule C) for federal income tax purposes;
(g) A party to a written contract, the intent of which establishes the person to be an independent contractor;
(h) Paid a gross amount for the work without deductions for employment taxes (such as Federal Insurance Contributions Act, Federal Unemployment Tax Act, and similar state taxes).
(4) Employees. The following conditions indicate that a person is an employee.
If the person:
(a) Receives compensation, which is fixed at a certain rate per day, week, month or year, or at a certain percentage of business obtained, payable in all events;
(b) Is employed to perform services in the affairs of another, subject to the other's control or right to control, and includes hired household employees that may cook, clean, provide nanny-care, or grounds maintenance;
(c) Has no liability for the expenses of maintaining an office or other place of business, or any other overhead expenses or for compensation of employees;
(d) Has no liability for losses or indebtedness incurred in the conduct of the business;
(e) Is generally entitled to fringe benefits normally associated with an employer-employee relationship, e.g., paid vacation, sick leave, insurance, and pension benefits;
(f) Is treated as an employee for federal tax purposes;
(g) Is paid a net amount after deductions for employment taxes, such as those identified in subsection (3)(h) of this rule.
(5) Full-time life insurance salespersons. RCW 82.04.360 provides that individuals performing services as full-time life insurance salespersons, as provided in section 3121 (d)(3)(ii) of the Internal Revenue Code, will be considered employees. Treatment as an employee under this subsection (5) applies only to persons engaged in the full-time sale of life insurance. The status of other persons, including others listed in section 3121(d) of the Internal Revenue Code, will be determined according to the provisions of subsections (1) through (4) of this rule. For information on the taxability of insurance producers, adjusters, title insurance agents, and surplus line brokers refer to WAC 458-20-164.
(6) Operators of rented or owned equipment. Persons who furnish equipment on a rental or other basis for a charge and who also furnish the equipment operators, are engaging in and operating a business and are not employees of their customers. Likewise, persons who furnish materials and the labor necessary to install or apply the materials, or produce something from the materials, are presumed to be engaging in and operating a business and not to be employees of their customers.
(7) Casual laborers. Persons regularly performing odd job carpentry, painting or paperhanging, plumbing, bricklaying, electrical work, cleaning, yard work, etc., for the public generally are presumed to be engaging in and operating a business. The burden of proof is on such persons to show otherwise. For tax registration and tax reporting requirements refer to WAC 458-20-101. Readers may also want to contact the Washington state employment security department or the Internal Revenue Service for additional information.
(8) Corporations, joint ventures, or individuals acting as a unit. A corporation, joint venture, partnership, limited liability corporation, or any other group of individuals acting as a unit, is not an employee.
(9) Booth renters. For purposes of the business and occupation tax a "booth renter," as defined in RCW 82.04.360, is considered to be engaging in and operating a business and not an employee.
(a) A "booth renter" is any person who:
(i) Performs cosmetology, barbering, esthetics, or manicuring services for which a license is required pursuant to chapter 18.16 RCW; and
(ii) Pays a fee for the use of salon or shop facilities and receives no compensation or other consideration from the owner of the salon or shop for the services performed.
(b) For the taxability of amounts received for the rental or licensing of real estate refer to WAC 458-20-118. Refer to WAC 458-20-200 for the taxability of amounts received for leased departments.
(10) Personal chefs. Personal chefs are engaging in and operating a business as independent contractors. They prepare meals for consumption at their clients' homes. Personal chefs typically serve multiple clients, working with the clients to create personalized meal plans based on the client's specific dietary requirements or requests. The meals may be prepared in the client's home or in a commercial kitchen and delivered to the client's home. Personal chefs may also prepare meals for social events, such as dinner parties, cocktail parties, engagement parties, weddings, or receptions.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-20-020, § 458-20-105, filed 9/25/15, effective 10/26/15. Statutory Authority: RCW 82.32.300. WSR 92-06-082, § 458-20-105, filed 3/4/92, effective 4/4/92; WSR 89-16-080 (Order 89-10), § 458-20-105, filed 8/1/89, effective 9/1/89; Order ET 70-3, § 458-20-105 (Rule 105), filed 5/29/70, effective 7/1/70.]


PDF458-20-106

Casual or isolated sales—Business reorganizations.

A casual or isolated sale is defined by RCW 82.04.040 as a sale made by a person who is not engaged in the business of selling the type of property involved. Any sales which are routine and continuous must be considered to be an integral part of the business operation and are not casual or isolated sales.
Furthermore, persons who hold themselves out to the public as making sales at retail or wholesale are deemed to be engaged in the business of selling, and sales made by them of the type of property which they hold themselves out as selling, are not casual or isolated sales even though such sales are not made frequently.
In addition the sale at retail by a manufacturer or wholesaler of an article of merchandise manufactured or wholesaled by him is not a casual or isolated sale, even though he may make but one such retail sale.
Business and Occupation Tax
The business and occupation tax does not apply to casual or isolated sales.
Retail Sales Tax
The retail sales tax applies to all casual or isolated retail sales made by a person who is engaged in the business activity; that is, a person required to be registered under WAC 458-20-101. Persons not engaged in any business activity, that is, persons not required to be registered under WAC 458-20-101, are not required to collect the retail sales tax upon casual or isolated sales.
However, persons in business as selling agents who are authorized, engaged or employed to sell or call for bids on tangible personal property belonging to another, and so selling or calling, are deemed to be sellers, and shall collect the retail sales tax upon all retail sales made by them. The tax applies to all such sales even though the sales would have been casual or isolated sales if made directly by the owner of the property sold.
A transfer of capital assets to or by a business is deemed not taxable to the extent the transfer is accomplished through an adjustment of the beneficial interest in the business. The following examples are instances when the tax will not apply.
(1) Transfers of capital assets between a corporation and a wholly-owned subsidiary, or between wholly-owned subsidiaries of the same corporation.
(2) Transfers of capital assets by an individual or by a partnership to a corporation, or by a corporation to another corporation in exchange for capital stock therein.
(3) Transfers of capital assets by a corporation to its stockholders in exchange for surrender of capital stock.
(4) Transfers of capital assets pursuant to a reorganization under 26 U.S.C Section 368 of the Internal Revenue Code, when capital gain or ordinary income is not realized.
(5) Transfers of capital assets to a partnership or joint venture in exchange for an interest in the partnership or joint venture; or by a partnership or joint venture to its members in exchange for a proportional reduction of the transferee's interest in the partnership or joint venture.
(6) Transfer of an interest in a partnership by one partner to another; and transfers of interests in a partnership to third parties, when one or more of the original partners continues as a partner, or owner.
The burden is upon the taxpayer to establish the facts concerning the adjustment of the beneficial interest in the business when exemption is claimed.
Use Tax
The use tax applies upon the use of any property purchased at a casual retail sale without payment of the retail sales tax, unless exempt by law. Uses which are exempt from the use tax are set out in RCW 82.12.030.
Where there has been a transfer of the capital assets to or by a business, the use of such property is not deemed taxable to the extent the transfer was accomplished through an adjustment of the beneficial interest in the business, provided, the transferor previously paid sales or use tax on the property transferred. (See the exempt situations listed under the retail sales tax subdivision of this rule.)
[Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-106, filed 3/15/83; Order ET 75-1, § 458-20-106, filed 5/2/75; Order ET 74-1, § 458-20-106, filed 5/7/74; Order ET 70-3, § 458-20-106 (Rule 106), filed 5/29/70, effective 7/1/70.]


PDF458-20-107

Requirement to separately state sales tax—Advertised prices including sales tax.

(1) Introduction. Under the provisions of RCW 82.08.020 the retail sales tax is to be collected and paid upon retail sales, measured by the selling price.
(2) Retail sales tax separately stated. RCW 82.08.050 specifically requires that the retail sales tax must be stated separately from the selling price on any sales invoice or other instrument of sale, i.e., contracts, sales slips, and/or customer billing receipts. (For an exception covering food and beverage receipts, see WAC 458-20-124, Restaurants, cocktail bars, taverns and similar businesses.) This is required even though the seller and buyer may know and agree that the price quoted is to include state and local taxes, including the retail sales tax.
(a) The law creates a "conclusive presumption" that, for purposes of collecting the tax and remitting it to the state, the selling price quoted does not include the retail sales tax. This presumption is not overcome or rebutted by any written or oral agreement between seller and buyer.
(b) Selling prices may be advertised as including the tax, and in such cases, the advertised price is not the taxable selling price.
(3) Advertising prices including tax.
(a) RCW 82.08.055 provides that a seller may advertise prices as including the sales tax or that the seller is paying the sales tax under the following conditions:
(i) The words "tax included" are stated immediately following the advertised price in print size at least half as large as the advertised price print size, unless the advertised price is one in a listed series;
(ii) When advertised prices are listed in series, the words "tax included in all prices" are placed conspicuously at the head of the list in the same print size as the list;
(iii) If the price is advertised as including tax, the price listed on any price tag must be shown in the same way; and
(iv) All advertised prices and the words "tax included" are stated in the same medium, whether oral or visual, and if oral, in substantially the same inflection and volume.
(b) If these conditions are satisfied, as applicable, then price lists, reader boards, menus, and other price information mediums need not reflect the item price and separately show the actual amount of sales tax being collected on any or all items.
(c) The scope and intent of the foregoing is that buyers have the right to know whether retail sales tax is being included in advertised prices or not and that the tax is not to be used for the competitive advantage or disadvantage of retail sellers.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.050, and 2013 2nd sp.s. c 13. WSR 14-01-050, § 458-20-107, filed 12/12/13, effective 1/12/14. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.08.050. WSR 08-14-021, § 458-20-107, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300. WSR 90-10-080, § 458-20-107, filed 5/2/90, effective 6/2/90; WSR 86-03-016 (Order ET 86-1), § 458-20-107, filed 1/7/86; WSR 83-07-034 (Order ET 83-17), § 458-20-107, filed 3/15/83; Order ET 70-3, § 458-20-107 (Rule 107), filed 5/29/70, effective 7/1/70.]


PDF458-20-108

Selling price—Credit card service fees, foreign currency, discounts, patronage dividends.

(1) Introduction. This rule explains "selling price" and what is included in the selling price when discounts, coupons, rebates, or foreign currency are used. This rule also provides tax guidance for credit card service fees, patronage dividends, and payments for "make ready" services.
(a) Other rules that may apply. Readers may also want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-107, Requirement to separately state sales tax—Advertised prices including sales tax.
(ii) WAC 458-20-211, Leases or rentals of tangible personal property, bailments.
(iii) WAC 458-20-247, Trade-ins, selling price, sellers' tax measures.
(iv) WAC 458-20-278, Returned goods, defective goods—Motor vehicle lemon law.
(b) Examples: Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) What is included in the "selling price"? RCW 82.08.010 states that "selling price" includes "sales price." "Sales price" means the total amount of consideration, except separately stated trade-in property of like kind, including cash, credit, property, and services, for which tangible personal property, extended warranties, digital goods, digital codes, digital automated services, or other services or anything else defined as a "retail sale" under RCW 82.04.050 are sold, leased, or rented, valued in money, whether received in money or otherwise. No deduction from the total amount of consideration is allowed for the following:
(a) The seller's cost of the property sold;
(b) The cost of materials used, labor or service cost, interest, losses, costs of transportation to the seller, taxes imposed on the seller, and any other expense of the seller;
(c) Charges by the seller for any services necessary to complete the sale other than delivery and installation charges;
(d) Delivery charges; and
(e) Installation charges.
(3) When is third-party consideration included in the "selling price"? The "selling price" or "sales price" includes consideration received by the seller from a third party if:
(a) The seller actually receives consideration from a party other than the buyer, and the consideration is directly related to a price reduction or discount on the sale;
(b) The seller has an obligation to pass the price reduction or discount through to the buyer;
(c) The amount of the consideration attributable to the sale is fixed and determinable by the seller at the time of sale of an item to the buyer; and
(d) One of the following criteria is met:
(i) The buyer presents a coupon, certificate, or other documentation to the seller to claim a price reduction or discount where the coupon, certificate, or documentation is authorized, distributed, or granted by a third party with the understanding that the third party must reimburse any seller to whom the coupon, certificate, or documentation is presented;
(ii) The price reduction or discount is identified as a third-party price reduction or discount on the invoice received by the buyer or on a coupon, certificate, or other documentation presented by the buyer; or
(iii) The buyer identifies himself or herself to the seller as a member of a group or organization entitled to a price reduction or discount; however, a "preferred customer" card that is available to any patron does not constitute membership in such a group. RCW 82.08.010.
(e) Example 1. The Sporting Goods Store offers a 10% discount to all members of the local credit union. Dave, the customer and credit union member, must present an identification card or other evidence of membership in the credit union to claim the 10% discount on his $100 purchase. As the credit union reimburses The Sporting Goods Store for the discount of $10, the store must compute sales tax on the full price of $100. The discount of $10 is deducted from the total price after sales tax has been added to the purchase price. The store must compute retailing business and occupation (B&O) tax on $100.
(4) What is not included in the "selling price"? The "selling price" or "sales price" does not include:
(a) Discounts, including cash, term, or coupons that are not reimbursed by a third party that a seller allows a buyer to take on a sale;
(b) Interest, financing, and carrying charges from credit extended on the sale of tangible personal property, extended warranties, digital goods, digital codes, digital automated services, or other services or anything else defined as a retail sale in RCW 82.04.050, if the amount is separately stated on the invoice, bill of sale, or similar document given to the buyer; and
(c) Any taxes legally imposed directly on the buyer that are separately stated on the invoice, bill of sale, or similar document given to the buyer. RCW 82.08.010.
(d) Example 2. The Good Health Club offers a 10% discount to all members of the local credit union. Jill, the club member and credit union member, must present an identification card or other evidence of membership in the credit union to claim the 10% discount on her monthly membership fee of $50. If the credit union does not reimburse the health club for the $5 discount, the health club absorbs the $5 and it is not part of the taxable selling price. Thus, the club must collect sales tax on a selling price of $45 and compute retailing B&O tax on gross proceeds of sale of $45.
(5) Credit card service fees. When a seller allows a buyer to charge purchases on a credit card, the institution that issued the credit card charges a service fee to the seller. The service fee charge is a part of the seller's cost of doing business. Because the service fee is a cost of doing business, the seller may not deduct the fee when determining its B&O tax and retail sales tax liabilities. RCW 82.04.070 and 82.08.010.
(6) Foreign currency accepted by seller. When determining the measure of tax liability, the selling price or gross proceeds of sale must be measured in terms of the currency of the United States. If payment is accepted in foreign currency, the payment must be converted into United States currency. The effect of this conversion, whether resulting in an increase or decrease in the selling price or gross proceeds of sale, must be recognized when tax is computed.
Example 3. ABC Company (ABC) sells a sweater for $100, plus $8 in retail sales tax, for a total of $108. ABC accepts payment in the form of $108 Canadian. The exchange rate for Canadian dollars at ABC's bank is 0.95 Canadian to 1 U.S. dollars at the time of the sales transaction. In terms of U.S. currency, ABC has actually accepted a payment of $102.60 (108 Canadian x 0.95). The selling price or gross proceeds of sale for determining the measure of tax liability is $95 ($102.60 less $7.60 retail sales tax).
(7) Bona fide discounts. When a sale is made subject to cash or trade discount, the gross proceeds actually derived from the selling price are determined by the transaction as finally completed. A sale is made subject to a discount when the sales price is reduced under terms known to the buyer and seller at the time of the sale, and the price reduction occurs at the time of the sale or within a time agreed and understood by the parties at the time of the sale.
The selling price or sales price of a service or article of tangible personal property does not include bona fide discounts actually taken by the buyer. The amount of bona fide discounts may be deducted only if the amount has been included in the gross amount reported.
Discounts are not deductible when the retail sales tax is based on the selling price or sales price before the discount is taken and no portion of the tax is refunded to the buyer.
(a) Discount vouchers. A discount voucher is an instrument redeemed by a customer from a seller at the time of purchase that:
• Is obtained by the customer from a discount voucher provider that has an agreement with the seller, and the seller determined the price of the voucher sold;
• Allows the customer to acquire the voucher for less than its face value;
• Is redeemable either for a specific good or service (product) or for a certain dollar amount towards the sales price of any product sold by the seller; and
• The seller, at the time of redemption, knows the amount paid by the customer for the voucher.
For additional information that may apply see subsection (3) of this rule.
(i) Taxes apply on the redemption of a discount voucher.
(A) The purchase of a discount voucher prior to redemption is not taxable.
(B) The seller of a product or products purchased using a discount voucher must include the amount the customer paid for the discount voucher in the gross proceeds of sales or gross income of the business, as the case may be.
(C) If a discount voucher is redeemed by a customer for a product subject to retail sales tax, then the amount paid by the customer is included in the taxable sales price of the product.
(D) The seller may not deduct advertising or similar expenses (fees) paid to the discount voucher provider, even if the discount voucher provider "nets out" those expenses (fees) before remitting the payment to the seller.
(ii) Determining the amount paid by the customer for the discount voucher. Sellers must be able to substantiate, through documentation, the amount the customer paid for the redeemed discount voucher and any discount applied to the sale.
(A) If a discount voucher indicates the amount the customer paid, the seller must include that amount in the sales price of the product purchased.
(B) If the seller, through its agreement with the discount voucher provider, knows the amount the customer paid for the discount voucher, that amount is to be included in the sales price of the product purchased.
(C) If the seller does not know at the time of sale the amount the customer paid to obtain a payment instrument and thus does not know whether the instrument is a discount voucher, the seller must treat the consideration paid by the customer as equal to the face value of the instrument.
(b) Cash discounts. A cash discount is an incentive for the buyer to pay the seller's invoice price of goods or charges for services on or before a specified date. RCW 82.04.160. Cash discounts may be deducted when determining the measure for the B&O tax.
Example 4. Mann's Lumber Shop (Mann's) sells construction material to Ken, who builds sheds for resale. Mann's bills Ken for $2,000.00, and offers Ken a 10% discount if he pays the invoiced amount within ten days. Ken pays the invoice upon receipt and takes a 10% discount. Mann's may reduce its gross sales figure by $200 when determining its wholesaling B&O tax.
(i) Extracting or manufacturing. Discount deductions are allowed under the extracting or manufacturing classifications only when the value of the products is determined from the gross proceeds of sales. No discount is available if tax is computed by other means authorized by RCW 82.04.450 (e.g., gross proceeds determined by sales in this state of similar products of like quality and character, and in similar quantities by other taxpayers).
(ii) Retail sales tax. Cash discounts are not deductible for retail sales tax purposes when the seller collects the tax on the selling price before the discount is taken and no portion of the tax is refunded to the buyer.
Example 5. Mann's sells Richard all materials needed for a shed that Richard wants to build for extra storage. Mann's bills Richard for $500 plus retail sales tax at 9.5% ($500 + $47.50). Mann's offers a 10% discount if Richard pays the invoiced amount within ten days. Richard neglects to take advantage of the offered discount even though he pays the full invoice within ten days. Mann's gives Richard a credit for $50. Mann's may deduct the $50 discount when reporting retailing B&O tax, but cannot when reporting retail sales tax as no sales tax was refunded.
Example 6. Mann's sells George all the materials needed for a shed that George plans to build for storage. Mann's bills George for $500 plus retail sales tax at 9.5% ($500 + $47.50 = $547.50). Mann's offers a 10% discount if George pays the invoiced amount within ten days. George takes advantage of the cash discount and pays $492.75. Mann's must report a sale of $450 and sales tax of $42.75 on its excise tax return.
(c) Retail stores' coupons. Retail stores' coupons are issued by retail stores and redeemable only at that store or at affiliated stores of the chain. The coupons offer a reduced price for a specific item upon presentation at the store. The price reduction is a discount, and the retail store must report the amount actually paid by the buyer when reporting retail sales and B&O taxes.
(8) What is not a bona fide discount? Bona fide discounts do not include discounts on the selling price to the buyer, when the buyer is required to perform a service to receive a discount. Examples of services that may be required include advertising, shelf placement of product, special in-store displays, and hiring product demonstrators to promote sales.
(a) Slotting fees. Grocers sometimes receive discounts, allowances, slotting fees, or free product from manufacturers if the grocers provide shelf space for new products or advantageous shelf space for display of the manufacturers' products. Grocers' product placement or slotting activities in exchange for consideration from manufacturers constitute business transactions. RCW 82.04.140. Receipts received by grocers for product placement or slotting activities are taxable income to the grocers under the service and other activities B&O tax classification.
(b) Manufacturers' or distributors' coupons. Manufacturers' or distributors' coupons offer a reduction in price of a specified amount on the customer's purchase of specified items. The manufacturer or distributor will redeem these coupons when they are turned in by the seller. Redemption is usually at full face value plus a small handling charge. In this case, the seller actually receives the full retail price for the item sold. Tax is due on the full retail price.
(c) Manufacturers' rebates. Manufacturers sometimes make rebates available to buyers. Normally the buyer pays the seller the full purchase price for an item, and then sends requested documentation with a rebate claim form to the manufacturer. The rebate is sent directly to the buyer.
(i) Seller's measure of tax. A cash payment by the manufacturer to the buyer has no effect on the selling price of the sales transaction that occurred between the seller and buyer. The measure of the tax remains the total consideration paid or delivered to the seller by the buyer.
(ii) Automobile manufacturers' sales promotions. Automobile manufacturers routinely run sales promotions offering a rebate or cash payment directly to the buyer. As an alternative to direct payment, these programs may allow the buyer to assign his or her right to the rebate to the selling dealer. The assignment from the buyer to the seller of the right to a manufacturer's rebate is a part of the consideration paid or delivered by the buyer to the seller. In such cases, the measure of the B&O tax and retail sales tax must include the value of the manufacturer's rebate.
(d) Manufacturers' incentives to retailers. Except as provided in subsection (7)(b) of this rule regarding cash discounts, a payment or credit from a manufacturer or distributor to a retailer that is conditioned on the retailer making sales of services or tangible personal property to consumers, or engaging in any activity other than making the original wholesale purchase from the manufacturer or distributor, is not a bona fide discount.
(9) Patronage dividends. A patronage dividend is the distribution of a member's share of the profits of a cooperative association based on the quantity of purchases made by the member. The amount of a patronage dividend (rebate or refund) is determined by:
• The expenses of doing business;
• The volume of sales to other members; and
• The proportion of business the specific member has conducted with the cooperative.
A patronage dividend determined in this manner is simply a redistribution of the cooperative's "profit," even though the cooperative may refer to accounting mechanisms such as "tentative" or "delayed" invoices, or to "deferred discounts."
A member receiving dividends may deduct the amount received from gross income if it reports the income and qualifies for the investment income deduction under RCW 82.04.4281.
(a) Exception. Patronage dividends that are granted in the form of discounts in the selling price of specific articles (for example, a rebate of five cents per gallon on purchases of gasoline) are deductible from the gross income received by the taxpayer granting the dividends.
(b) Example 7. AB Cooperative, a nonprofit association, sells equipment to members and nonmembers. All equipment is sold at the normal and competitive prices. At year-end the volume of business done with members is determined, and proportionate shares of net profit are refunded. These dividends are not discounts on the selling price of specific articles and are not deductible from the cooperative's gross proceeds of sales when determining taxability.
(c) Example 8. MAX, a cooperative selling association comprised of several franchise dealers, sets up refunds as patronage dividends to comply with the Robinson-Patman Act. This act allows MAX to return to its dealers net earnings resulting from trading operations in proportion to purchases from or through the association.
Each purchase is invoiced to the dealer at the suggested wholesale price with net price to MAX also indicated. Every month dealers pay a regular flat fee plus a fixed percentage assessed on volume of purchases for payment of operational expenses. Refunds of the difference between the suggested wholesale price and the net cost are made to dealers quarterly.
The patronage dividends are distributions of the cooperative corporation's profits and are not deductible discounts because the discounts were not provided as a part of the sale of a particular article.
(10) Payments to dealers for "make-ready" services. Equipment dealers may be required by the manufacturer to perform or be responsible for "make-ready" services. These services generally include the inspection, conditioning, and necessary repair of the equipment prior to the sale by the dealer. Payments for "make-ready" services are not bona fide cash discounts taken by the dealer, nor do they represent any adjustment to the dealer's purchase price of the sold equipment.
Payment for these services is a cost of doing business for the manufacturer. As a cost of doing business, the payment may not be deducted from the gross proceeds of sales when the manufacturer determines its B&O tax liability. Payments or credits received by the dealer for services performed are subject to the wholesaling B&O tax classification.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-15-157, § 458-20-108, filed 7/21/15, effective 8/21/15. Statutory Authority: RCW 82.32.300. WSR 88-01-050 (Order 87-9), § 458-20-108, filed 12/15/87; WSR 83-07-034 (Order ET 83-17), § 458-20-108, filed 3/15/83; Order ET 70-3, § 458-20-108 (Rule 108), filed 5/29/70, effective 7/1/70.]


PDF458-20-109

Finance charges, carrying charges, interest, penalties.

(1) Introduction. This section explains the B&O and public utility taxation of finance charges, carrying charges, interest and/or penalties received by taxpayers in the regular course of business. This section also explains when these amounts are not part of the selling price for retail sales tax purposes.
(2) Business and occupation tax. Persons who receive finance charges, carrying charges, service charges, penalties and interest are taxable under the service and other business activities classification on the receipt of amounts from these sources.
(a) Amounts received from these sources include but are not limited to:
(i) Interest received by persons engaged in public utility activities; and
(ii) Interest received by persons regularly engaged in the business of selling real estate.
(b) Persons engaged in financial business activities should refer to WAC 458-20-146.
(c) Amounts categorized as "interest" in a lease payment are generally taxable in the retailing classification as part of the total lease payment and part of the selling price for retail sales tax purposes. See WAC 458-20-211.
(d) Interest or finance charges received from an installment sale are taxable under the service classification.
(3) Retail sales tax. Retail sales tax applies as follows.
(a) Finance charges, carrying charges, service charges, penalties and/or interest from installment sales are not considered a part of the selling price of such property and are not subject to the retail sales tax, when:
(i) The amount of such finance charges, carrying charges, service charges, penalty, or interest is in addition to the usual or established cash selling price; and
(ii) The amount is segregated on the taxpayers' accounts; and
(iii) The amount is billed separately to customers.
(b) Amounts designated as finance charges, carrying charges, service charges or interest in a lease of tangible personal property must be included in the measure of retail sales tax regardless of the fact that such charges may be billed separately to customers. However, a penalty or interest charge for failure of the customer to make a timely lease payment is taxable under the service and other business activities classification and not subject to retail sales tax.
(4) Examples. The following examples identify a number of facts and then state a conclusion as to whether the situation results in taxable interest or finance charges. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(a) ABC Electric Company, who sells electricity to consumers, receives $9,000.00 in late charges in the month of November. These fees are taxable under the service and other classification of the business and occupation tax. The public utility tax would not apply to this income.
(b) XYZ Furniture Company sells furniture and allows its customers to pay for the furniture over a twelve-month period. The seller charges interest at twelve percent per annum for allowing the customer to defer immediate payment. The interest charged the customer is a separate activity from the sale of the furniture and is taxable under the service and other business activities classification.
(c) Jane Doe is leasing a car from ABC Leasing, Inc. The lease contract provides that if the customer is more than fifteen days late in making the lease payment, a five percent penalty will be charged. Jane Doe was more than fifteen days late in making her March payment and was required to pay the five percent penalty. The penalty amount received by ABC Leasing is a separate activity from the lease of the vehicle and is taxable under the service and other activity business and occupation tax. Retail sales tax does not apply to this amount.
(d) John Doe sold his personal residence on contract. He receives monthly interest and principal payments. The interest is received in exchange for the seller's deferring receipt of immediate payment. The sale of the residence was not related to any other business activities and John Doe has sold no other real estate. The interest is not taxable under the B&O tax since the transaction was a casual and isolated sale.
(e) Judy Smith is engaged in business as a real estate broker and regularly sells real estate for others. Judy Smith sold her personal residence on contract. She receives monthly interest and principal payments. She receives no other interest from real estate contracts. The sale of her own residence can be distinguished from the sale of real estate for others. Since this was a single sale of her own residence, it is a casual and isolated sale and the interest is not subject to B&O tax.
(f) James Smith sold on contract seventeen of twenty-three apartment complexes which he owned during a four-year period. He receives payment of principal and interest every month from these sales. The only other income he receives is from the rental of apartment units to nontransients. The income which James Smith receives as interest from the sale of the real estate is subject to the service and other B&O tax. The rental of the apartment units is not taxable for the B&O tax. The courts have held that the selling and financing of sales of capital assets by means of real estate contracts does not constitute an investment within the meaning of RCW 82.04.4281. James Smith is engaged in a taxable business activity. A deduction is provided to sellers who are engaged in banking, loan, security, or other financial businesses if the sale is primarily secured by a first mortgage or trust deed on nontransient residential property. However, James Smith is not engaged in these types of business, nor was the loan secured in this manner. Persons in a financial business should refer to WAC 458-20-146.
(g) David Roe acquired four pieces of real property over a period of several years. This property has been held for residential rental to nontransients. David Roe sold all of the real estate in 1991 and is receiving payments of principal and interest pursuant to sales contracts. The determination of whether the interest received is subject to the business and occupation tax depends on all facts and circumstances and cannot be made based on the limited facts set forth in this example. Additional facts and circumstances would include, but not be limited to, the extent to which David Roe has purchased and sold real property in the past, the number of other sales contracts held by David Roe aside from the ones mentioned here, whether the property may have been acquired by inheritance, and the type of business in which David Roe regularly engages.
[Statutory Authority: RCW 82.32.300. WSR 91-23-038, § 458-20-109, filed 11/13/91, effective 1/1/92; Order ET 70-3, § 458-20-109 (Rule 109), filed 5/29/70, effective 7/1/70.]


PDF458-20-110

Delivery charges.

(1) Introduction. This section explains the manner in which delivery charges are considered for purposes of business and occupation (B&O), retail sales, and use taxes. For information about delivery charges with regard to promotional materials, see WAC 458-20-17803 (Use tax on promotional materials).
(2) What are delivery charges? "Delivery charges" means charges by the seller for preparation and delivery to a location designated by the purchaser of tangible personal property or services including, but not limited to, transportation, shipping, postage, handling, crating, and packing.
(3) Do the business and occupation (B&O) and retail sales taxes apply to delivery charges? The measure of the tax is "gross proceeds of sales" for B&O tax (RCW 82.04.070) and "selling price" for retail sales tax (RCW 82.08.010). Gross proceeds of sales and selling price include all consideration paid by the buyer, without any deduction for costs of doing business such as material, labor, and transportation costs, including delivery charges. Thus, delivery charges by the seller are a component of these tax measures.
(a) What if delivery charges are separately itemized on the sales invoice? Amounts received by a seller from a buyer for delivery charges are included in the measure of tax regardless of whether charges for such costs are billed separately, itemized, or whether the seller is also the carrier. Limiting delivery charges to the actual cost of delivery to the seller does not affect taxability.
(b) Does retail sales tax apply to all delivery charges by the seller? Delivery charges by the seller making a retail sale are a component of the selling price. If the sale of the tangible personal property or service is exempt from retail sales tax, such as certain "food and food ingredients," retail sales tax does not apply to the selling price, including delivery charges, associated with that sale. Similarly, if the product is sold at wholesale, retail sales tax does not apply to the delivery charges of that sale.
If a retail sale consists of both taxable and nontaxable tangible personal property, and delivery charges are a component of the selling price, retail sales tax applies to the percentage of delivery charges allocated to the taxable tangible personal property. Retail sales tax is not due on delivery charges allocated to exempt tangible personal property.
The seller may use either of the following percentages to determine the taxable portion of the delivery charges:
(i) A percentage based on the total sales price of the taxable tangible personal property compared to the total sales price of all tangible personal property in the shipment; or
(ii) A percentage based on the total weight of the taxable tangible personal property compared to the total weight of all tangible personal property in the shipment.
(c) Are there any situations in which delivery charges by the seller may be excluded from the measure of tax? There is no specific exclusion from the measure of tax for delivery charges by the seller. Actual delivery costs, regardless of whether separately charged, may be excluded from the measure of the manufacturing and extracting B&O taxes when the products are delivered outside the state. For further discussion, refer to WAC 458-20-112 (Value of products). WAC 458-20-13501 (Timber harvest operations) provides guidance regarding this issue for persons engaged in activities associated with timber harvesting.
(d) Delivery charges in cases of payments to third parties. Delivery charges incurred after the buyer takes delivery of the goods are not part of the selling price when the seller is not liable for payment of the delivery charges. To be excluded from the gross proceeds of sales for B&O tax and selling price for retail sales tax, the seller must document that the buyer alone is responsible to pay the carrier for the delivery charges.
(e) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances. In these examples, if the seller had been required to collect use tax (RCW 82.12.040) instead of retail sales tax (RCW 82.08.050), the use tax collection responsibility remains the same as for retail sales tax. This is because, in this context, the "value of article used" has the same meaning as the "purchase price" or "selling price."
(i) Example 1. Jane Doe orders a life vest from Marine Sales and requests that the vest be mailed by the United States Postal Service to her home. Marine Sales places the correct postage on the package using its postage meter and separately itemizes a charge on the sales invoice to Jane at the exact amount of the postage cost. Marine Sales is subject to the retailing B&O tax on the gross proceeds of the sale and must collect retail sales tax on the selling price, both of which measures of tax include the charge for postage.
(ii) Example 2. XYZ Corporation orders equipment from ABC Distributors and provides ABC with a properly completed resale certificate (WAC 458-20-102A), for purchases made before January 1, 2010, or a reseller permit (WAC 458-20-102), for purchases made on or after January 1, 2010. ABC ships the equipment using overnight air delivery and itemizes the actual amount of its shipping costs on the sales invoice. ABC must remit wholesaling B&O tax on the gross proceeds of sale, which includes the amount billed as shipping charges. Since the equipment is purchased for resale, ABC does not collect or report retail sales tax.
(iii) Example 3. The facts in this example are the same as those in (ii) of this subsection except that XYZ provides ABC with a properly completed exemption certificate. Retail sales tax does not apply to the delivery charge because the selling price, of which the delivery charge is a component, is exempt from retail sales tax. However, the delivery charge is included in the gross proceeds of the sale, and thus, is subject to retailing B&O tax.
(iv) Example 4. Jones Computer Supply, a distributor, makes retail sales of computer products primarily by mail order. It is the practice of Jones Computer Supply to add a ten-dollar handling charge for each order. No separate charge is made for actual transportation. The handling charge is part of the measure of tax for the retailing B&O and retail sales taxes.
(v) Example 5. ABC Construction in Seattle purchased a new saw from XYZ, Inc. The sales contract specifies that ABC will contract with MNO, Inc. for shipping to Seattle and that MNO, Inc. will pick up the saw in Spokane. ABC does contract with MNO for the shipping and is shown as the consignor on the bill of lading. The transportation charge is not included in the measure of tax for purposes of the retailing B&O and retail sales taxes because ABC, the buyer, is liable for payment to MNO, for shipping the new saw.
(4) Delivery charges and use tax. "Value of article used," which is the measure of the use tax for tangible personal property, includes the amount of any delivery charge paid or given to the seller or on behalf of the seller with respect to the purchase of such article. Beginning July 1, 2004, both the "value of the article used" and the "value of the service used" will be the "purchase price" in instances where the seller is required under RCW 82.12.040 to collect use tax from the purchaser. RCW 82.12.010. "Purchase price" has the same meaning as "selling price" as described in subsection (3) of this section. Consumers responsible for remitting use tax directly to the department should refer to WAC 458-20-178 (Use tax).
The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances. Presume that all transactions in the following examples occur July 1, 2004, or later.
(a) Example 1. ABC Construction ordered replacement parts for a saw from XYZ, Inc., a business located in Chicago that is not required to collect Washington taxes. XYZ contracted with MNO Freight to ship the parts from Chicago. ABC is subject to use tax on the value of the article used (presumed to be the purchase price of the parts) including the cost of the transportation, regardless of whether the transportation costs are itemized.
(b) Example 2. The facts in this example are the same as those in (a) of this subsection except that instead of ordering a replacement part, ABC Construction sends a broken part to XYZ, Inc. in Chicago for repair. ABC is subject to use tax on the repair service. The cost of transportation is included in the value of the service used, regardless of whether the transportation costs are itemized.
(c) Example 3. ABC Construction ordered replacement parts for a saw from XYZ, Inc., a business located in Chicago that is not required to collect Washington taxes. ABC hired MNO Freight to ship the parts from Chicago and was responsible for payment. ABC may exclude the cost of the transportation from the value on which use tax is due. The transportation costs ABC pays MNO are not a component of the value of the article used because the cost is not part of the consideration paid to XYZ for the replacement parts. ABC is subject to use tax on the value of the parts, which is presumed to be their purchase price.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-110, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapters 82.04, 82.08 and 82.12 RCW. WSR 08-14-026, § 458-20-110, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-02-039, § 458-20-110, filed 12/30/04, effective 1/30/05. Statutory Authority: RCW 82.32.300. WSR 91-23-037, § 458-20-110, filed 11/13/91, effective 12/14/91; Order ET 70-3, § 458-20-110 (Rule 110), filed 5/29/70, effective 7/1/70.]


PDF458-20-111

Advances and reimbursements.

The word "advance" as used herein, means money or credits received by a taxpayer from a customer or client with which the taxpayer is to pay costs or fees for the customer or client.
The word "reimbursement" as used herein, means money or credits received from a customer or client to repay the taxpayer for money or credits expended by the taxpayer in payment of costs or fees for the client.
The words "advance" and "reimbursement" apply only when the customer or client alone is liable for the payment of the fees or costs and when the taxpayer making the payment has no personal liability therefor, either primarily or secondarily, other than as agent for the customer or client.
There may be excluded from the measure of tax amounts representing money or credit received by a taxpayer as reimbursement of an advance in accordance with the regular and usual custom of his business or profession.
The foregoing is limited to cases wherein the taxpayer, as an incident to the business, undertakes, on behalf of the customer, guest or client, the payment of money, either upon an obligation owing by the customer, guest or client to a third person, or in procuring a service for the customer, guest or client which the taxpayer does not or cannot render and for which no liability attaches to the taxpayer. It does not apply to cases where the customer, guest or client makes advances to the taxpayer upon services to be rendered by the taxpayer or upon goods to be purchased by the taxpayer in carrying on the business in which the taxpayer engages.
For example, where a taxpayer engaging in the business of selling automobiles at retail collects from a customer, in addition to the purchase price, an amount sufficient to pay the fees for automobile license, tax and registration of title, the amount so collected is not properly a part of the gross sales of the taxpayer but is merely an advance and should be excluded from gross proceeds of sales. Likewise, where an attorney pays filing fees or court costs in any litigation, such fees and costs are paid as agent for the client and should be excluded from the gross income of the attorney.
On the other hand, no charge which represents an advance payment on the purchase price of an article or a cost of doing or obtaining business, even though such charge is made as a separate item, will be construed as an advance or reimbursement. Money so received constitutes a part of gross sales or gross income of the business, as the case may be. For example, no exclusion is allowed with respect to amounts received by (1) a doctor for furnishing medicine or drugs as a part of his treatment; (2) a dentist for furnishing gold, silver or other property in conjunction with his services; (3) a garage for furnishing parts in connection with repairs; (4) a manufacturer or contractor for materials purchased in his own name or in the name of his customer if the manufacturer or contractor is obligated to the vendor for the payment of the purchase price, regardless of whether the customer may also be so obligated; (5) any person engaging in a service business or in the business of installing or repairing tangible personal property for charges made separately for transportation or traveling expense.
Revised May 1, 1947.
[Order ET 70-3, § 458-20-111 (Rule 111), filed 5/29/70, effective 7/1/70.]


PDF458-20-112

Value of products.

The term "value of products" includes the value of by-products, and except as provided herein, shall be determined by "gross proceeds of sales" whether such sales are at wholesale or at retail, to which shall be added all subsidies and bonuses received with respect to the extraction, manufacture, or sale thereof.
"The term 'gross proceeds of sales' means the value proceeding or accruing from the sale of tangible personal property . . . without any deduction on account of the cost of property sold, the cost of materials used, labor costs, interest, discount paid, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses." (RCW 82.04.070.)
In the case of bona fide sales of products. The law provides (RCW 82.04.450), that under the extracting and manufacturing classifications of the business and occupation tax the value of products extracted or manufactured shall be determined by the gross proceeds of sales in every instance in which a bona fide sale of such products is made, and whether sold at wholesale or at retail.
Sales to points outside the state. In determining the value of products delivered to points outside the state there may be deducted from the gross proceeds of sales so much thereof as the taxpayer can show to be actual transportation costs from the point at which the shipment originates in this state to the point of delivery outside the state.
All other cases. The law provides that where products extracted or manufactured are
(1) For commercial or industrial use (by the extractor or manufacturer—see WAC 458-20-134); or
(2) Transported out of the state, or to another person without prior sale; or
(3) Sold under circumstances such that the stated gross proceeds from the sale are not indicative of the true value of the subject matter of the sale; the value shall correspond as nearly as possible to the gross proceeds from other sales at comparable locations in this state of similar products of like quality and character, in similar quantities, under comparable conditions of sale, to comparable purchasers, and shall include subsidies and bonuses.
In the absence of sales of similar products as a guide to value, such value may be determined upon a cost basis. In such cases, there shall be included every item of cost attributable to the particular article or article extracted or manufactured, including direct and indirect overhead costs.
Revised June 1, 1970.
[Order ET 70-3, § 458-20-112 (Rule 112), filed 5/29/70, effective 7/1/70.]


PDF458-20-113

Ingredients or components, chemicals used in processing new articles for sale.

(1) The term "retail sale" means "every sale of tangible personal property . . . other than a sale to one who purchases for the purpose of resale . . . or for the purpose of consuming the property purchased in producing for sale a new article of tangible personal property or substance, of which such property becomes an ingredient or component or is a chemical used in processing, when the primary purpose of such chemical is to create a chemical reaction directly through contact with an ingredient of a new article being produced for sale . . . (RCW 82.04.050.)
(2) Ingredients or components. The sale of articles of tangible personal property which physically enter into and form a part of a new article or substance produced for sale does not constitute a retail sale. This does not exempt from the retail sales tax the sale of articles consumed in a manufacturing process which do not enter into and become a physical part of the new article produced for sale, such as fuel used for heating purposes, oil for machinery, sandpaper, etc.
(3) Also, the definition of retail sale does not exclude consumables purchased for use in manufacturing, refining, or processing new articles for sale merely because some constituents of the consumables may also be traceable in the finished product, which are impurities or undesirable or unnecessary constituents of the finished product.
(4) For articles to qualify for sales and use tax exemption as ingredients or components of products produced for sale, such articles or their constituents must be traceable in the finished product and identifiable as having been directly provided by the article claimed for exemption.
(5) Chemicals used in processing. Sales of chemicals to a person for use in processing articles produced for sale are not retail sales, and therefore are not subject to the retail sales tax.
(6) "Chemicals used in processing" carries its common restricted meaning in commercial usage. It includes only chemical substances which are used by the purchaser to unite with other chemical substances, present as ingredients or components of the articles or substances being processed, to produce a chemical reaction therewith, as contrasted with merely a physical change therein. A chemical reaction is one in which there takes place a permanent change of certain properties, with the formation of new substances which differ in chemical composition and properties from the substances originally present, and usually differ from them in appearance as well. It is not necessary that all of the new substances which are formed be present in the final completed article or substance which is sold; one or more of such new substances resulting from the chemical reaction may be removed or drawn off in the processing.
(7) To illustrate: Sales of chemicals to a pulp mill for use in the digesting and bleaching of pulp are not subject to the retail sales tax because such chemicals react chemically with the cellulose in the pulp fiber which, in turn, becomes a major ingredient of the final product, paper. Similarly, sales of carbon to an aluminum reduction plant for the primary purpose of forming a chemical reaction with alumina to remove its oxygen content are not retail sales.
(8) Conversely, sales of water purifiers and wetting agents to a pulp mill are taxable sales. The treated water acts primarily as a conveyor or carrier of the pulp fibers and only an insignificant part of the water becomes an ingredient of the final product. Similarly, sales of caustic soda to potato processors to remove peelings from potatoes are retail sales because the chemical reacts only with the peelings which are removed as waste, and not with the potatoes which are sold as the final product.
(9) Sales of diesel or fuel oil to a steel mill or foundry, for use or consumption primarily in generating heat, are retail sales and subject to the retail sales tax, notwithstanding the fact that some portion of the oil may cause a chemical reaction and to some extent alter the character of the article being manufactured or processed.
(10) Effective April 3, 1986, (chapter 231, Laws of 1986), purchases for the purpose of consuming the property purchased in producing ferrosilicon which is subsequently used in producing magnesium for sale, if the primary purpose is to create a chemical reaction directly through contact with an ingredient of ferrosilicon, are not subject to retail sales tax or use tax.
(11) In special cases where doubt exists, a special ruling will be made by the department of revenue upon submission of all the pertinent facts relative to the nature of the chemical substances concerned and the use made thereof by the purchaser.
Revised June 1, 1970.
[Statutory Authority: RCW 82.32.300. WSR 86-20-027 (Order 86-17), § 458-20-113, filed 9/23/86; Order ET 70-3, § 458-20-113 (Rule 113), filed 5/29/70, effective 7/1/70.]


PDF458-20-115

Sales of packing materials and containers.

(1) Introduction. This section explains the B&O, retail sales, and use taxes which apply to persons who sell packing materials and to those who use packing materials.
(2) Definitions. The term "packing materials" means and includes all boxes, crates, bottles, cans, bags, drums, cartons, wrapping papers, cellophane, twines, gummed tapes, wire, bands, excelsior, waste paper, and all other materials in which tangible personal property may be contained or protected within a container, for transportation or delivery to a purchaser.
(3) Business and occupation tax.
(a) Sales of packing materials to persons who sell tangible personal property contained in or protected by packing materials are sales for resale and subject to tax under the wholesaling classification. Sellers must obtain resale certificates for sales made before January 1, 2010, or reseller permits for sales made on or after January 1, 2010, from purchasers to document the wholesale nature of any sale as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(b) Sales of containers to persons who sell tangible personal property contained within the containers, but who retain title to such containers which are to be returned, are sales for consumption and subject to tax under the retailing classification. This class includes wooden or metal bottle cases, barrels, gas tanks, carboys, drums, bags and other items, when title to the container remains with the seller of the tangible personal property contained within the container, and even though a deposit is not made for the containers, and when such articles are customarily returned to the seller. If a charge is made against a customer for the container, with the understanding that such charge will be canceled or rebated when the container is returned, the amount charged is deemed to be made as security for the return of the container and is not part of the selling price for tax purposes. However, refer to the comments below for sales of containers for beverages and foods.
(c) Title to containers, whether designated as returnable or nonreturnable, for beverages and food sold at retail, including beer, milk, soft drinks, mixers and the like, will be deemed to pass to the customer along with the contents. In such cases, amounts charged for the containers are part of the selling price of the food or beverage and subject to retailing tax when sold to consumers. Sales to persons who will resell the food or beverages are wholesale sales.
(d) Persons who perform custom or commercial packing for others are generally taxable under the service B&O tax classification on the income from the packing activity.
(i) Under RCW 82.04.190, persons taxable under the service B&O tax classification are consumers of any materials used in performing the service. Sales of packing materials to persons engaged in the business of custom or commercial packing are sales for consumption and are subject to the retail sales tax. However, there is a specific statutory exemption from the B&O tax for persons who perform packing of fresh perishable horticultural products for the grower. These persons are also exempt from retail sales tax on the purchase of any materials and supplies used in performing the packing service.
(ii) Persons who perform custom or commercial packing for others and who also manufacture the boxes, containers, or other packaging materials used by them in the packing are subject to the manufacturing tax and use tax on the value of the packing materials which they manufacture. Refer to WAC 458-20-136 Manufacturing, processing for hire, fabricating.
(e) Persons who operate cold storage warehouses or who perform processing for hire for others, which includes packaging the processed items, are not the consumers of the containers or other packaging materials. Sales of boxes, cartons, and packaging materials to these persons are taxable under the wholesaling tax classification. Refer to WAC 458-20-136 and 458-20-133 Frozen food lockers.
(f) Persons who manufacture packing materials for delivery outside Washington or for their own commercial or industrial use are manufacturers and should refer to WAC 458-20-136, 458-20-134 Commercial or industrial use, and WAC 458-20-112 Value of products.
(4) Retail sales tax.
(a) All sales taxable under the retailing classification of the business and occupation tax as indicated above are also subject to retail sales tax except those specifically distinguished hereafter in this subsection.
(b) Retail sales tax does not apply to sales of returnable food and beverage containers, and vendors may take a deduction from gross retail sales for the amount of such sales in reporting sales tax due, providing (i) the seller separately states the charge for the container and (ii) the separately stated charge is the amount the vendor will pay for a repurchase of the container. Return of the containers is a repurchase by the vendor, and sales tax is not due on amounts paid to the customer on such repurchases, since the vendor will resell the containers in the regular course of business. (RCW 82.08.0282.)
(c) No deduction is allowed in computing tax under the retail sales tax classification where the retail sales tax is collected from the customer upon the charge for the container.
(d) Sales of packing materials to cooperative marketing associations, agents, or independent contractors for the purpose of packing fresh perishable horticultural products for the growers thereof, are not subject to retail sales tax. See also WAC 458-20-214 Cooperative marketing associations and independent dealers acting as agents of others with respect to the sale of fruit and produce.
(5) Use tax.
(a) The use tax applies to uses of packing materials and containers to which retail sales tax would apply but, for any reason, was not paid at the time such materials and containers were acquired.
(b) The use tax applies to the use of packing materials, such as boxes, cartons, and strapping materials, by a manufacturer in Washington where the packing materials are used to protect materials while being transported to another site of the manufacturer for further processing.
(c) The use tax applies to the use of pallets by a manufacturer or seller where the pallets will not be sold with the product, but are for use in the manufacturing plant or warehouse.
(6) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(a) ABC Packing Co. does custom packing of small parts for a Washington manufacturer. The parts are sent by truck to ABC who then places the parts into plastic bags and seals the bags through a heat fusion process. ABC is the consumer of the bags and must pay either retail sales tax or use tax on the use of the bags. This is true even though the bags will remain with the parts until delivered to the ultimate user of the parts.
(b) XY manufactures paper products in Washington. The paper is placed on large rolls. These large rolls are shipped to another of its own plants where the paper goes through a slitter for conversion into reams of paper. These large rolls involve the use of "cores" made of heavy fiber board on which the paper is rolled. "Plugs" are placed in the ends to give additional support. The rolls are also wrapped and banded with steel banding. The cores, plugs, wrapping materials, and banding are all eventually removed during the additional processing. XY is the consumer of the plugs, cores, and other packing materials and must pay retail sales or use tax on these items.
(c) XY uses three types of pallets in its manufacturing operation. One type of pallet is used strictly for storing paper which is in the manufacturing process. A second type of pallet is returnable and the customer is charged a deposit which is refunded at the time the pallet is returned. The third type of pallet is nonreturnable and is sold with the product. XY is required to pay retail sales or use tax on the first two types of pallets. The third type of pallets may be purchased by XY without the payment of retail sales or use tax since these pallets are sold with the paper products.
(d) Cold Storage Co. does custom fish processing for various customers. The processing involves cutting whole fish into fillets or steaks, vacuum packaging the pieces, and freezing the packages. The packing activity is considered to be part of a processing for hire activity. As a processor for hire, Cold Storage Co. is not the consumer of the packing materials.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-115, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 93-19-017, § 458-20-115, filed 9/2/93, effective 10/3/93; WSR 88-20-014 (Order 88-6), § 458-20-115, filed 9/27/88; Order 74-2, § 458-20-115, filed 6/24/74; Order ET 70-3, § 458-20-115 (Rule 115), filed 5/29/70, effective 7/1/70.]


PDF458-20-116

Sales and/or use of labels, name plates, tags, premiums, and advertising material.

(1) Introduction. This section explains Washington's B&O and retail sales tax applications to the sale of labels, name plates, tags, and advertising material. It also gives tax reporting information to persons offering premiums at reduced or no cost to customers.
(2) Definitions. For the purposes of this section, the following definitions apply:
(a) "Labels," "name plates," and "tags" are slips, generally made of paper or cloth, which are affixed to articles or containers for identification or description.
(b) A "premium" is an item offered free of charge or at a reduced price to prospective customers as an inducement to buy.
(3) Sales for resale. Sales of labels, name plates, tags, premiums, and advertising material to persons for use in the following manner are sales for resale (wholesale sales) and not subject to retail sales tax:
(a) Sales of labels, name plates, and tags to persons who will attach these items to articles or containers sold by them, or enclose these items with articles sold by them. However, the labels, name plates, or tags may not be purchased for resale if they will be put to intervening use by such persons.
(b) Sales of premiums to persons who pass title to the premium along with other articles which are sold by them, when the passing of title to the premiums is not contingent upon the returning of coupons or other evidence of prior purchase.
(c) Sales of premiums to persons who in turn sell the same to customers at a reduced price.
(d) Sales of advertising material to persons who enclose the advertising material with articles sold by them, when such advertising material relates primarily to the articles with which it is enclosed. Persons who enclose advertising material with articles being sold for the purpose of promoting sales of other products are consumers and may not purchase this advertising material for resale. (See RCW 82.12.010(5).)
(4) Retail sales tax. Sales of labels, name plates, tags, premiums, and advertising material to consumers are retail sales. The retail sales tax applies to the following:
(a) Sales of labels, name plates, and tags to persons who attach the same to containers enclosing articles sold by them, when such persons retain title to the containers which are to be returned. Such sales are sales for consumption and subject to the retail sales tax. Since the container is not being resold, any labels, name plates, tags, or similar items attached to the container are also not being resold.
(b) Sales of labels, name plates, and tags to persons who use them for inventory, statistical, or other business purposes. Such sales are sales for consumption and the retail sales tax applies, notwithstanding the labels, name plates, or tags remain attached to the articles or containers delivered to the customer.
(c) Sales of premiums to persons who do not pass title thereto with other articles which are sold by them, but which are given as an inducement to perform a service, or are given upon the returning of coupons or other evidence of prior purchase. Such sales are sales for consumption and are subject to the retail sales tax.
(d) Sales of premiums to persons who offer them as an inducement to potential customers at no charge and with no requirement that the customer purchase any other article or service as a condition to receive the premium. Such sales are sales for consumption and subject to the retail sales tax.
(5) Business and occupation tax. The B&O tax applies to the sale of labels, name plates, tags, premiums, and advertising material as follows:
(a) Wholesaling. Persons who sell labels, name plates, tags, premiums, and advertising material to persons who will resell these items as described in subsection (3) of this section are subject to the wholesaling B&O tax on the gross proceeds of these sales. Sellers must obtain resale certificates for sales made before January 1, 2010, or reseller permits for sales made on or after January 1, 2010, from their customers to document the wholesale nature of any sale as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(b) Retailing. Persons who sell labels, name plates, tags, premiums, and advertising material to consumers are subject to the retailing B&O tax on such sales.
(6) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.
(7) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(a) ABC Timber purchases log tags which are attached to logs as they are received in ABC's yard. These tags are used by ABC to keep track of the logs for inventory purposes. These tags remain on the logs after sale, and are also used by ABC's customers to verify receipt of the logs. ABC must remit retail sales or use tax upon the purchase of the log tags, notwithstanding they remain attached to the logs after sale to ABC's customers. The use of these tags for inventory purposes by ABC prior to actual sale is intervening use as a consumer.
(b) MT Gas, a gasoline and service station, offers customers a free set of stemware with any gasoline purchase of ten gallons or more. Customer purchasing seven to nine gallons of gasoline may purchase the same set of stemware for a nominal amount. MT Gas may purchase the stemware without paying retail sales tax. The stemware is offered as a premium, and is considered to be resold along with the gasoline. It is immaterial that the sale of gasoline is exempt from the retail sales tax. MT Gas must report the retailing B&O tax and collect and remit retail sales tax on the price charged for the stemware sold to those customers purchasing seven to nine gallons of gasoline.
(c) KMP Company is a camping club which purchases gift items which are used as premiums. These gift items are offered free of charge to potential customers on condition that the potential customer attend a sales presentation. No purchase of a membership or anything else is required to receive the premium. KMP must remit retail sales or use tax upon the purchase of the premiums. KMP is the consumer of premiums given away free of charge where the recipient has no requirement to purchase any service or article as a condition of receiving the premium.
(d) BC Bank offers a choice of various premiums to customers opening new savings accounts. In some cases, a charge may be made to the customer for the premium, with the amount of the charge based on the amount of deposit the customer makes in the new savings account. BC Bank may give a resale certificate (WAC 458-20-102A) for purchases made before January 1, 2010, or a reseller permit (WAC 458-20-102) for purchases made on or after January 1, 2010, to its suppliers for those premiums which will be resold to its new customers. For those premiums which will be given to customers without charge, BC Bank must pay either the retail sales tax to its suppliers or use tax to the department on the cost of the premiums. It also must report the retailing B&O tax and collect and remit retail sales tax on any amounts charged to its customers.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-116, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 93-19-018, § 458-20-116, filed 9/2/93, effective 10/3/93; WSR 83-07-034 (Order ET 83-17), § 458-20-116, filed 3/15/83; Order ET 70-3, § 458-20-116 (Rule 116), filed 5/29/70, effective 7/1/70.]


PDF458-20-117

Sales and/or use of dunnage.

(1) Introduction. This rule explains Washington's B&O tax, retail sales tax, and use tax to the sale or use of dunnage.
(a) The term "dunnage" means any material used for the purpose of protecting or holding in place cargo or freight during transportation by any carrier of property, and which is not an integral part of the carrier itself. Dunnage includes, but is not limited to, wood blocks, stakes, separating strips, timber, double decks, false floors, door shields, bulkheads, and other bracing. Dunnage generally does not remain with the cargo that is being transported and will not be delivered to the person who will ultimately receive the cargo. On the other hand, packing materials are generally part of the total package containing the cargo and are ultimately delivered to the customer as part of the cargo or merchandise.
(b) Persons selling dunnage to air, rail, or water carriers operating in interstate or foreign commerce should also refer to WAC 458-20-175. Persons selling or purchasing packing materials should refer to 458-20-115 (Sales of packing materials and containers).
(2) Business and occupation tax. The B&O tax applies as follows to sales of dunnage.
(a) Wholesaling. The wholesaling tax applies to the gross proceeds derived from sales of dunnage to persons who resell the dunnage, without intervening use.
(b) Retailing of interstate transportation equipment. This B&O tax classification applies to sales of dunnage to air, rail, and water carriers. These sales are exempt from retail sales tax because of the provisions of RCW 82.08.0261.
(c) Retailing. The retailing tax applies to sales of dunnage to motor carriers and all other consumers.
(3) Retail sales tax. The retail sales tax generally applies to the sale of dunnage to consumers. This includes situations in which the purchaser may initially use the materials for dunnage and then resell the materials after they have served that purpose. RCW 82.08.0261 does provide a retail sales tax exemption for sales of tangible personal property, including dunnage, to air, rail, and water carriers operating in interstate or foreign commerce. To substantiate a claim for this exemption, the seller must retain as part of its records the completed exemption certificate(s) prescribed by WAC 458-20-175. However, air, rail, and water carriers are subject to use tax on dunnage used in Washington. (See below.)
(4) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.
(a) Air, rail, and water carriers engaged in interstate or foreign commerce should note that while the purchase of dunnage may qualify for the retail sales tax exemption provided by RCW 82.08.0261, the subsequent use in Washington of that dunnage is subject to use tax. These carriers should refer to WAC 458-20-175 to determine any potential use tax liability.
(b) Persons who manufacture the materials they will use for dunnage, such as lumber manufacturers, are subject to use tax on the value of the dunnage and are also subject to the manufacturing B&O tax. These persons should refer to WAC 458-20-136 and WAC 458-20-112.
(5) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all facts and circumstances. Unless stated otherwise, these examples presume both seller and purchaser are located in Washington.
(a) BCD, Inc. provides stevedoring services within the State of Washington. BCD routinely acquires lumber for use in securing cargo within the holds of ships during transport. While this lumber may be bolted or nailed to the ship, it is removed at the destination port when the cargo is off-loaded. BCD provides the lumber as a part of its overall stevedoring services, and does not make retail sales of the lumber to its customers.
BCD Inc. must pay retail sales tax when purchasing all such lumber. The lumber is used as dunnage and does not become an integral part of the ship, despite being bolted or nailed to the ship. If BCD has not paid retail sales tax on the acquisition of the lumber, it must remit the deferred sales or use tax directly to the department.
(b) D Company sells lumber and wood blocks to FG Engineering. FG is a manufacturer of equipment parts and uses the lumber and wood blocks as dunnage for the transportation of parts by rail to Montana. The lumber and wood blocks are salvaged and sold by FG after the transportation of the parts is completed.
The sale of the lumber and wood blocks to FG Engineering is a sale at retail, notwithstanding FG resells the dunnage materials in Montana. The use of the lumber and wood blocks as dunnage by FG Engineering is considered use as a consumer. D Company must collect and remit the retail sales tax, and report the gross proceeds of the sale under the retailing B&O tax classification.
(c) RB Lumber manufactures lumber in Washington which it ships by rail to customers in other states. RB Lumber takes irregular sized and other low quality lumber and uses it as dunnage in loading rail cars. Arrangements have been made with the rail carrier for the dunnage to be given away as firewood at the destination.
RB Lumber is subject to manufacturing B&O tax and also use tax on the value of the dunnage. If there is a comparable retail selling price for these materials, the value will be determined on that basis. If there is no comparable selling price, the value may be determined on the basis of cost of production as provided in WAC 458-20-112.
(d) KMB, Inc. sells lumber for use as dunnage to Western Rail, a common carrier operating by rail in multiple states. Some of the lumber will be first used in Washington and some will be transported to other states without intervening use for use in those states as dunnage. Western Rail may purchase the dunnage without payment of retail sales tax by giving the seller an exemption certificate as explained in WAC 458-20-175.
KMB, Inc. must report this sale under the retailing of interstate equipment B&O tax classification since Western Rail has claimed exemption for payment of the retail sales tax under RCW 82.08.0261. The seller must retain copies of the exemption certificates for five years. Western Rail must report use tax on the dunnage which is used in Washington.
[Statutory Authority: RCW 82.32.300. WSR 00-01-068, § 458-20-117, filed 12/13/99, effective 1/13/00; WSR 93-19-019, § 458-20-117, filed 9/2/93, effective 10/3/93; Order ET 70-3, § 458-20-117 (Rule 117), filed 5/29/70, effective 7/1/70.]


PDF458-20-118

Sale or rental of real estate, license to use real estate.

(1) Amounts derived from the sale and rental of real estate are exempt from taxation under the business and occupation tax. However, there is no exemption of amounts derived from engaging in any business wherein a mere license to use or enjoy real property is granted. Amounts derived from the granting of a license to use real property are taxable under the service B&O tax classification unless otherwise taxed under another classification by specific statute, e.g., sale of lodging taxed under retailing. (See RCW 82.04.050 and 82.04.290.) Further, no exemption is allowed for amounts received as commissions for the sale or rental of real estate (RCW 82.04.390) nor for interest received by persons engaged in the business of selling real estate on time or installment contracts. For purposes of distinguishing the lease or rental of real estate from the granting of a license to use real estate the department of revenue will be guided by the following principles.
(2) Lease or rental of real estate. A lease or rental of real property conveys an estate or interest in a certain designated area of real property with an exclusive right in the lessee of continuous possession against the world, including the owner, and grants to the lessee the absolute right of control and occupancy during the term of the lease or rental agreement. An agreement will not be construed as a lease of real estate unless a relationship of "landlord and tenant" is created thereby. It is presumed that the sale of lodging by a hotel, motel, tourist court, etc., for a continuous period of thirty days or more is a rental of real estate. It is further presumed that all rentals of mini-storage facilities, apartments and leased departments constitute rentals of real estate. The rental of a boat moorage slip or an airplane hangar/tie down site is presumed to be a rental of real estate only if a specific space, slip, or site is assigned and the rental is for a period of thirty days or longer.
(3) License to use real estate. A license grants merely a right to use the real property of another but does not confer exclusive control or dominion over the same. Usually, where the grant conveys only a license to use, the owner controls such things as lighting, heating, cleaning, repairing, and opening and closing the premises.
(a) Persons who are involved in more than one kind of business activity are required to segregate their income and report under the appropriate tax classification based on the nature of the specific activity (see RCW 82.04.440).
(b) It will be presumed that a taxable license to use or enjoy real property is granted in the rental of the following:
(i) Hotel rooms (for periods of less than 30 continuous days; see WAC 458-20-166).
(ii) Motels, tourist courts and trailer parks (for periods of less than 30 continuous days; see WAC 458-20-166).
(iii) Cold storage lockers (see WAC 458-20-133).
(iv) Safety deposit boxes and private mail boxes.
(v) Storage space (see WAC 458-20-182).
(vi) Space within park or fair grounds to a concessionaire.
(vii) Hairdressers, barbers, or manicurists who lease space within another business (see WAC 458-20-200 Leased departments).
(viii) Use of boat launch facilities for recreational purposes.
(ix) Space on a building for the attachment of advertising signs, including for periods in excess of 30 continuous days.
(c) RCW 82.04.050 (2)(f) specifically defines all services of a hotel, motel, or similar businesses as being retail sales. Thus, the rentals of meeting rooms, display rooms, or ball rooms are retail sales when rented out by such businesses. Persons who are not in the business of selling lodging are taxable under the service B&O tax classification on income from the rental of meeting rooms.
[Statutory Authority: RCW 82.32.300. WSR 91-02-056, § 458-20-118, filed 12/28/90, effective 1/28/91; WSR 83-07-034 (Order ET 83-17), § 458-20-118, filed 3/15/83; Order ET 70-3, § 458-20-118 (Rule 118), filed 5/29/70, effective 7/1/70.]


PDF458-20-119

Sales by caterers and food service contractors.

(1) Introduction. This rule explains Washington's business and occupation (B&O) tax and retail sales tax applications for sales by caterers and food service contractors.
(a) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(b) Other rules that may apply. The following rules may contain additional relevant information:
(i) WAC 458-20-107 Requirement to separately state sales tax—Advertised prices including sales tax.
(ii) WAC 458-20-124 Restaurants, cocktail bars, taverns and similar businesses.
(iii) WAC 458-20-166 Hotels, motels, boarding houses, rooming houses, resorts, hostels, trailer camps, short-term rentals and similar lodging businesses.
(iv) WAC 458-20-167 Educational institutions, school districts, student organizations, and private schools.
(v) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.
(vi) WAC 458-20-175 Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce.
(vii) WAC 458-20-189 Sales to and by the state of Washington and municipal corporations, including counties, cities, towns, school districts, and fire districts.
(viii) WAC 458-20-190 Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments.
(ix) WAC 458-20-244 Food and food ingredients.
(2) Sales by caterers. Sales of meals and prepared food by caterers are subject to the retailing B&O and retail sales taxes when sold to consumers. "Caterer" means a person who provides, prepares, and serves meals for immediate consumption at a location selected by the customer. The tax liability is the same whether the meals are prepared at the customer's site or the caterer's site. The retailing B&O and retail sales taxes also apply when caterers prepare and serve meals using ingredients provided by the customer.
(3) Food service contractors. The term "food service contractor" means a person who operates a food service at a kitchen, cafeteria, dining room, or similar facility owned by an institution or business. Food service contractors may manage the food service operation on behalf of the institution or business, or may actually make sales of meals or prepared foods.
(a) Sales of meals. Food service contractors who sell meals or prepared foods to consumers are subject to the retailing B&O and retail sales taxes on their gross proceeds of sales. For example, the operation of a cafeteria which provides meals to employees of a manufacturing or financial business is generally a retail activity. The food service contractor is considered to be making retail sales of meals, whether payment for the meal is made by the employees or the business, unless the business itself is reselling the meals to the employees.
In all cases where the meals are prepared at off-site facilities not owned by the institution or business, the food service contractor is considered to be making sales of meals and the retailing B&O and retail sales taxes apply to the gross proceeds of sale, or gross income for sales to consumers.
(b) Food service management. The gross proceeds derived from the management of a food service operation are subject to the service and other business activities B&O tax. These tax reporting provisions apply whether the staff actually preparing the meals or prepared foods is employed by the institution or business hiring the food service contractor, or by the food service contractor itself. If the food service contractor merely manages the food service operation on behalf of an institution or business, that institution or business is considered to be selling meals or providing the meals as a part of the services the institution or business renders to its customers. These institutions and businesses should refer to subsections (4) and (5) in this rule to determine their B&O tax and retail sales tax liabilities.
Food service management includes, but is not limited to, the following activities:
(i) Food service contractors operating a cafeteria or similar facility which provides meals and prepared food for employees or guests of a business, but only where the business owning the facility is the one actually selling the meals to its employees.
(ii) Food service contractors managing or operating a cafeteria, lunch room, or similar facility for the exclusive use of students or faculty at an educational institution or private school. The educational institution or private school provides these meals to the students and faculty as a part of its educational services. The food service contractor is managing a food service operation on behalf of the institution, and is not making retail sales of meals to the students, faculty, or institution. Sales of meals or prepared foods to guests in such areas are, however, subject to the retailing B&O and retail sales taxes.
(iii) Food service contractors managing or operating the dietary facilities of a hospital, nursing home, or similar institution, for the purpose of providing meals or prepared foods to its patients or residents. These meals are provided to the patients or residents by the hospital, nursing home, or similar institution as a part of the services rendered by the institution. The food service contractor is managing a food service operation on behalf of the institution, and is not considered to be making retail sales of meals to the patients, residents, or institution. Sales of meals to doctors, nurses, visitors, and other employees through a cafeteria or similar facility are, however, subject to the retailing B&O and retail sales taxes.
(c) Examples.
(i) Example 1. GC Inc. is a food service contractor managing and operating an on-site cafeteria for B College. This cafeteria is operated for the exclusive use of students and faculty. Guests of students or faculty members, however, are allowed to use the facilities. All moneys collected in the cafeteria are retained by B College. B College pays GC's direct costs for managing and operating the cafeteria, including the costs of the unprepared food products, employee salaries, and overhead expenses. GC also receives a management fee.
GC Inc. is managing a food service operation. The measure of tax is the gross proceeds received from B College. GC Inc. may not claim a deduction on account of cost of materials, salaries, or any other expense. GC Inc.'s proceeds are subject to the service and other activities B&O tax classification. B College is considered to be making retail sales of meals to the guests and must collect and remit retail sales tax on the gross proceeds of these sales. B College should refer to WAC 458-20-167 to determine whether the retailing B&O tax applies.
(ii) Example 2. DF Food Service contracts with Hospital A to manage and operate Hospital A's dietary and cafeteria facilities. DF is to receive a per meal fee for meals provided to Hospital A's patients. DF Food Service retains all proceeds for sales of meals to physicians, nurses, and visitors in the cafeteria.
The gross proceeds received from Hospital A regarding the meals provided to the patients are derived from the management of a food service operation. These proceeds are subject to the service and other activities B&O tax classification. DF, however, is making retail sales of meals to physicians, nurses, and visitors in the cafeteria. DF Food Service must pay retailing B&O tax, and collect and remit retail sales tax, on the gross proceeds derived from the cafeteria sales.
(4) Retailing B&O and retail sales taxes. The sales of meals to consumers are subject to the retailing B&O tax and generally subject to retail sales tax. However, a retail sales tax exemption is available for the following sales of meals:
(a) Prepared meals sold under a state-administered nutrition program for the aged as provided for in the Older Americans Act (Public Law 95-478 Title III) and RCW 74.38.040(6);
(b) Prepared meals sold to or for senior citizens, disabled persons, or low-income persons by a nonprofit organization organized under chapter 24.03A or 24.12 RCW. However, this exemption does not apply to purchases of prepared meals by nonprofit organizations, such as hospitals, which provide the meals to patients as a part of the services they render;
(c) Food, drink, or meals furnished by a senior living community, as defined in RCW 82.04.040, to tenants as part of a rental or residency agreement for which no separate charge is made, regardless of whether the tenant is a resident for purposes of chapter 18.20 or 18.390 RCW. RCW 82.04.040; and
(d) Prepared meals sold to the federal government. WAC 458-20-190. However, meals sold to federal employees are taxable, even if the federal employee will be reimbursed for the cost of the meals by the federal government.
(5) Wholesale sales of prepared meals. Persons making sales of prepared meals to persons who will be reselling the meals are subject to the wholesaling B&O tax classification. Sellers must obtain a reseller permit for sales from their customers to document the wholesale nature of any sale as provided in WAC 458-20-102 Reseller permits.
(6) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department for many catering and food service items, as follows:
(a) Purchases of dishes, kitchen utensils, linens, and items which do not become an ingredient of the meal, are subject to retail sales tax.
(b) Retail sales tax or use tax applies to purchases of equipment, repairs, appliances, and construction.
(c) Retail sales tax or use tax does not apply to purchases of food or beverage products that are ingredients of meals being sold at retail or wholesale.
(d) Purchases of food products and prepared meals by persons who are not in the business of selling meals at retail or wholesale are subject to the retail sales tax. However, certain food products are exempt from retail sales or use tax. See WAC 458-20-244.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 24-03-129, § 458-20-119, filed 1/22/24, effective 2/22/24; WSR 22-14-014, § 458-20-119, filed 6/23/22, effective 7/24/22. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 2011 c 55. WSR 12-07-060, § 458-20-119, filed 3/19/12, effective 4/19/12. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-119, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 99-11-107, § 458-20-119, filed 5/19/99, effective 6/19/99; WSR 93-23-019, § 458-20-119, filed 11/8/93, effective 12/9/93; WSR 86-03-016 (Order ET 86-1), § 458-20-119, filed 1/7/86; WSR 82-16-061 (Order ET 82-7), § 458-20-119, filed 7/30/82. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-119, filed 6/27/78; Order ET 74-1, § 458-20-119, filed 5/7/74; Order ET 70-3, § 458-20-119 (Rule 119), filed 5/29/70, effective 7/1/70.]


PDF458-20-120

Sales of ice.

Sales of ice to fishermen for the purpose of packing and preserving their fish during the trip from the fishing banks to their port of discharge are sales for consumption and are taxable under the retail sales tax.
Sales of ice to persons, other than railroad companies, for use in icing refrigerator cars are sales for consumption and are taxable under the retail sales tax.
The use of ice purchased or manufactured by interstate railroad companies for the purpose of icing within this state perishables or refrigerator cars or car cooling systems, is subject to use tax. (See WAC 458-20-175.)
Sales of ice to persons who sell fish, fruit, vegetables and other commodities are sales for resale and not subject to the retail sales tax when such ice is used for packing during shipment and title thereto passes to the purchaser along with the property sold.
Sales of ice to persons operating restaurants, soda fountains and the like are sales for resale and are not subject to the retail sales tax when such ice is used exclusively as crushed ice in drinks sold by such persons.
Sales of ice to persons operating creameries, beer parlors, restaurants, soda fountains and the like are sales for consumption and are taxable under the retail sales tax when such ice is used primarily for the purpose of cooling food products and is not for resale to customers.
Revised May 1, 1949.
[Order ET 70-3, § 458-20-120 (Rule 120), filed 5/29/70, effective 7/1/70.]


PDF458-20-121

Sales of heat or steam—Including production by cogeneration.

(1) Introduction. This section provides tax reporting information to persons who sell heat and/or steam. Because heat and steam are often the product of a cogeneration facility, this section also provides tax information for persons operating cogeneration facilities. Persons generating electrical power should also refer to WAC 458-20-179 (Public utility tax).
(2) Definitions.
(a) The term "biomass fuel" means wood waste and other wood residuals, including forest derived biomass, but does not include firewood or wood pellets. "Biomass fuel" also includes partially organic by-products of pulp, paper, and wood manufacturing processes.
(b) The term "hog fuel" means wood waste and other wood residuals including forest derived biomass. "Hog fuel" does not include firewood or wood pellets.
(3) Sale of heat or steam - Business and occupation (B&O) tax. Persons engaging in the business of operating a plant for the production, extraction, or storage of heat or steam for distribution, for hire or sale, are taxable under the service and other business activities classification. This includes heat or steam produced by a biomass system, cogeneration, geothermal sources, fossil fuels, or any other method.
(4) Sale or production of electricity - Cogeneration. The production of steam, heat, or electricity is not a manufacturing activity within the definition of RCW 82.04.120. Persons who operate a plant or system for the generation, production or distribution of electrical energy for hire or sale are subject to the provisions of the public utility tax under the light and power tax classification. Persons who generate electrical energy should refer to WAC 458-20-179 (Public utility tax). A deduction may be taken for:
(a) Power generated in Washington and delivered out-of-state. (See RCW 82.16.050(6).)
(b) Amounts derived from the sale of electricity to persons who are in the business of selling electricity and are purchasing the electricity for resale. (See RCW 82.16.050(2).)
(5) Tax incentive programs - Cogeneration. There were tax incentive programs available for cogeneration projects begun before January 1, 1990. Sales and use tax deferrals may apply under certain conditions for power generation facilities, even though the production of power is not specifically subject to a manufacturing tax. For example, if the cogeneration facilities are part of a manufacturing plant for the production of new articles of tangible personal property and the requirements for tax deferral are met, the business may apply for tax deferral programs. These incentive programs are discussed in WAC 458-20-240 (Manufacturer's new employee tax credits), 458-20-24001 (Sales and use tax deferral—Manufacturing and research/development activities in rural counties—Applications filed after March 31, 2004), and 458-20-24002 (Sales and use tax deferral—New manufacturing and research/development facilities).
(6) Fuel. Persons who produce their own fuel to generate heat, steam, or electricity are subject to the manufacturing B&O tax on the value of the fuel. This includes the value of fuel which is created at the same site as a by-product of another manufacturing process, such as production of hog fuel. The taxable value should be determined based on comparable sales, or on the basis of all costs in the absence of comparable sales. Refer to WAC 458-20-112 (Value of products).
(a) Fuel does not become an ingredient or component of power, steam, or electricity. The sale of fuel to be used by the purchaser to generate heat, steam, or electricity is a retail sale. In most cases, the purchase of fuel for such purposes is subject to payment of retail sales tax to the supplier. (See (b) of this subsection for discussion of a sales and use tax exemption specific to biomass fuel.)
In the event retail sales tax is not paid to the supplier, and no exemption from retail sales tax is available, deferred sales or use tax must be paid. However, the law provides a specific exemption from the use tax for biomass fuel used by the fuel's extractor or manufacturer when used directly in the operation of the particular extractive operation or manufacturing plant which produced or manufactured the same biomass fuel. For example, if a lumber manufacturer produces wood waste which is used in the same plant to produce heat for drying lumber, the wood waste is not subject to use tax even though the manufacturing B&O tax applies to this biomass fuel. (See RCW 82.12.0263.)
(b) Effective July 1, 2009:
• Sales of hog fuel used to produce electricity, steam, heat, or biofuel are exempt from retail sales tax when the purchaser provides the seller with a properly filled out "buyer's retail sales tax exemption certificate." RCW 82.08.956.
• The use of hog fuel for production of electricity, steam, heat, or biofuel is exempt from use tax. RCW 82.12.956.
(7) Equipment and supplies. Persons who are in the business of producing heat, steam, or electricity are required to pay retail sales tax to suppliers of all equipment and supplies. If the supplier fails to collect retail sales tax, deferred sales or use tax must be paid.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-05-011, § 458-20-121, filed 2/8/18, effective 3/11/18; WSR 10-10-031, § 458-20-121, filed 4/26/10, effective 5/27/10. Statutory Authority: RCW 82.32.300. WSR 94-13-033, § 458-20-121, filed 6/6/94, effective 7/7/94; WSR 83-07-034 (Order ET 83-17), § 458-20-121, filed 3/15/83; Order ET 70-3, § 458-20-121 (Rule 121), filed 5/29/70, effective 7/1/70.]


PDF458-20-124

Restaurants, cocktail bars, taverns and similar businesses.

(1) Introduction. This rule explains how Washington's business and occupation (B&O) tax and retail sales tax apply to sales by restaurants, cocktail bars, taverns, and similar businesses. It discusses sales of meals, beverages, and foods at prices that include retail sales tax. This rule also explains how discounted and promotional meals are taxed. Caterers and persons who merely manage the operations of a restaurant or similar business should refer to WAC 458-20-119 Sales by caterers and food service contractors, to determine their tax liability.
(a) Definition. Restaurants, cocktail bars, and taverns. The term "restaurants, cocktail bars, taverns, and similar businesses" means every place where prepared foods and beverages are sold and served to individuals, generally for consumption on the premises where sold.
(b) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(c) Other rules that may apply. The following rules may contain other relevant information:
(i) WAC 458-20-107 Requirement to separately state sales tax—Advertised prices including sales tax.
(ii) WAC 458-20-119 Sales by caterers and food service contractors.
(iii) WAC 458-20-131 Gambling activities.
(iv) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.
(v) WAC 458-20-183 Recreational services and activities.
(vi) WAC 458-20-187 Tax responsibility of vending machine owners and operators.
(vii) WAC 458-20-189 Sales to and by the state of Washington and municipal corporations, including counties, cities, towns, school districts, and fire districts.
(viii) WAC 458-20-190 Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments.
(ix) WAC 458-20-243 Litter tax.
(x) WAC 458-20-244 Food and food ingredients.
(2) Retailing B&O and retail sales taxes. Sales of meals and prepared foods to consumers by restaurants, cocktail bars, taverns, and similar businesses are subject to retailing B&O tax and generally subject to retail sales tax. Retail sales tax exemptions are available for the following sales of meals:
(a) Prepared meals sold under a state-administered nutrition program for the aged as provided for in the Older Americans Act (Public Law 95-478 Title III) and RCW 74.38.040(6);
(b) Prepared meals sold to or for senior citizens, disabled persons, or low-income persons by a nonprofit organization organized under chapter 24.03A or 24.12 RCW;
(c) Food, drink, or meals furnished by a senior living community, as defined in RCW 82.04.040, to tenants as part of a rental or residency agreement for which no separate charge is made, regardless of whether the tenant is a resident for purposes of chapter 18.20 or 18.390 RCW. RCW 82.04.040;
(d) Prepared meals sold to the federal government. WAC 458-20-190. However, meals sold to federal employees are taxable, even if the federal employee will be reimbursed for the cost of the meals by the federal government; and
(e) Meals provided without specific charge by a restaurant to its employees. RCW 82.08.9995. These meals are also exempt from B&O tax and use tax. RCW 82.04.750 and 82.12.9995. However, if any charge is made for meals to employees, retailing B&O tax and retail sales tax apply.
For purposes of (e) of this subsection, the following definitions apply:
(i) "Meal" means one or more items of prepared food or beverages other than alcoholic beverages. For the purposes of (e) of this subsection, "alcoholic beverage" and "prepared food" have the same meanings as provided in RCW 82.08.0293.
(ii) "Restaurant" means any establishment having special space and accommodation where food and beverages are regularly sold to the public for immediate, but not necessarily on-site, consumption, but excluding grocery stores, mini-markets, and convenience stores. Restaurant includes, but is not limited to, lunch counters, diners, coffee shops, espresso shops or bars, concession stands or counters, delicatessens, and cafeterias. It also includes space and accommodations where food and beverages are sold to the public for immediate consumption, if a separate charge is made for such food and beverages, and are located within:
• Hotels, motels, lodges, boarding houses, bed and breakfast facilities;
• Hospitals, office buildings, movie theaters; and
• Schools, colleges, or universities.
Restaurants also include:
• Mobile sales units that sell food or beverages for immediate consumption within a place, the entrance to which is subject to an admission charge; and
• Public and private carriers, such as trains and vessels, that sell food or beverages for immediate consumption if a separate charge is made for such food or beverages.
A restaurant is open to the public for purposes of this subsection (2) (e) if members of the public can be served as guests. "Restaurant" does not include businesses making sales through vending machines or through mobile sales units such as catering trucks or sidewalk vendors of food or beverage items.
(3) Wholesaling B&O tax. Persons making sales of prepared meals to persons who will be reselling the meals are subject to the wholesaling B&O tax classification. Sellers must obtain a copy of the purchaser's reseller permit to document the wholesale nature of any sale as provided in WAC 458-20-102 Reseller permits.
(4) Service and other business activities B&O tax. Compensation received from owners of vending machines for allowing the placement of those machines at the restaurant, cocktail bar, tavern, or similar business is subject to the service and other business activities tax. WAC 458-20-187. Persons operating contests of chance should refer to WAC 458-20-131.
(5) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.
(a) Retail sales tax or use tax applies to purchases of dishes, kitchen utensils, linens, and items that do not become an ingredient of the meal.
(b) Retail sales tax or use tax applies to purchases of equipment, repairs, appliances, and construction.
(c) Retail sales tax or use tax does not apply to purchases of food or beverage products that are ingredients of the meals being sold.
(d) Retail sales tax or use tax does not apply to purchases of paper plates, paper cups, paper napkins, toothpicks, or any other articles that are furnished to customers, the first actual use of which renders such articles unfit for further use, when purchased by restaurants and similar businesses making actual sales of meals.
(6) Combination business. Persons operating a combination of two kinds of food sales, of which one is the sale of prepared food (i.e., an establishment, such as a deli, selling food products ready for consumption and in bulk quantities), should refer to WAC 458-20-244 for taxability information.
(7) Discounted meals, promotional meals, and meals given away. Persons who sell meals on a "two for one" or similar basis are not giving away a free meal, but rather are selling two meals at a discounted price. Both the retailing B&O and retail sales taxes are calculated on the reduced price actually received by the seller.
Persons who provide meals free of charge to persons other than their employees are consumers of those meals. Persons operating restaurants or similar businesses are not required to report use tax on food and food ingredients given away, even if the food or food ingredients are part of prepared meals. For example, a restaurant providing meals to the homeless or hot dogs free of charge to a little league team will not incur a retail sales or use tax liability with respect to these items given away. A sale has not occurred, and the food and food ingredients exemption applies. Should the restaurant provide the little league team with soft drinks free of charge, the restaurant will incur a deferred retail sales or use tax liability with respect to those soft drinks. Soft drinks are excluded from the exemption for food and food ingredients. WAC 458-20-244.
(8) Sales of meals, beverages and food at prices that include retail sales tax. Persons may advertise and/or sell meals, beverages, or any kind of food product at prices including retail sales tax. Any person electing to advertise and/or make sales in this manner must clearly indicate this pricing method on the menus and other price information. WAC 458-20-107.
(9) Spirits, beer, and wine restaurant licensees. Restaurants operating under the authority of a license from the liquor and cannabis board to sell spirits, beer, and wine by the glass for on-premises consumption generally have both dining and cocktail lounge areas. Customers purchasing beverages or food in lounge areas may not be given sales invoices, sales slips, or dinner checks, nor are they generally provided with menus.
(a) Many spirits, beer, and wine restaurant licensees elect to sell beverages or food at prices inclusive of the retail sales tax in the cocktail lounge area. If this pricing method is used, notification that retail sales tax is included in the price of the beverages or foods must be posted in the lounge area in a manner and location so that customers can see the notice without entering employee work areas. The department presumes that no retail sales tax has been collected or is included in the gross receipts when a notice is not posted and the customer does not receive a sales slip or sales invoice separately stating the retail sales tax.
(b) The election to include retail sales tax in the selling price in one area of a location does not preclude the restaurant operator from selling beverages or food at a price exclusive of retail sales tax in another. For example, a spirits, beer, and wine restaurant licensee may elect to include the retail sales tax in the price charged for beverages in the lounge area, while the price charged in the dining area is exclusive of the retail sales tax.
(c) Spirits, beer, and wine restaurant licensees are not required to post actual drink prices in the cocktail lounge areas. However, if actual prices are posted, the advertising requirements expressed in WAC 458-20-107 must be met.
(d) Examples.
(i) Example 1. XYZ Restaurant operates both a cocktail bar and a dining area. XYZ has elected to sell drinks and appetizers in the bar at prices including the retail sales tax while selling drinks and meals served in the dining area at prices exclusive of the retail sales tax. There is a sign posted in the bar area advising customers that all prices include retail sales tax. Customers in the dining area are given sales invoices that separately state the retail sales tax. As an example, a typical well drink purchased in the bar for $7.00 inclusive of the retail sales tax, is sold for $7.00 plus retail sales tax in the dining area. The pricing requirements have been satisfied and the drink and food totals are correctly reflected on the customers' dinner checks. XYZ may factor the retail sales tax out of the cocktail bar gross receipts when determining its retailing B&O and retail sales tax liability.
(ii) Example 2. RBS Restaurant operates both a cocktail bar and a dining area. RBS has elected to sell drinks at prices inclusive of retail sales tax for all areas where drinks are served. It has a sign posted to inform customers in the bar area of this fact and a statement is also on the dinner menu indicating that any charges for drinks includes retail sales tax. Dinner checks are given to customers served in the dining area that state the price of the meal exclusive of retail sales tax, the retail sales tax on the meal, and the drink price including retail sales tax. Because the business has met the sign posting requirement in the bar area and has indicated on the menu that retail sales tax is included in the price of the drinks, RBS may factor the retail sales tax out of the gross receipts received from its drink sales when determining its taxable retail sales.
(iii) Example 3. Z Tavern sells all foods and drinks at a price that includes the retail sales tax. However, there is no mention of this pricing structure on its menus or reader boards. The gross receipts from Z Tavern's food and drink sales are subject to the retailing B&O and retail sales taxes. Z Tavern has failed to meet the conditions for selling foods and drinks at prices including retail sales tax. Z Tavern may not assume the gross receipts include any retail sales tax and may not factor the retail sales tax out of the gross receipts.
(10) Gratuities. Tips or gratuities representing donations or gifts by customers under circumstances which are clearly voluntary are not part of the selling price and not subject to tax. However, mandatory additions to the price by the seller, whether labeled service charges, tips, gratuities or otherwise are part of the selling price and are subject to both the retailing B&O and retail sales taxes.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 24-03-129, § 458-20-124, filed 1/22/24, effective 2/22/24; WSR 22-14-014, § 458-20-124, filed 6/23/22, effective 7/24/22. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 2015 c 86. WSR 15-21-092, § 458-20-124, filed 10/21/15, effective 11/21/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.050, and 2013 2nd sp.s. c 13. WSR 14-01-050, § 458-20-124, filed 12/12/13, effective 1/12/14. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 2011 c 55. WSR 12-07-060, § 458-20-124, filed 3/19/12, effective 4/19/12. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-124, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 93-23-018, § 458-20-124, filed 11/8/93, effective 12/9/93; WSR 83-07-034 (Order ET 83-17), § 458-20-124, filed 3/15/83; Order ET 70-3, § 458-20-124 (Rule 124), filed 5/29/70, effective 7/1/70.]


PDF458-20-12401

Special stadium sales and use tax.

(1) Introduction. RCW 82.14.360 provides for a special stadium sales and use tax that applies to sales of food and beverages by restaurants, taverns, and bars in counties with a population of one million or more. The tax applies only to those food and beverage sales that are already subject to the retail sales tax. Grocery stores, mini-markets, and convenience stores were specifically excluded from the definition of a restaurant and are not required to collect the tax. However, a restaurant located within a grocery store, mini-market, or convenience store is subject to this tax if the restaurant is owned or operated by a different legal entity from the store or market. The special stadium tax applied only in King County and was effective through September 30, 2011.
(2) Definitions. The following definitions apply to this section.
(a) "Restaurant" means any establishment having special space and accommodation where food and beverages are regularly sold to the public for immediate, but not necessarily on-site, consumption, but excluding grocery stores, mini-markets, and convenience stores. Restaurant includes, but is not limited to, lunch counters, diners, coffee shops, espresso shops or bars, concession stands or counters, delicatessens, and cafeterias. It also includes space and accommodations where food and beverages are sold to the public for immediate consumption that are located within hotels, motels, lodges, boarding houses, bed-and-breakfast facilities, hospitals, office buildings, movie theaters, and schools, colleges, or universities, if a separate charge is made for such food or beverages. Mobile sales units that sell food or beverages for immediate consumption within a place, the entrance to which is subject to an admission charge, are "restaurants" for purposes of this tax. So too are public and private carriers, such as trains and vessels, that sell food or beverages for immediate consumption on trips that both originate and terminate within the county imposing the special stadium tax if a separate charge for the food and/or beverages is made. A restaurant is open to the public for purposes of this section if members of the public can be served as guests. "Restaurant" does not include businesses making sales through vending machines or through mobile sales units such as catering trucks or sidewalk vendors of food or beverage items.
(b) "Tavern" has the same meaning here as in RCW 66.04.010 and means any establishment with special space and accommodation for the sale of beer by the glass and for consumption on the premises.
(c) "Bar" means any establishment selling liquor by the glass or other open container and includes, but is not limited to, establishments that have been issued a class H license by the liquor control board.
(d) "Grocery stores, mini-markets, and convenience stores," have their ordinary and common meaning.
(3) Tax application. This special stadium sales and use tax applied only to food and beverages sold by restaurants, bars, and taverns in King County through September 30, 2011. The tax is in addition to any other sales or use tax that applies to these sales. This special tax only applies if the regular sales or use tax imposed by chapters 82.08 or 82.12 RCW applies.
(a) The tax applies to the total charge made by the restaurant, tavern, or bar, for food and beverages. If a mandatory gratuity is included in the charge that, too, is subject to the tax.
(b) Catering provided by a restaurant, tavern, or bar is also subject to the tax. However, when catering is done by a business that does not meet the definition of restaurant in subsection (2) of this section, has no facilities for preparing food, and all food is prepared at the customer's location, the charge is not subject to the tax.
(c) In the case of catering subject to the tax, if a separate charge is made for linens, glassware, tables, tents, or other items of tangible personal property that are not required for the catering, those separate charges are not subject to the tax. However, separately stated charges for items that are required as a part of the catering service, such as waitpersons or mandatory gratuities, are subject to the tax.
(4) Examples. The following examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances. For these examples, assume the transactions occurred in King County prior to October 1, 2011.
(a) The Hot Bakery operates a coffee shop where customers may purchase baked goods and coffee for consumption on the premises. When utensils are provided with the bakery goods, the sale of bakery goods, along with the coffee is considered prepared food. The sale of prepared food is subject to the retail sales tax and special stadium tax. If the bakery products are bagged or boxed without utensils, the retail sales and special stadium taxes do not apply under the provisions of RCW 82.08.0293. See WAC 458-20-244 Food and food ingredients, for information about the sales of prepared foods.
(b) Charlie operates a "fast food" business. Customers may consume the food and beverages on the premises or may take the food "to go" for consumption elsewhere. All sales of food and beverages by this business are subject to the special stadium tax, including the food and beverages sold "to go."
(c) Jane operates carts that may be set up on a sidewalk or within parks from which customers may purchase hot dogs and beverages. The cart includes heating facilities for preparation of hot dogs at the cart site. No seating is provided by the business. The site location is not owned or leased by Jane. These sales are not subject to the special stadium sales tax because the business does not have a designated space for the preparation of the food it sells. This business does not fit the definition of "restaurant." However, if Jane operates a mobile food service unit selling food or beverages for immediate consumption at fixed locations within the grounds of a stadium, arena, fairgrounds, or other place, admission to which is subject to an admission charge, then the special stadium tax applies.
(d) Bill operates a combination gas station and convenience store. The convenience store sells some groceries and also some prepared foods such as hot dogs and hamburgers. Customers may also purchase soft drinks or coffee by the cup. None of these sales are subject to the special stadium sales tax because of the specific language in the statute exempting convenience stores from the tax.
(e) Peter operates a business that sells prepared pizza. The business prepares and bakes the pizza at its premises. The business has no seating. Customers may order the pizzas by either entering Peter's place of business or by telephone. Customers may either take delivery at the seller's site or the business will deliver the pizza to the customer's residence or other site. These sales are subject to the special stadium sales tax because the business does have a designated site and facilities for the preparation of food for sale for immediate consumption, even though no seating is available. The regular retail sales tax applies to these sales since these sales are not exempt food products under RCW 82.08.0293(2).
(f) Jack has the exclusive concession rights to prepare and sell hot dogs within a sports facility. Customers place their orders and take delivery of the prepared food and beverages at Jack's site in the sports facility. Jack provides no seating that he controls. Customers generally take the food and beverage to their seats and consume the items while watching the sports event. Jack will also prepare hot dogs and soft drinks at his food bar and use his employees or agents to sell these products to customers in the stands while the sports event is in progress. All of the sales of food and beverages by Jack are subject to the special stadium sales tax. Jack's business operation meets the definition of "restaurant." Jack has set aside space that he controls for the purpose of preparing food and beverages for immediate consumption for sale to the public.
(g) Jinny operates a cafe within Abe's grocery store, for the sale of food or beverages for immediate consumption on the premises. Abe's grocery store is a separate entity from Jinny's cafe, and it leases the space for the cafe to Jinny. Sales of food and beverages by Abe's grocery store are exempt from the special stadium tax, but sales at the cafe by Jinny are subject to retail sales tax and the special stadium sales tax.
[Statutory Authority: RCW 82.32.300, 82.01.060(2) and 82.14.360(1). WSR 12-01-026, § 458-20-12401, filed 12/12/11, effective 1/12/12; WSR 10-01-050, § 458-20-12401, filed 12/9/09, effective 1/9/10. Statutory Authority: RCW 82.32.300 and 82.14.080. WSR 96-16-086, § 458-20-12401, filed 8/7/96, effective 9/7/96.]


PDF458-20-126

Sales of motor vehicle fuel, special fuel, and nonpolluting fuel.

(1) Introduction. This rule explains the retail sales and use taxes for motor vehicle fuel, special fuel, and fuels commonly referred to as liquefied natural gas, compressed natural gas, or propane. This rule also provides documentation requirements to buyers and sellers of fuel for both on and off highway use.
(2) What are motor vehicle fuel and special fuel, and how are they taxed? "Motor vehicle fuel" as used in this rule means gasoline or any other inflammable gas or liquid the chief use of which is as fuel for the propulsion of motor vehicles. (See RCW 82.36.010.) "Special fuel" as used in this rule means all combustible gases and liquids suitable for the generation of power for propulsion of motor vehicles, except that it does not include motor vehicle fuel as defined above. (See RCW 82.38.020.) Diesel fuel is an example of a special fuel.
Retail sales tax or use tax applies to sales and uses of motor vehicle fuel or special fuel, unless an exemption applies, when the taxes of chapter 82.36 or 82.38 RCW have not been paid or have been refunded. Generally, fuel taxes apply to sales of fuel for highway consumption and retail sales or use tax applies to fuel sold for consumption off the highways (e.g., boat fuel, or fuel for farm machinery or construction equipment, etc.).
(3) What motor vehicle fuel and special fuel exemptions are available?
(a) Passenger-only ferries. RCW 82.08.0255 and 82.12.0256 provide retail sales tax and use tax exemptions for motor vehicle fuel or special fuel for use in passenger-only ferry vessels. These exemptions apply only to fuel purchased by public transportation benefit areas created under chapter 36.57A RCW, county owned ferries, or county ferry districts created under chapter 36.54 RCW.
(b) Nonprofit transportation providers. RCW 82.08.0255 and 82.12.0256 provide retail sales tax and use tax exemptions for motor vehicle fuel or special fuel purchased or used by private, nonprofit transportation providers certified under chapter 81.66 RCW, if the purchaser is entitled to fuel tax refund or exemption under chapter 82.36 or 82.38 RCW.
(c) Public transportation. RCW 82.08.0255 and 82.12.0256 provide retail sales tax and use tax exemptions for motor vehicle fuel or special fuel purchased or used for the purpose of public transportation, if the purchaser is entitled to a refund or an exemption under RCW 82.36.275 or 82.38.080.
(d) Special fuel used in interstate commerce. RCW 82.08.0255 provides a retail sales tax credit or refund for sales of special fuel that is delivered in this state but later transported and used outside this state by persons engaged in interstate commerce. The credit or refund also applies to persons hauling their own goods in interstate commerce.
Certificate. Persons selling special fuel to interstate carriers must obtain a completed "Certificate of Special Fuel Sales to Interstate Carriers" from the purchaser to document entitlement to the credit or refund. The certificate may be obtained from the department of revenue (department) on the internet at http://www.dor.wa.gov/, or by contacting the department's taxpayer services division at:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
The provisions of the certificate may be limited to a single sales transaction, or may apply to all sales transactions as long as the seller has a recurring business relationship with the buyer. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months.
(e) Farm fuel users of diesel or aircraft fuels. For the purpose of this rule, a "farm fuel user" means either a farmer or a person who provides horticultural services for farmers, such as soil preparation, crop cultivation, or crop harvesting services.
(i) RCW 82.08.865 and 82.12.865 provided retail sales tax and use tax exemptions to farm fuel users for diesel, biodiesel, and aircraft fuel purchased for nonhighway use.
(ii) These exemptions also apply to a fuel blend if all the component fuels of the blend would otherwise be exempt under RCW 82.08.865 and 82.12.865 if the component fuels were sold as separate products. The exemptions do not apply to fuel used for residential heating purposes.
(iii) When purchasing an eligible fuel, a farm fuel user must provide the seller with a completed "Farmers' Retail Sales Tax Exemption Certificate," which may be obtained from the department using the contact information described in (d) of this subsection.
Sellers of eligible fuels to farm fuel users must document the tax exempt sales of red-dyed diesel, biodiesel, or aircraft fuel by accepting the certificate mentioned above and retaining it in their records for five years.
(4) Nonpolluting fuels. Nonpolluting fuels are described as liquefied natural gas, compressed natural gas, or liquefied petroleum gas, commonly called propane. Nonpolluting fuels may be purchased for either highway or "off-highway" use. Nonpolluting fuels purchased for highway use are normally subject to taxes under either chapter 82.36 or 82.38 RCW. Nonpolluting fuels purchased for "off-highway" use are subject to retail sales tax or use tax.
(a) Highway fuel used by Washington licensed vehicle owners. RCW 82.38.075 encourages the use of nonpolluting fuels by providing for payment of an annual fee by users of nonpolluting fuels, in lieu of the motor vehicle fuel tax. This fee is paid at the time of original and annual renewals of vehicle license registrations. A decal or other identifying device must be displayed as prescribed by the department of licensing as authority to purchase these nonpolluting fuels.
Fuel dealers should not collect retail sales or use tax on any nonpolluting fuels sold to Washington licensed vehicle owners for highway use when the vehicle displays a valid decal or other identifying device issued by the department of licensing.
(b) "Off-highway" fuel use. Nonpolluting fuels purchased for "off-highway" use are not subject to the taxes of chapter 82.36 or 82.38 RCW, and therefore the retail sales tax applies.
(c) Bulk purchases of fuel. The department recognizes that certain licensed special fuel users may find it more practical to accept deliveries of nonpolluting fuels into a bulk storage facility rather than into the fuel tanks of motor vehicles. Persons selling nonpolluting fuels to such bulk purchasers must obtain from the purchaser an exemption certificate to document entitlement to the exemption. The "Certificate for Purchase of Nonpolluting Special Fuels" must certify the amount of fuel that the purchaser will consume in using motor vehicles upon the highways of this state. This procedure is limited to persons duly registered with the department. The registration number given on the certificate ordinarily will be sufficient evidence that the purchaser is properly registered. The "Certificate for Purchase of Nonpolluting Special Fuel" may be obtained from the department using the contact information described in subsection (3)(d) of this rule.
(i) When fuel is purchased for both on and off highway use, and it is not possible for a special fuel user licensee to determine the exact proportion purchased for highway use in this state, the amount of the off-highway use special fuel may be estimated. If an estimate is used and retail sales tax is not paid, the purchaser must make an adjustment on the next excise tax return and remit use tax on the portion of the fuel used for off-highway purposes.
(ii) Nonpolluting fuel not placed in motor vehicle fuel tanks by the seller are subject to retail sales tax, unless a "Certificate for Purchase of Nonpolluting Special Fuel" is obtained from the purchaser. The seller must collect and remit the retail sales tax to the department, or retain the certificate as part of its permanent records. When nonpolluting fuel is delivered by the seller into the bulk storage facilities of a special fuel user licensee or is otherwise sold to such buyers under conditions where it is not delivered into the fuel tanks of motor vehicles, the department will presume that the entire amount of fuel sold is subject to retail sales tax unless the seller has obtained a completed certificate.
(d) Vehicles licensed outside the state of Washington. Owners of out-of-state licensed vehicles are exempt from the requirement to purchase an annual license as provided in RCW 82.38.075.
(i) Therefore, the fuel taxes of chapters 82.36 and 82.38 RCW generally apply to the out-of-state licensed vehicle owner's purchases of nonpolluting fuel for highway use.
(ii) Retail sales tax applies to the out-of-state licensed vehicle owner's purchases of nonpolluting fuel for off-highway use.
(iii) If the fuel taxes of chapters 82.36 and 82.38 RCW have not been paid, have been refunded, or have not been applied, then retail sales tax is due on the out-of-state licensed vehicle owner's purchases of nonpolluting fuel, for either highway or off-highway use.
(e) Any person selling or dispensing liquefied natural gas, compressed natural gas, or propane into a tank of a motor vehicle powered by this fuel that does not comply with the provisions in chapter 82.38 RCW described in this rule, is subject to the penalty provisions in chapter 82.38 RCW.
(5) Refunds are available for fuel taxes paid when fuel is consumed off the highway. If a person purchases motor vehicle fuel or special fuel and pays the fuel taxes of chapter 82.36 or 82.38 RCW, and then consumes the fuel off the highway, the person is entitled to a refund of these taxes under the procedures of chapter 82.36 or 82.38 RCW. However, a person receiving a refund of vehicle fuel taxes because of the off-highway consumption of the fuel in this state is subject to use tax on the value of the fuel. The department of licensing administers the fuel tax refund provisions and will deduct from the amount of a refund the amount of use tax due.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-126, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.12.022, and 82.14.230. WSR 15-04-104, § 458-20-126, filed 2/3/15, effective 3/6/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0255, 82.12.0256, 82.08.865, and 82.12.865. WSR 10-01-051, § 458-20-126, filed 12/9/09, effective 1/9/10; WSR 08-16-045, § 458-20-126, filed 7/29/08, effective 8/29/08. Statutory Authority: RCW 82.32.300. WSR 91-15-022, § 458-20-126, filed 7/11/91, effective 8/11/91; WSR 83-17-099 (Order ET 83-6), § 458-20-126, filed 8/23/83; WSR 83-07-034 (Order ET 83-17), § 458-20-126, filed 3/15/83; Order ET 73-1, § 458-20-126, filed 11/2/73; Order ET 70-3, § 458-20-126 (Rule 126), filed 5/29/70, effective 7/1/70.]


PDF458-20-127

Sales of newspapers, magazines and periodicals.

(1) Introduction. This section explains the application of the business and occupation (B&O) tax, retail sales tax, and use tax to sales and/or use of newspapers, magazines, and periodicals. The tax reporting information in the section is limited to persons that purchase and resell these publications. The department of revenue (department) has adopted other sections providing tax reporting information to persons printing and/or publishing these publications and other printed materials.
• Persons printing and/or publishing newspapers, magazines, and periodicals should also refer to WAC 458-20-143.
• For information regarding the printing industry in general, see WAC 458-20-144.
• Persons duplicating printed materials for others should also refer to WAC 458-20-141.
• For information regarding potential litter tax liability, see WAC 458-20-243.
(2) General tax application. This subsection explains the B&O tax and retail sales tax responsibilities of persons selling newspapers, magazines, and periodicals to consumers, when the seller is not also the printer or publisher of the publication. Refer to subsection (4) of this section for information about tax reporting responsibilities of persons selling through organizers, captains, or others selling from house to house.
Where subscriptions or renewals of subscriptions are mailed directly by purchasers to publishers outside the state, the guidelines contained in WAC 458-20-193 and 458-20-221 apply to the obligation of sellers to collect retail sales or use tax.
(a) Sales of printed magazines and periodicals. Sales of magazines and periodicals to consumers by persons operating newsstands, book stores, department stores, drug stores and the like are sales at retail and are subject to the retailing B&O tax and retail sales tax. Refer to WAC 458-20-143 for the definition of "periodical or magazine."
(b) Magazines and periodicals sold as digital products. Sales of magazines and periodicals that are transferred electronically to the end user are subject to the retailing B&O tax and retail sales tax regardless of how they are accessed. For more information on the application of tax on digital products, refer to RCW 82.04.050, 82.04.192, and 82.04.257.
(c) Sales of newspapers. Sales of printed newspapers to consumers by persons operating newsstands, book stores, department stores, drug stores and the like are sales at retail and are subject to the retailing B&O tax. Sales of newspapers are specifically exempt from the retail sales tax per RCW 82.08.0253. Refer to WAC 458-20-143 for the definition of "newspaper."
(3) Retail sales tax exemptions. The retail sales tax does not apply to the following:
(a) Newspapers (refer to WAC 458-20-143 for a definition of "newspaper"); and
(b) Subscription sales of magazines and periodicals, including those transferred electronically to the buyer, if these sales are for the purpose of fund-raising by:
• Educational institutions as defined in RCW 82.04.170; or
• Nonprofit organizations engaged in activities primarily for the benefit of boys and girls nineteen years of age and younger. (RCW 82.08.02535.)
(4) Sales by distributors. When magazines or periodicals are distributed to the final purchaser by a news company or distributor who effects such distribution through organizers, captains, or others selling from house to house or upon the streets, the news company or distributor is responsible for the collection and payment of the retail sales tax.
(a) Such news companies or distributors must collect from those selling the magazines or periodicals the retail sales tax upon the gross retail selling price of all magazines and periodicals taken by such persons.
(b) Tax registration endorsements are not required for organizers, captains, or other persons selling magazines or other periodicals if they meet the conditions of WAC 458-20-101 (2)(a). Separate registration and license documents will be issued to the news company or magazine distributor for each of the local stations operated by such company. Such registration and license documents will reflect the same tax reporting account number as the news company or magazine distributor. For more information, refer to WAC 458-20-101(10).
(5) Buyer's responsibility to remit deferred sales or use tax. Where no retail sales tax is paid upon the purchase of, or subscription to, a magazine or periodical, the buyer or subscriber must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law.
Deferred sales or use tax should be reported on the use tax line of the buyer's excise tax return. For detailed information about use tax, refer to WAC 458-20-178 (Use tax).
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-21-043, § 458-20-127, filed 10/13/10, effective 11/13/10. Statutory Authority: RCW 82.32.300. WSR 89-21-001, § 458-20-127, filed 10/5/89, effective 11/5/89; WSR 83-07-034 (Order ET 83-17), § 458-20-127, filed 3/15/83; Order ET 70-3, § 458-20-127 (Rule 127), filed 5/29/70, effective 7/1/70.]


PDF458-20-128

Real estate brokers and salesmen.

Definitions
As used herein:
The terms "real estate broker" and "real estate salesman" mean, respectively, a person licensed as such under the provisions of chapter 18.85 RCW.
Business and Occupation Tax
A real estate broker is engaged in business as an independent contractor and is taxable under the service and other activities classification upon the gross income of the business.
The measure of the tax on real estate commissions earned by the real estate broker shall be the gross commission earned by the particular real estate brokerage office including that portion of the commission paid to salesmen or associate brokers in the same office on a particular transaction: Provided, however, That where a real estate commission is divided between an originating brokerage office and a cooperating brokerage office on a particular transaction, each brokerage office shall pay the tax only upon their respective shares of said commission; and provided further, that where the brokerage office has paid the tax as provided herein, salesmen or associated brokers within the same brokerage office shall not be required to pay a similar tax upon the same transaction. RCW 82.04.255.
Thus, with the exception of cooperating brokerage offices, no deduction is allowed for commissions, fees or salaries paid by a broker to another broker or salesman, nor for other expenses of doing business.
The term "gross income of the business" includes gross income from commissions, fees and other emoluments however designated which the agent receives or becomes entitled to receive, but does not include amounts held in trust for others. (See also WAC 458-20-111, advances and reimbursements.) No deductions are allowed for dues, charges, and fees paid to multiple listing associations.
Real estate salesmen are presumed to be independent contractors. They are subject to the service and other activities classification of the business and occupation tax on gross income from real estate commissions and fees earned where the brokerage office at which the real estate salesman's license is posted has not paid the tax on the gross commission.
[Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-128, filed 3/15/83; Order ET 70-3, § 458-20-128 (Rule 128), filed 5/29/70, effective 7/1/70.]


PDF458-20-129

Gasoline service stations.

Gasoline Service Stations
Business and Occupation Tax
Retailing. Persons operating gasoline service stations are taxable under the retailing classification upon the gross proceeds of sales of tangible personal property, from services rendered with respect to the cleaning or repair of such property, gross income from towing and gross income from automobile parking and storage. On computing tax there may be deducted from gross proceeds of sales the amount of state and federal gallonage tax on motor vehicle fuel included therein.
Retail Sales Tax
The retail sales tax applies upon the sale of tangible personal property (except vehicle fuel) on which the tax of either chapters 82.36 or 82.38 RCW is paid and upon charges for towing, automobile parking and storage and the sale of services rendered with respect to the cleaning or repairing of tangible personal property.
Thus the tax applies upon the sale of tires, accessories, etc., upon sales of labor and materials in respect to lubricating, greasing, tire changing, etc., and also upon washing, battery charging and repair work. (See also WAC 458-20-126.)
[Order ET 73-1, § 458-20-129, filed 11/2/73; Order ET 70-3, § 458-20-129 (Rule 129), filed 5/29/70, effective 7/1/70.]


PDF458-20-131

Gambling activities.

(1) Introduction. This section explains the business and occupation (B&O), retail sales, and use tax reporting requirements of persons operating contests of chance such as pull-tab and punch board games, card games, bingo games, raffles, and persons operating amusement games such as dart-toss games, ball-throw or ball-roll games, and crane games. It also explains the B&O tax reporting requirements of persons engaged in the business of conducting parimutuel wagering, which became effective July 1, 2005. Nonprofit organizations conducting activities for fund-raising purposes should also refer to RCW 82.04.3651, 82.08.02573, and WAC 458-20-169 (Religious, charitable, benevolent, nonprofit service organizations, and sheltered workshops) to determine if a B&O, retail sales, or use tax exemption is available for their activities.
Persons conducting the types of activities described above should also be aware that the Washington state gambling commission regulates these activities. These persons should refer to chapter 9.46 RCW (Gambling—1973 Act), Title 230 WAC (Gambling commission), and/or contact the Washington state gambling commission with any questions regarding their licensing and reporting responsibilities with the commission. Persons engaging in the business of parimutuel wagering should refer to chapter 67.16 RCW (Horse racing) and/or contact the Washington horse racing commission for additional reporting responsibilities.
(2) Parimutuel wagering. Effective July 1, 2005, persons engaging within this state in the business of conducting race meets for which a license must be obtained from the Washington horse racing commission are taxable under the parimutuel wagering B&O tax classification. Chapter 369, Laws of 2005. This tax is in addition to any tax imposed under chapter 67.16 RCW. Unlike the parimutuel tax, the B&O tax applies to both in-state and out-of-state parimutuel wagering. The measure of tax is the gross income of the business derived from parimutuel wagering. For purposes of this classification, "gross income" does not include amounts paid to players for winning wagers, or taxes imposed or other distributions required under chapter 67.16 RCW (i.e., RCW 67.16.102 owners bonus, RCW 67.16.105 fair fund, RCW 67.16.175 breeders award).
(3) Contests of chance. Contests of chance means any contests, games, gaming schemes, or gaming devices, other than the state lottery as defined in RCW 67.70.010, in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor in the outcome. The term includes social card games, bingo, raffle, and punch board games, and pull-tabs as those terms are defined in chapter 9.46 RCW. Contests of chance does not include race meets for the conduct of which a license must be secured from the Washington horse racing commission, or "amusement game" as defined in RCW 9.46.0201.
(a) Taxability of contests of chance on or after July 1, 2005. Effective July 1, 2005, persons operating contests of chance are taxable under one of two new B&O tax classifications on their total gross income for all contests of chance. Chapter 369, Laws of 2005. Persons whose gross income from contests of chance is less than fifty thousand dollars in a calendar year will report all such income under the "gambling contests of chance (less than $50,000 a year)" tax classification. Income from amusement games should not be combined with income from contests of chance for purposes of determining if the "less than fifty thousand dollar" threshold is met. (See subsection (4) of this section for tax-reporting information about amusement games.)
Persons whose gross income from contests of chance is fifty thousand dollars or more in a calendar year will report all such income under the "gambling contests of chance ($50,000 a year or greater)" tax classification.
(b) Taxability of contests of chance before July 1, 2005. Before July 1, 2005, persons operating contests of chance were taxable on their gross income under the service and other activities B&O tax classification.
(c) Measure of tax. Persons operating contests of chance are subject to B&O tax on the gross income of the business derived from contests of chance. With respect to income from contests of chance, "gross income" of the business does not include the monetary value or actual cost of any prizes that are awarded, amounts paid to players for winning wagers, accrual of prizes for progressive jackpot contests, or repayment of amounts used to seed guaranteed progressive jackpot prizes. In the case of donated merchandise, the operator may deduct the fair-market value of the merchandise. Costs of operating the game, including the amount paid for the purchase of the actual game (e.g., a punch board), may not be deducted.
(d) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(i) Example 1. Persons operating for-profit weekly bingo games at the Town & Country Social Club are taxable upon gross income arising from the operation of their games. As their annual gross income from the bingo games is $30,000, they will report under the gambling contests of chance (less than $50,000 a year) tax classification.
(ii) Example 2. The Lucky Card Room (LCR) charges a fee to all card players as a condition for participating in their card games. Depending on the game, the LCR may charge a fee based on time, on a per-hand basis, or on a percentage of the wagered amount (commonly referred to as a "rake"). Their annual gross income from card game fees and percentages of wagers is $120,000, and thus they will report under the gambling contests of chance ($50,000 a year or greater) tax classification.
(iii) Example 3. Take A Chance (TAC) is a business offering customers several types of gambling activities, such as pull-tabs, bingo, and punch board games. Based on last year's income and this year's anticipated income, TAC started the year out reporting their gross income under the gambling contests of chance (less than $50,000 a year) tax classification. As their income from gambling activities was better than anticipated, they passed the $50,000 threshold. TAC must now start reporting their gross income under the gambling contests of chance ($50,000 a year or greater) tax classification. They must also reclassify, by filing amended excise tax returns, all income reported for the year under the tax classification for less than $50,000 a year to $50,000 a year or greater.
(4) Amusement games. Chapter 369, Laws of 2005, made no change to the taxability of income derived from amusement games as defined in RCW 9.46.0201. The gross receipts derived from the operation of these games are subject to the service and other activities B&O tax. The cost of any prizes awarded may not be deducted from the measure of tax.
For example. The Flying High Club provides amusement games for customers to play. Prizes, such as free or discounted meal vouchers or home appliances, are awarded to the winners. The cost of these prizes is not allowed as an adjustment to computing the Flying High Club's gross income.
(a) What is an amusement game? The term "amusement game" is defined in RCW 9.46.0201 as a game played for entertainment in which:
(i) The contestant actively participates;
(ii) The outcome depends in a material degree upon the skill of the contestant;
(iii) Only merchandise prizes are awarded;
(iv) The outcome is not in the control of the operator;
(v) The wagers are placed, the winners are determined, and a distribution of prizes or property is made in the presence of all persons placing wagers at such game; and
(vi) The game is conducted or operated by any agricultural fair, person, association, or organization in such manner and at such locations as may be authorized by rules adopted by the gambling commission under chapter 9.46 RCW.
(b) Examples of amusement games. Crane machines, coin-toss and dart-toss games at fairs and carnivals, and skill-stop games are examples of games qualifying as amusement games under RCW 9.46.0201. For additional examples of amusement games, refer to WAC 230-20-508 (Authorized amusement games—Types, standards and classifications) issued by the gambling commission.
(c) Coin-operated games are not amusement games. Persons operating coin-operated games that do not qualify under the definition of amusement games in RCW 9.46.0201 (e.g., pinball, video, and pool games) should refer to WAC 458-20-187 (Coin-operated vending machines, amusement devices and service machines) for an explanation of their tax reporting responsibilities.
(5) Sales of foods and beverages. Sales of foods, beverages, and other tangible personal property by persons operating or conducting any of the activities described above are retail sales and subject to the retailing B&O and retail sales taxes, unless a specific exemption applies (e.g., see WAC 458-20-124 regarding sales of food and beverages by restaurants, taverns, and similar businesses and WAC 458-20-244 for exemptions available for certain food products). Persons conducting dice games to determine the amount that the customer will pay for food or beverages are subject to tax upon the amount the customer actually pays for the food or drink.
(6) Merchandise prizes. Persons operating or conducting any of the activities described above are the consumers of any merchandise delivered to the players in the form of prizes or awards. Purchases of this merchandise are purchases at retail and subject to the retail sales tax, unless a specific exemption applies (e.g., see WAC 458-20-244 for exemptions available for certain food products). Purchases of supplies, devices, and other equipment used in the conduct of these activities are also subject to the retail sales tax.
If retail sales tax is not collected by the seller, the person conducting these activities must remit the retail sales tax (often referred to as deferred retail sales tax) or use tax directly to the department of revenue. See also WAC 458-20-178 (Use tax).
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 07-02-072, § 458-20-131, filed 12/29/06, effective 1/29/07. Statutory Authority: RCW 82.32.300. WSR 99-08-090, § 458-20-131, filed 4/6/99, effective 5/7/99; WSR 83-07-034 (Order ET 83-17), § 458-20-131, filed 3/15/83; Order ET 70-3, § 458-20-131 (Rule 131), filed 5/29/70, effective 7/1/70.]


PDF458-20-132

Automobile dealers/demonstrator and executive vehicles.

(1) Introduction. This section accounts for the unique practices of the retail automobile dealer's industry and reflects administrative notice of the customs of this trade. The tax reporting formulas explained in this rule represent a compromise of tax liabilities and offsetting deductions. It recognizes that demonstrators and vehicles used by executives or persons associated with a dealer are actually used for limited periods of time without significantly affecting their marketability or retail selling value, and that such used vehicles have a high trade-in value when returned to inventory for sale.
(2) Definitions. The following definitions apply to this section.
(a) The terms "demonstration" and "demonstrator" mean the use of automobiles provided by dealers to their sales staff, without charge, for any personal or business reason other than (or in addition to) the mere display of such vehicles to prospective purchasers.
(b) The term "display" means the showing for sale of vehicles to prospective purchasers, at or near the dealer's premises, including the short term test driving, operating, and examining by prospective purchasers.
(c) The term "executive use vehicle" means any vehicle from sales inventory, used by any person associated with the automobile dealership for personal driving, other than for demonstration or display purposes as defined above, when such person does not have a recent model vehicle registered and licensed in that person's own name on which retail sales tax was paid.
(d) The term "recent model vehicle" refers to a car of the current model year or either of the two preceding model years.
(e) The terms "purchase price" and "total cost" mean the amount charged to the dealer for the purchase of a vehicle and includes any additional charges for accessories installed on the vehicle. If the vehicle was acquired through a trade-in by a customer, these terms then mean the trade-in value given to the customer by the dealer (with consideration of underallowances and overallowances) as well as any costs of refurbishing and repairs in preparing the vehicle for resale or use. These values will generally be the amounts shown as the vehicle cost within the dealer's inventory records.
(f) The phrase "pickup truck" refers only to trucks having a commercial pickup body rated at three-quarter ton capacity or less.
(3) Business and occupation tax. Automobile dealers are taxable under the retailing classification upon the sale or lease of automobiles to their employees or other representatives for personal use, including demonstration. The business and occupation tax does not apply upon the transfer of vehicles to employees or other representatives for their personal use, including demonstration where no sale occurs.
(4) Retail sales tax. The retail sales tax applies upon the sale or lease of automobiles, parts, and accessories by dealers to their employees or other representatives for the personal use by such persons. The retail sales tax does not apply to the display of automobiles where no sale takes place.
(5) Use tax. The use tax does not apply to the display of new or used automobiles by dealers, their employees or other representatives. Neither does use tax apply upon the personal use or demonstration of automobiles which have been sold or leased to dealers' employees or other representatives and upon which the retail sales tax has been paid. Also, use tax does not apply upon demonstrator vehicles if no such vehicles are actually used. However, where an automobile dealer purchases a passenger car or pickup truck without paying a retail sales tax and uses such car or truck for personal use or demonstration purposes, the use tax applies even if such personal car or demonstrator may later be sold by the dealer.
(6) Computation of use tax. For practical purposes, automobile dealers may elect to compute the use tax upon the use of demonstrators by sales staff on either a "one per one hundred vehicles sold" basis or on an "actual number of demonstrators used" basis. Use of the one per one hundred vehicles sold method will satisfy the use tax liability for personal or business use of demonstrators by sales staff employed by a new car dealer. However, the one per one hundred vehicles sold method will not satisfy the use tax liability for the personal or business use of vehicles by persons other than sales staff employed by the dealership.
(a) One per one hundred demonstrator reporting basis. The use of demonstrators is subject to the use tax on the basis of one demonstrator for each one hundred new automobiles and pickup trucks, or fractional part of such number, of all makes or models sold at retail including lease transactions during a calendar year. The use tax on each such demonstrator is measured by twenty-five percent of the average selling price, including dealer preparation, transportation, and factory or dealer installed accessories, of all makes and models of new passenger cars and new pickup trucks sold during the preceding calendar year divided by the number of such units sold: Provided, That the first such vehicle reported during any calendar year shall be subject to use tax measured by the full average retail selling price.
(i) The average retail selling price is computed by dividing the total retail sales of new passenger cars and trucks in the preceding year by the total units sold in the preceding year. Thus, for example, a dealer with $3,000,000.00 in gross sales for the previous year, who sold 250 units that year derives an average selling price of $12,000.00. The very first demonstrator use in the current year will be $12,000.00 multiplied by the prevailing use tax rate. All subsequent demonstrators reported in the current year, based upon the formula of one demonstrator for each one hundred units sold, will be $3,000.00 multiplied by the prevailing use tax rate.
(ii) The use tax is paid as of the date of the first sale in any calendar year and subsequently upon the sale of the one hundred and first automobile or pickup truck. If a dealer sold 340 units in the current year, use tax would be due on four units (the first at one hundred percent of the average retail selling price of all new vehicles sold in the preceding year and the remaining three at twenty-five percent of the previous year's average selling price of new vehicles).
(b) Actual demonstrator reporting basis. Dealers who decide to report use tax on demonstrators on an actual basis are required to report use tax on each vehicle assigned to demonstrator use. The value is computed in the same manner as under the one per one hundred basis. The first vehicle in the current year which is used for demonstrator use is taxable on the full average selling price of all new vehicles sold in the preceding year. Additional vehicles during the year which are put to use as demonstrators are taxable at twenty-five percent of the average selling price of new vehicles sold in the preceding year.
(c) The above method of computation applies only in respect to use by sales staff of demonstrator vehicles operated under dealer plates issued to the dealership. Vehicles which are required to be licensed other than to the dealership are presumed to be used substantially for purposes other than demonstration and are subject to the use tax measured by the actual value (purchase price) of such vehicles.
(d) Change in reporting method. When an automobile dealer has elected to report the use tax under the "one per one hundred basis," or upon the actual number of demonstrators used, it will not be permitted to change the manner of reporting without the written consent of the department of revenue.
Dealers are required to provide reasonably accurate records reflecting the use of dealer plates.
(7) Executive vehicles - personal use of vehicles by executives and persons associated with a dealer. When a dealer or a person associated with a dealer (firm executive, corporate officer, partner, or manager) does not have a recent model car registered and licensed in its own name and regularly uses either one or various new cars from inventory for personal driving (whether or not such cars are also used for demonstration purposes) the use tax applies to the value of one such car for each two calendar years in addition to the tax which applies to demonstrator use by sales staff. The measure of the use tax is the same as the measure for the computation of use tax on subsequently used demonstrator vehicles, that is, twenty-five percent of the average selling price of all makes and models of new passenger cars and pickup trucks sold at retail during the preceding year.
(a) The dealer may not include within the executive car reporting method the use of a new vehicle which is not of the type or model of new vehicles authorized to be sold by the dealer's franchise agreement. The executive car reporting method applies only to vehicles removed from inventory for use by the executives. Vehicles purchased specifically for use by the executives are taxable on the purchase price of each vehicle.
(b) No use tax in addition to that outlined above will be due if members of the immediate family of the executive also use a vehicle from inventory which is not otherwise licensed or required to be licensed. "Immediate family" includes only the executive's spouse or state registered domestic partner and children or state registered domestic partner's children, who live in the same household as the executive.
(8) Vehicles used by automobile manufacturers or distributors. Automobile manufacturers or distributors will often assign vehicles to their employee representatives for demonstration purposes, sales solicitation and personal use in the state. It is common practice to replace these vehicles frequently so that several vehicles may be used by a company representative during the course of the year. Under these circumstances, the department of revenue will allow computation of the use tax based on the average selling price of all new cars sold in the preceding year multiplied by the maximum complement of cars of each model year in use at any time during the year. The tax is due at the start of the model year. No use tax is due on the usual turnover or replacement of cars within the model year.
(9) Vehicles loaned to nonprofit or other organizations. The use tax applies to the value of vehicles that are required to be licensed and are loaned or donated to civic, religious, nonprofit or other organizations. The use tax may be computed for loaned vehicles on a value of two percent per month multiplied by the purchase price of the vehicle. Such tax is in addition to the tax on the use of demonstrators as provided in this rule. Vehicles that are not required to be licensed which are used for the purpose of promoting or participating in an event such as a parade, pageant, convention, or other community activity are not subject to the use tax provided the dealer obtains a temporary letter of authority or a special plate in accordance with RCW 46.16.048.
(10) Service department vehicles. Vehicles removed from inventory and committed to use as service vehicles, parts trucks, or service department loaner cars are subject to use tax. Dealers will often use vehicles for this purpose for only short periods of time. In recognition of this, dealers may elect to report use tax on either the purchase price of the vehicle or on two percent per month of the purchase price for each month or any fraction thereof that the vehicle is being used as a service vehicle or loaner. If use tax is reported based on total purchase price rather than on the two percent method, a trade-in deduction is allowed if the vehicle is returned to inventory and concurrently another vehicle replaces this vehicle for use as a loaner or service vehicle. The trade-in value is the wholesale value and generally will be the value recorded by the dealer in the inventory records exclusive of any refurbishing costs at the time the vehicle is returned to inventory.
(11) Personal use of used vehicles. Used vehicle dealers who provide used cars for personal use to their sales staff or managers without charge are subject to use tax on one vehicle per year for each sales person or manager to whom a used vehicle is provided. The value for use tax reporting is the average selling price of all used vehicles sold in the preceding year multiplied by twenty-five percent. The use tax is due in the month in which the vehicle is first used for personal use. New vehicle dealers will also be taxable in this manner for used cars furnished to sales staff or managers, but only if no new cars are provided during the course of the year to the manager or sales person. If both new and used cars are provided by a new vehicle dealer to a manager or sales person, use tax liability is as provided in subsections (6) and (7) of this section.
Where used car dealers satisfy the criteria for executive car use (no current model vehicle registered in the user's name) they are deemed to be using one executive or personal use vehicle per calendar year. In such cases use tax must be reported under the same formula as for subsequently used new demonstrator cars, that is, measured by twenty-five percent of the average selling price of all used cars sold during the preceding calendar year. Use tax also is due on all vehicles that are capitalized for accounting purposes or removed from inventory and used for personal use. In such cases, the use tax measure is the purchase price of the vehicle. If the vehicle was acquired through a trade-in by a customer, the value will generally be that recorded by the dealer in the inventory records including any costs incurred in repairing or refurbishing the vehicle. Purchase of a new car by a used car dealer and used personally by the dealer or person associated with the dealer is subject to use tax measured by the purchase price of the vehicle.
(12) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(a) Dealer A makes a specific charge each month to its sales person for the use of a vehicle. The sales person uses the vehicle for personal use as well as displaying the vehicle to potential customers. The dealer is required to report the gross charges under the retailing and retail sales tax classifications. No use tax is due on this vehicle.
(b) Dealer A assigns a vehicle from its new vehicle inventory for personal and business use to each of its new vehicle sales staff. No charge is made to the sales staff for the use of the vehicle. Dealer A is subject to use tax and may elect to report the tax on each vehicle assigned to the sales staff or may report on the "one per one hundred" method discussed above. Once a method is elected, the dealer may not change methods without approval from the department.
(c) Dealer A assigns a vehicle from its new vehicle inventory for personal use to its service manager. The service manager will use the vehicle for approximately ninety days when it will be replaced with another new vehicle. The service manager does not have a recent model car registered and licensed in his/her name. The dealer is subject to use tax on the vehicles assigned to the service manager. The tax will apply on only one vehicle every second year and will be measured by twenty-five percent of the average selling price of all new passenger cars and trucks sold in the previous year.
(d) Dealer A has the franchise to sell Chevrolets. Dealer A purchases a new Mercedes Benz for its personal use. The dealer attaches a "dealer plate" to this vehicle. Dealer A is subject to use tax on the purchase price of this vehicle. The dealer may not report use tax on the method authorized for reporting executive cars for this vehicle since the dealer is not an authorized dealer for this make of vehicle and the vehicle was not removed from the dealer's new vehicle inventory.
(e) Vehicle Manufacturer A has five employees who live and work from their homes in Washington. These employees call on dealers in Washington to resolve warranty disputes. Each employee is given a new vehicle at the start of the model year. The vehicle will be replaced every sixty days. Manufacturer A owes use tax on five vehicles at the start of the model year. No additional use tax will be due when these vehicles are replaced during the same model year. However, should a sixth employee be added during the course of the year, an additional vehicle will be subject to use tax.
(f) Dealer A uses a vehicle from inventory as a service truck. This vehicle is used to pick up parts from local suppliers, transportation for making emergency repairs on customer's vehicles, and similar activities. The dealer is liable for use tax on this vehicle. At its option, the dealer may report use tax on two percent per month of the purchase price of the vehicle or may report use tax on the full value of the vehicle at the time it is put to use.
(g) Dealer A uses a new vehicle from inventory for his/her own personal use. Dealer A's spouse also uses a new vehicle. Dealer A's son who lives in the same household will occasionally use a new vehicle. All of these vehicles are operated with dealer plates attached. Dealer A does not have a recent model car licensed in Washington. Dealer A is subject to use tax on one vehicle as an "executive" car every second year as provided above.
(h) Dealer A loans a vehicle to a civic organization for a thirty-day period. The dealer is unable to obtain a temporary letter of authority for use of the vehicle under RCW 46.16.048. The dealer is liable for use tax, but the dealer may report the use tax based on two percent of the purchase price of the vehicle per month as the measure of the tax. No use tax would be due if the dealer had obtained a letter of authority under RCW 46.16.048 for the use of the vehicle.
(i) Dealer A, who sells new and used vehicles, assigns a used vehicle to the used car sales manager for personal use. However, if the sales manager exceeds the sales goals for the preceding quarter, the manager will be assigned a new vehicle for personal use for the following quarter. The manager will generally exceed the sales goal at least once during the year. Since the manager uses both a new and used car from inventory during the course of a year, use tax will be computed based on twenty-five percent of the average selling price of all new cars and trucks sold in the preceding year. The use tax will be due on one such vehicle every second year.
(j) Dealer A, who sells new and used vehicles, regularly assigns a used vehicle from inventory to its service manager for personal use. This vehicle is replaced approximately every sixty days. Use tax is due on one vehicle every year measured by twenty-five percent of the average selling price of all used vehicles sold in the preceding year.
[Statutory Authority: 2009 c 521. WSR 10-07-133, § 458-20-132, filed 3/23/10, effective 4/23/10. Statutory Authority: RCW 82.32.300. WSR 92-05-066, § 458-20-132, filed 2/18/92, effective 3/20/92; WSR 86-09-002 (Order ET 86-5), § 458-20-132, filed 4/3/86; WSR 83-07-034 (Order ET 83-17), § 458-20-132, filed 3/15/83; Order ET 70-3, § 458-20-132 (Rule 132), filed 5/29/70, effective 7/1/70.]


PDF458-20-133

Frozen food lockers.

Business and Occupation Tax
Persons engaged in the business of renting frozen food lockers are taxable under the service and other business activities classification upon the gross income from rentals thereof.
When such persons also engage in the activities of curing, smoking, cutting or wrapping meat of and for consumers, or do any other act through which such meat is altered or improved, they become taxable under the retailing classification upon the gross charges made therefor.
Retail Sales Tax
The retail sales tax applies upon the charges made for curing, smoking, cutting or wrapping meat of and for consumers, or for any act through which such meat is altered or improved, and sellers are required to collect such tax from their customers.
The retail sales tax does not apply upon the charges made for the rental of frozen food lockers.
Issued May 1, 1949.
[Order ET 70-3, § 458-20-133 (Rule 133), filed 5/29/70, effective 7/1/70.]


PDF458-20-134

Commercial or industrial use.

(1) Definitions.
(a) The term "commercial or industrial use" means the following uses of products, including by-products, by the same person that extracted or manufactured them:
(i) Any use as a consumer; and
(ii) Manufacturing of articles, substances, or commodities. (RCW 82.04.130.)
(b) The term "biomass fuel" means wood waste and other wood residuals, including forest derived biomass, but does not include firewood or wood pellets. "Biomass fuel" also includes partially organic by-products of pulp, paper, and wood manufacturing processes.
(2) Examples of commercial or industrial use. The following are examples of commercial or industrial use:
(a) The use of lumber by the manufacturer of that lumber to build a shed for its own use.
(b) The use of a motor truck by the manufacturer of that truck as a service truck for itself.
(c) The use by a boat manufacturer of patterns, jigs, and dies that it has manufactured.
(d) The use by a contractor building or improving a publicly owned road of crushed rock or pit run gravel that it has extracted.
(3) Business and occupation tax. Persons manufacturing or extracting tangible personal property for commercial or industrial use are subject to tax under the manufacturing or extracting B&O tax classifications, as the case may be. The tax is measured by the value of the product manufactured or extracted and used. See WAC 458-20-112 Value of products, for additional information.
(4) Use tax. Persons manufacturing or extracting tangible personal property for commercial or industrial use are subject to use tax on the value of the article used, unless a specific exemption is provided. See WAC 458-20-178 Use tax and the use of tangible personal property, for further explanation of use tax and the definition of "value of the article used."
(5) Exemptions. The following uses of articles produced for commercial or industrial use are expressly exempt from use tax.
(a) RCW 82.12.0263 exempts from the use tax the use of biomass fuel by the same person that extracted or manufactured that biomass fuel when it is used directly in the operation of the particular extractive operation or manufacturing plant that produced or manufactured the same biomass fuel.
(b) Property produced for use in manufacturing ferrosilicon, which is subsequently used to make magnesium for sale, is exempt from use tax if the primary purpose is to create a chemical reaction directly through contact with an ingredient of ferrosilicon. RCW 82.04.190(1).
(c) Hog fuel used to produce electricity, steam, heat, or biofuel is exempt from use tax. RCW 82.12.956. For the purposes of this exemption, "hog fuel" means wood waste and other wood residuals including forest derived biomass, but not including firewood or wood pellets. "Biofuel" means a liquid or gaseous fuel derived from organic matter intended for use as a transportation fuel including, but not limited to, biodiesel, renewable diesel, ethanol, renewable natural gas, and renewable propane.
(6) Special provisions regarding value of article used. RCW 82.12.010 provides the following special valuation provisions to persons manufacturing products for commercial or industrial use:
(a) In the case of articles manufactured or produced by the user and used in the manufacture or production of products sold or to be sold to the United States Department of Defense, the value of the articles used is determined according to the value of the ingredients of those articles.
(b) In the case of an article manufactured or produced for purposes of serving as a prototype for the development of a new or improved product, the value of the article used is determined by:
(i) The retail selling price of such new or improved product when first offered for sale; or
(ii) The value of materials incorporated into the prototype in cases in which the new or improved product is not offered for sale.
(c) In the case of a person manufacturing or extracting asphalt or aggregates used in providing services taxable under RCW 82.04.280 (1)(b), the value of the asphalt or aggregates used is based on cost. Specifically, the value of the asphalt or aggregates equals the sum of all direct and indirect costs attributable to the asphalt or aggregates used, plus a public road construction market adjustment of five percent of those costs.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-04-001, § 458-20-134, filed 1/24/24, effective 2/24/24; WSR 22-04-026, § 458-20-134, filed 1/24/22, effective 2/24/22. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-05-011, § 458-20-134, filed 2/8/18, effective 3/11/18; WSR 10-10-031, § 458-20-134, filed 4/26/10, effective 5/27/10. Statutory Authority: RCW 82.32.300. WSR 86-20-027 (Order 86-17), § 458-20-134, filed 9/23/86; WSR 83-07-032 (Order ET 83-15), § 458-20-134, filed 3/15/83; Order ET 70-3, § 458-20-134 (Rule 134), filed 5/29/70, effective 7/1/70.]


PDF458-20-135

Extracting natural products.

(1) Introduction. This rule explains the application of the business and occupation (B&O), retail sales, and use taxes to persons extracting natural products. Persons extracting natural products often 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. In addition to all other taxes, commercial fishermen may be subject to the enhanced food fish excise tax levied by chapter 82.27 RCW (Tax on enhanced food fish).
Persons engaging in activities associated with timber harvest operations should refer to WAC 458-20-13501 (Timber harvest operations). 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).
(2) Who is an "extractor"? 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. The term includes a person who fells, cuts, or takes timber, Christmas trees other than plantation Christmas trees, or other natural products. It also includes any person who takes fish, shellfish, or other sea or inland water foods or products.
(a) Persons excluded from the definition of "extractor." The term "extractor" does not include:
(i) Persons performing under contract the necessary labor or mechanical services for others (these persons are extractors for hire, see subsection (4) of this section); or
(ii) Persons who are farmers as defined in RCW 82.04.213. Refer to WAC 458-20-209 and 458-20-210 for tax-reporting information for farmers and persons selling property to or performing horticultural services for farmers; or
(iii) Persons producing cannabis.
(b) When an extractor is also a manufacturer. 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. A determination of when extracting ends and manufacturing begins for other situations can be made only after a review of all of the facts and circumstances.
(i) Mining and quarrying. Mining and quarrying operations are extracting activities, and generally include the screening, sorting, and piling of rock, sand, stone, gravel, or ore. For example, an operation that extracts rock, then screens, sorts, and with no further processing places the rock into piles for sale, is an extracting operation.
(A) The crushing and/or blending of rock, sand, stone, gravel, or ore are manufacturing activities. These are manufacturing activities whether or not the materials were previously screened or sorted.
(B) Screening, sorting, piling, or washing of the material, when the activity takes place in conjunction with crushing or blending at the site where the materials are taken or produced, is considered a part of the manufacturing operation 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 a part of the manufacturing operation.
(ii) Commercial fishing. Commercial fishing operations, including the taking of any fish in Washington waters (within the statutory limits of the state of Washington) and the taking of shellfish or other sea or inland water foods or products, are extracting activities. These activities often include the removal of meat from the shell and the icing of fish or sea products.
(A) A person growing, raising, or producing a product of aquaculture 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 is considered a farmer. RCW 82.04.213.
(B) Cleaning (removal of the head, fins, or viscera), filleting, and/or steaking fish are manufacturing activities. The cooking of fish or seafood is also a manufacturing activity. Refer to RCW 82.04.260 and WAC 458-20-136 for information regarding the special B&O tax rate/classification that applies to the manufacturing of seafood products that remain in a raw, raw frozen, or raw salted state.
(C) The removal of meat from the shell or the icing of fish or sea products, when the activity is performed in conjunction with and at the site where manufacturing takes place (e.g., cooking the fish or seafood), is considered a part of the manufacturing operation.
(3) Tax-reporting responsibilities for income received by extractors. Extractors are subject to the extracting B&O tax upon the value of the extracted products. (See WAC 458-20-112 regarding "value of products.") 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). See also WAC 458-20-19301 (Multiple activities tax credits) for a more detailed explanation of the MATC reporting requirements. Extractors that manufacture tangible personal property that they sell to buyers who will either resell the tangible personal property without any intervening use, or will include the tangible personal property as a component or ingredient in another product for sale by the buyer to another customer, are making wholesale sales. To document the wholesale nature of any transaction, sellers making wholesale sales must obtain from the buyer a resale certificate for sales made before January 1, 2010, or reseller permit for sales made on or after January 1, 2010. See also WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits) for a more detailed explanation of a seller's obligation to document its wholesale sales. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or until December 31, 2014, whichever first occurs.
For example, Corporation quarries rock without further processing. Corporation sells and delivers the rock to Landscaper, who is located in Washington. Landscaper provides Corporation with a resale certificate (WAC 458-20-102A) for purchases made before January 1, 2010, or a reseller permit (WAC 458-20-102) for purchases made on or after January 1, 2010. Corporation should report under both the extracting and wholesaling B&O tax classifications, and claim a MATC per WAC 458-20-19301. Had Corporation delivered the quarried rock to an out-of-state location, Corporation would have incurred only an extracting B&O tax liability.
(a) When extractors use their products in a manufacturing process. Persons who extract products, use these extracted products in a manufacturing process, and then sell the products all within Washington are subject to both "production" taxes (extracting and manufacturing) and the "selling" tax (wholesaling or retailing), and may claim the appropriate credits under the MATC. (See also WAC 458-20-136 on manufacturing.)
For example, Company quarries rock (an extracting activity), crushes and blends the rock (a manufacturing activity), and sells the resulting product at retail. The taxable value of the extracted rock is $50,000 (the amount subject to the extracting B&O tax). The taxable value of the crushed and blended rock is $140,000 (the amount subject to the manufacturing B&O tax). The crushed and blended rock is sold for $140,000 (the amount subject to the retailing B&O tax). Assume the tax rates for the extracting and manufacturing B&O taxes are .00484, and the tax rate for the retailing B&O tax is .00471. Company should compute its tax liability as follows:
(i) Reporting B&O tax on the combined excise tax return:
(A) Extracting B&O tax liability of $242 ($50,000 x .00484);
(B) Manufacturing B&O tax liability of $678 ($140,000 x .00484); and
(C) Retailing B&O tax liability of $659 ($140,000 x .00471).
(ii) Completing the multiple activities tax credit (Part II of Schedule C):
Activity which results in a tax credit
Taxable Amount
Business and Occupation Tax Reported
Extracting
Manufacturing
Wholesaling
Retailing
Total Credit
Washington extracted products manufactured in Washington
50,000
242
242
 
 
242
Washington extracted products sold in Washington
 
 
 
 
 
 
Washington manufactured products sold in Washington
140,000
 
678
 
659
659
 
Multiple Activities Tax Credit Subtotal of taxes paid to Washington state
901
 
Credit ID 800
901
Schedule C helps taxpayers calculate and claim the multiple activities tax credit provided by RCW 82.04.440. In the Schedule C example above, materials that a person extracts and then uses in a manufacturing process in Washington are entered at their value when extracting ceases and manufacturing begins ($50,000 shown on the "Washington extracted products manufactured in Washington" line of the Schedule C). The taxable amount reported on the "Washington manufactured products sold in Washington" line of the Schedule C is the value of products at the point that manufacturing ceases ($140,000), not simply the value added by the manufacturing activity. For more information and examples that are helpful in determining the value of products, refer to WAC 458-20-112 (Value of products).
(b) When extractors sell their products at retail or wholesale. 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 for sales made before January 1, 2010, or reseller permits for sales made on or after January 1, 2010, from their customers to document the wholesale nature of any transaction as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or until December 31, 2014, whichever first occurs.
(4) Tax-reporting responsibilities for income received by extractors for hire. Persons performing extracting activities for extractors are subject to the extracting for hire B&O tax upon their gross income from those services.
For example, a person removing ore, waste, or overburden at a mining pit for the operator of the mining operation is an extractor for hire. Likewise, a person drilling to locate or provide access to a satisfactory grade of ore at the mining pit for the operator is also an extractor for hire. The gross income derived from these activities is subject to the extracting for hire B&O tax classification.
(5) Mining or mineral rights. Royalties or charges in the nature of royalties for granting another the privilege or right to remove minerals, rock, sand, or other natural resource product are subject to the service and other activities B&O tax. The special B&O tax rate provided by RCW 82.04.2907 does not apply because this statute specifically excludes compensation received for any natural resource. Refer also to RCW 82.45.035 and WAC 458-61-520 (Mineral rights and mining claims) for more information regarding the sale of mineral rights and the real estate excise tax.
Income derived from the sale or rental of real property, whether designated as royalties or another term, is exempt of the B&O tax.
(6) Tax liability with respect to purchases of equipment or supplies and property extracted and/or manufactured for commercial or industrial use. The retail sales tax applies to all purchases of equipment, component parts of equipment, and supplies by persons engaging in extracting or extracting for hire activities unless a specific exemption applies. 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.
(a) Exemption available for certain manufacturing equipment. RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for certain machinery and equipment used by manufacturers and processors for hire. While this exemption does not extend to extractors or extractors for hire, persons engaged in both extracting and manufacturing activities should refer to WAC 458-20-13601 for an explanation of how these exemptions may apply to them.
(b) Property manufactured for commercial or industrial use. Persons manufacturing tangible personal property for commercial or industrial use are subject to both the manufacturing B&O and use taxes upon the value of the property manufactured, unless a specific exemption applies. (See also WAC 458-20-134 on commercial or industrial use.)
If the person also extracts materials used in the manufacturing process, the extracting B&O tax is due on the value of the extracted materials and a MATC may be taken. For example, Quarry extracts rock, crushes the rock into desired size, and then uses the crushed rock in its parking lot. The use of the crushed rock by Quarry in its parking lot is a commercial or industrial use. Quarry is subject to the extracting and manufacturing B&O taxes and may claim a MATC. Quarry is also responsible for remitting use tax on the value of the crushed rock applied to the parking lot.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-24-096, § 458-20-135, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.04.100. WSR 14-23-060, § 458-20-135, filed 11/17/14, effective 12/18/14. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-135, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 04-01-126, § 458-20-135, filed 12/18/03, effective 1/18/04. Statutory Authority: RCW 82.32.300. WSR 00-11-096, § 458-20-135, filed 5/17/00, effective 6/17/00; WSR 86-09-058 (Order ET 86-7), § 458-20-135, filed 4/17/86; WSR 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. WSR 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.]


PDF458-20-13501

Timber harvest operations.

(1) Introduction. Timber harvest operations generally consist of a variety of activities. Depending on the nature of the activity, different tax types and tax rates may apply, such as the business and occupation (B&O) tax, public utility tax (PUT), retail sales tax, use tax, real estate excise tax (REET), and timber harvest excise tax (timber excise tax). See chapters 82.04, 82.08, 82.12, 82.16, 82.45, and 84.33 RCW.
(a) Scope of rule. This rule explains the application of the B&O tax, PUT, retail sales, and use taxes to persons performing activities associated with timber harvest operations, including timber harvesters, manufacturers of timber or wood products, extractors for hire, processors for hire, sellers of real property, and consumers of tangible personal property typically used in timber harvest operations. In addition, this rule explains how the PUT deduction provided by RCW 82.16.050 for the transportation of commodities to an export facility applies to the transportation of logs and provides details on how to apply the B&O tax exemption for small timber harvesters.
(b) Other rules that may be relevant.
(i) Persons engaged in timber harvest operations should refer to the following rules for additional information:
(A) WAC 458-20-135 Extracting natural products;
(B) WAC 458-20-136 Manufacturing, processing for hire, fabricating;
(C) WAC 458-20-13601 Manufacturers and processors for hire—Sales and use tax exemption for machinery and equipment.
(ii) Persons engaged in timber harvesting activities may be subject to the timber excise tax or REET. This rule does not cover either of those taxes in detail. For more information on timber excise tax and REET, readers should refer to:
(A) Chapter 458-40 WAC Taxation of forest land and timber; and
(B) Chapter 458-61A WAC Real estate excise tax.
(iii) Persons cultivating short-rotation hardwoods are considered farmers. "Short-rotation hardwoods" are hardwood trees, such as hybrid cottonwoods, cultivated by agricultural methods in growing cycles shorter than 15 years. RCW 84.33.035. For tax-reporting information for farmers and persons selling property to, or performing horticultural service for, farmers, readers should refer to:
(A) WAC 458-20-209 Farming for hire and horticultural services performed for farmers; and
(B) WAC 458-20-210 Sales of tangible personal property for farming—Sales of agricultural products by farmers.
(c) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Timber harvesters. Timber harvesters may engage in a variety of business activities, each subject to different tax reporting and collection obligations, including B&O tax under the extracting, manufacturing, wholesaling, or retailing classifications; retail sales tax; and use tax. Timber harvesters are eligible for preferential B&O tax rates on certain qualifying business activities until July 1, 2045. RCW 82.04.260(12).
(a) Definition of "harvester." With respect to timber, the term "harvester" means, 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, fells, cuts, or takes timber for sale or for commercial or industrial use. RCW 84.33.035.
(i) When a government entity, i.e., the United States or any instrumentality thereof; the state, including its departments and institutions and political subdivisions; or any municipal corporation, fells, cuts, or takes timber for sale or for commercial or industrial use, the first person other than that government entity who acquires title to or possessory interest in the timber is considered the harvester.
(ii) The term "harvester" does not include persons performing, under contract, the necessary labor or mechanical services for a harvester.
(iii) For purposes of B&O tax, a timber "harvester" is considered an "extractor," as that term is defined in RCW 82.04.100. In general, an extractor is subject to extracting B&O tax upon the value of the extracted products. RCW 82.04.230 and WAC 458-20-135. A timber harvester may also be a "manufacturer" as defined in RCW 82.04.110 if the harvester subsequently performs a manufacturing activity as defined in RCW 82.04.120 (1)(c) involving the extracted trees. The type of excise tax under which a timber harvester must report and pay is dependent on the business activities the timber harvester conducts. See (b) through (g) of this subsection for additional information.
(b) Timber purchasers - Special reporting requirements. A purchaser of privately owned timber in excess of 200,000 board feet in a voluntary sale made in the ordinary course of business must report the particulars of the purchase to the department of revenue (department) on or before the last day of the month following the purchase of the timber. RCW 84.33.088.
(i) The report must contain all information relevant to the value of the timber purchased including, but not limited to, the following, as applicable: Purchaser's name, address and contact information; seller's name, address, and contact information; sale date; termination date in sale agreement; total sale price; legal description of sale area; sale name; forest practice application/harvest permit number if available; total acreage involved in the sale; estimated net volume of timber purchased by tree species and log grade; and description and value of property improvements.
(ii) The report must be filed on or before the last day of the month following the timber purchase date. A penalty of $250 may be imposed against a purchaser for each failure to file this report. These filing requirements are scheduled to expire September 30, 2025. RCW 84.33.088.
(c) Extracting. The felling, cutting (severing from land), or taking of trees is an extracting activity as defined in RCW 82.04.100. The extracting B&O tax classification applies to the value of the products extracted, which generally is the gross proceeds of sales, whether such sales are at wholesale or at retail. See RCW 82.04.230 and WAC 458-20-112.
(i) Until July 1, 2045, timber extractors are eligible for a preferential B&O tax rate for timber extracting activities. RCW 82.04.260 (12)(a). Taxpayers reporting under the preferential extracting timber B&O tax classification in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.
(ii) Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.
(d) Manufacturing. The cutting into length (bucking), delimbing, and measuring (for bucking) of felled, cut (severed), or taken trees is a manufacturing activity as defined in RCW 82.04.120. The manufacturing B&O tax is measured by the value of the products manufactured, which is generally the gross proceeds of sale. For more information regarding the value of products see RCW 82.04.450 and WAC 458-20-112.
(i) For timber harvest operations, the manufacturing portion of the operation begins after the standing timber has been extracted (felled, cut (severed from land), or taken) if the severed trees are subsequently measured, delimbed, and bucked at the manufacturing (harvest) site. The manufacturing site includes the entire contiguous area that is being actively logged (known as a "cutting area" or "harvest unit"). For timber harvest operations, manufacturing activities include bucking (cutting into length), delimbing, and measuring of felled, cut (severed from the land), or taken trees.
(ii) If the product is delivered to a point outside the state, transportation costs incurred by the seller from the last point at which manufacturing takes place within Washington may be deducted from the gross proceeds of sale when determining the value of the product, depending on the extent of the additional manufacturing activity conducted subsequent to the manufacturing conducted at the harvest site. See WAC 458-20-112.
(A) If there is no further manufacturing subsequent to manufacturing conducted at the harvest site, the measure of tax is the gross proceeds of the sale of the logs less transportation costs incurred by the seller from the harvest site to delivery to the customer out-of-state;
(B) If logs are hauled to a separate manufacturing facility for processing into lumber, poles, or piles, the measure of tax is the gross proceeds of sale of the lumber, poles, or piles less transportation costs incurred by the seller from the manufacturing facility to the place of delivery to the customer out-of-state; and
(C) If logs are hauled to a facility that only removes the bark, the measure of tax is the gross proceeds of sale of the logs less transportation costs incurred by the seller from the harvest site to the place of delivery to the customer out-of-state. This is because the mere removal of bark is not a manufacturing activity.
However, if at that facility the debarking is a part of a broader manufacturing process (e.g., cutting the logs into lumber), the entire process, including the debarking, is a manufacturing activity. In this case, the measure of tax is the gross proceeds of sale of the products manufactured from the logs less transportation costs incurred by the seller from the manufacturing facility to the place of delivery to the customer out-of-state.
(iii) Until July 1, 2045, persons who manufacture timber into timber products or wood products; timber products into other timber products or wood products; or mass timber products defined in RCW 19.27.570(1), are eligible to report their gross proceeds of sales under a preferential manufacturing of timber or wood products B&O tax classification. RCW 82.04.260 (12)(b). Taxpayers claiming this preferential B&O tax rate in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.
Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.
(e) Selling. Sales of felled timber and timber products are subject to B&O tax under either the wholesaling or retailing classification, as the case may be, unless exempt by law. The measure of tax is the gross proceeds of sales without any deduction for transportation costs.
(i) When determining the gross proceeds of sales, the timber harvester may not deduct amounts paid to others.
Example 1. Measure of B&O tax for timber harvester.Facts: UVW Company (UVW), a timber harvester and a timber manufacturer, enters into a contract with QRS Company (QRS), in which QRS agrees to perform the necessary labor and mechanical services for extracting the timber, and for manufacturing (measuring, delimbing, and bucking of) the felled timber. UVW receives 60 percent of the gross proceeds from sales of the logs, and QRS receives 40 percent. A third-party buyer located in Washington purchases the logs from UVW for $500,000. The buyer pays $300,000 to UVW for the log sales and $200,000 to QRS for performing the harvesting services.
Result: UVW is required to report the entire $500,000 in sales proceeds for B&O tax purposes, regardless of the fact that QRS received $200,000 of the sales proceeds directly from the buyer. In accordance with RCW 82.04.070, there is no deduction for the cost of doing business; therefore, UVW may not deduct the amount UVW paid to QRS for performing harvesting services. As a harvester and manufacturer, UVW must report $500,000 under extracting B&O tax, manufacturing B&O tax, and retailing or wholesaling B&O tax, depending on whether the third-party buyer is buying the logs for resale. UVW is eligible for a multiple activities tax credit (MATC) because UVW is selling the logs it extracted and manufactured in Washington to a Washington customer. See (g) of this subsection for more information on the MATC.
(ii) Retail sales tax must be collected and remitted on all sales to consumers, unless a statutory exemption applies. For wholesale sales, sellers must obtain and retain copies of their customers' reseller permits to document the wholesale nature of the transaction or otherwise comply with RCW 82.04.470. For information on reseller permits see WAC 458-20-102 and 458-20-10201.
(iii) Until July 1, 2045, persons who make wholesale sales of eligible products may report their gross proceeds of sales under the preferential wholesaling of timber or wood products B&O tax classification. RCW 82.04.260 (12)(c). Taxpayers who claim this preference in the current calendar year must complete an Annual Tax Performance Report by May 31st of the following calendar year. The following are eligible products:
(A) Timber extracted by the seller;
(B) Timber products manufactured by the seller from timber or other timber products;
(C) Wood products manufactured by the seller from timber or timber products; and
(D) Mass timber products, as defined in RCW 19.27.570(1), manufactured by the seller.
(iv) Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.
(f) Engaging in multiple activities. Persons who extract, manufacture, or both extract and manufacture the timber products they sell are engaged in multiple activities. Timber harvesters who are engaged in multiple activities are required to report their gross proceeds of sales under each applicable production B&O tax classification (extracting or manufacturing) and, under the appropriate selling B&O tax classification (wholesaling or retailing).
(g) Multiple activities tax credit (MATC). The MATC will apply in cases where a person sells products to Washington customers that they have also extracted and/or manufactured in Washington. For a detailed explanation of the MATC reporting requirements see WAC 458-20-19301.
Example 2. Computing the MATC.
Facts: ZYX Tree Company (ZYX) is in the business of manufacturing and selling wood siding products used in building construction. All of ZYX's products are manufactured by ZYX using timber that ZYX harvested. For the month of July 2023, ZYX had $100,000 in gross income from its sales of specialty wood siding products. All of the sales were made at wholesale and occurred in Washington.
Result: ZYX must report $100,000 in gross revenue under each of the following B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. Additionally, ZYX is eligible to claim the MATC. Because the preferential B&O tax rates are the same for all three of the classifications reported by ZYX, the MATC will fully offset both the extracting timber and manufacturing timber or wood products B&O tax liabilities. ZYX's tax liability after applying the MATC is $290.40 ($100,000 multiplied by the wholesaling of timber or wood products B&O tax rate of 0.2904 percent under RCW 82.04.260 (12)(c)). Note: An additional B&O tax surcharge imposed on those persons who are subject to any of the taxes imposed under RCW 82.04.260(12) may apply. See RCW 82.04.261 for more information.
(3) Extractors for hire. Persons performing extracting activities (labor or mechanical services) for timber harvesters as independent contractors for hire must report gross income from these activities under the extracting for hire B&O tax classification. RCW 82.04.280. Persons performing extracting for hire services for consumers must collect and remit retail sales tax on those services unless otherwise exempt by law. RCW 82.04.050(2).
Until July 1, 2045, persons who extract timber for hire are eligible for a preferential B&O tax rate for timber extracting for hire activities. RCW 82.04.260 (12)(a). Taxpayers reporting under the preferential extracting for hire timber B&O tax classification in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.
Extracting activities commonly performed by extractors for hire include, but are not limited to the following:
(a) Cutting or severing trees;
(b) Logging road construction or maintenance;
(c) Activities related to and performed on timber-producing property that are necessary and incidental to timber operations, such as:
(i) Slash cleanup and burning;
(ii) Scarification;
(iii) Stream and pond cleaning or rebuilding;
(iv) Restoration of logging roadways to a natural state;
(v) Restoration of wildlife habitat; and
(vi) Fire trail work.
Example 3. Extracting timber for hire.
Facts: Timber Harvester, a harvester and manufacturer, pays Tree Severing Corporation (TSC) $100,000 to fell trees owned by Timber Harvester.
Result: TSC is performing an extracting activity for hire. The $100,000 TSC receives is subject to B&O tax under the preferential extracting for hire timber classification. TSC must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). This transaction is not subject to retail sales tax because Timber Harvester is not the consumer of the extracted timber.
(4) Processors for hire. Persons that perform labor and mechanical services as independent contractors for timber harvesters upon property 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 during the manufacturing portion of a timber harvest operation are subject to B&O tax under the processing for hire classification, measured by the gross income from those services. A processor for hire is any person who would be a manufacturer if that person were performing the labor and mechanical services upon his or her own materials. RCW 82.04.280 and WAC 458-20-136. Persons performing processing for hire services for consumers must collect and remit retail sales tax on the charges for those services unless otherwise exempt by law. RCW 82.04.050(2).
(a) For timber harvest operations, the manufacturing portion of the operation begins after the standing timber has been felled, cut (severed from the land), or taken if the felled trees are subsequently delimbed, measured, and bucked at the manufacturing (harvest) site. The subsequent activities of cutting, delimbing, and measuring of the felled, cut (severed from the land), or taken timber by third parties are considered processing for hire activities when performed at the site of the harvest.
(b) Until July 1, 2045, persons who process for hire (i) timber into timber products or wood products; (ii) timber products into other timber products or wood products; or (iii) mass timber products defined in RCW 19.27.570(1), are eligible to report their gross proceeds under the preferential processing for hire timber products B&O tax classification. RCW 82.04.260 (12)(b). Taxpayers claiming this B&O tax preference in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.
Example 4. Processing timber for hire.
Facts: TTT Company (TTT), a harvester and a manufacturer, owns a parcel of land comprised of standing timber. TTT fells the timber on its own behalf. Subsequently, TTT pays Tree Services, Inc. (TSI) $300,000 to delimb, measure, and buck the severed trees at TTT's harvest site.
Result: TSI is a processor for hire. The $300,000 TSI received is subject to B&O tax under the preferential processing for hire timber products classification. TSI must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). This transaction is not subject to retail sales tax because TTT is not the consumer of the harvested timber, assuming TTT will resell the logs it extracted and manufactured.
Example 5. Tax treatment of services related to the manufacturing portion of a timber harvest operation.
Facts: With the same facts from Example 4, TTT pays Chopper Services Inc. (CS) $200,000 to transport severed timber by helicopter from the location within the harvest site where the timber was felled to a staging location where the severed timber can be delimbed, measured, and bucked (manufactured into logs) by TSI, prior to being loaded into trucks by TTT and transported to a mill for further processing.
Result: CS's provision of helicopter transportation services for transporting severed timber to a staging area within the manufacturing (harvest) site where the severed timber will be processed (measured, delimbed, and bucked) into logs are part of the manufacturing operation (which began after the timber was felled), and are themselves manufacturing activities. See RCW 82.08.02565 (2)(c)(ii). The $200,000 CS received from TTT is subject to B&O tax under the processing for hire timber products classification. CS must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12).
(5) Log hauling activities. Persons performing services for timber harvesters are often required to haul logs by motor vehicle from the harvest site to separate locations, over public roads. The income attributable to this hauling activity is subject to PUT.
(a) Effective August 1, 2015, RCW 82.16.020 provides a reduced PUT rate for most log transportation businesses. A "log transportation business" means a business engaged in transporting logs by truck, except when the transportation meets the definition of urban transportation business or occurs exclusively on private roads. RCW 82.16.010. WAC 458-20-180 explains the distinction between motor and urban transportation. If the hauling is exclusively performed over private roads, the gross income from the transportation activity is subject to B&O tax under the service and other activities classification, not a PUT classification.
Example 6. Tax consequences of hauling logs (private roads, public roads, or both).
Facts: Bob's Logging Company (Bob's Logging) pays HHH Log Hauling Company (HHH) $4,000 to haul logs over private roads from Bob's harvest site to a transfer site located 10 miles away, where Bob's Logging will unload, sort, and reload the logs for further distribution. Separately, Bob's Logging pays JJJ Log Hauling Ltd (JJJ) $6,000 to haul logs from the transfer site to a mill located 30 miles away. JJJ will transport the logs over both private and public roads. The harvest site, transfer site, and mill site are all located in unincorporated parts of Mason County.
Result: HHH is subject to B&O tax under the service and other activities classification because the haul of the logs performed by HHH is exclusively on private roads. HHH must report $4,000 in gross income under the service and other activities B&O tax classification.
JJJ is subject to PUT under the motor transportation classification because the haul occurs on both private and public roads. JJJ must report $6,000 in gross income under the motor transportation PUT classification.
(b) Jointly provided hauling services. In cases where log hauling services are jointly provided by two or more motor carriers, the motor carrier that contracts with the purchaser of the hauling services may be eligible to claim a PUT deduction for amounts paid to third-party motor carriers that jointly furnish some portion (or all) of the haul. See WAC 458-20-179 and RCW 82.16.050 for more information on the PUT deduction for services furnished jointly.
Example 7. Hauling services jointly provided.
Facts: Assume the facts from Example 6, except that JJJ contracts with Bob's Logging to perform all necessary hauling services from the harvest site to the transfer site, then from the transfer site to the mill. The portion of the haul from the harvest site to the transfer site will be performed over private and public roads. JJJ receives $10,000 from Bob's Logging in exchange for the contracted services. After entering into the contract with Bob's Logging, JJJ enters into a contract with HHH, in which HHH will perform the first portion of the haul from the harvest site to the transfer site. HHH receives $4,000 from JJJ in exchange for its portion of the jointly provided services.
Result: JJJ must report $10,000 in gross income under the log hauling over public highways PUT classification. Additionally, JJJ may take a $4,000 deduction for "Amounts Paid to Another for Services Jointly Provided" from the amount reported.
HHH must report $4,000 in gross income under the log hauling over public highways PUT classification. HHH is not eligible for a deduction.
Example 8. Hauling services jointly provided.
Facts: Assume the facts from Example 6, except that JJJ contracts with Bob's Logging to perform all necessary hauling services from the harvest site to the transfer site, then from the transfer site to the mill. The portion of the haul from the harvest site to the transfer site will be performed entirely over private roads. JJJ receives $10,000 from Bob's Logging in exchange for the contracted services. After entering into the contract with Bob's Logging, JJJ enters into a contract with HHH, in which HHH will perform the first portion of the haul from the harvest site to the transfer site. HHH receives $4,000 from JJJ in exchange for its portion of the jointly provided services.
Result: JJJ must report $10,000 in gross income under the log hauling over public highways PUT classification. JJJ may not claim a deduction for "Amount Paid to Another for Services Jointly Provided," as HHH's hauling services are not performed over a public road and are therefore not subject to PUT.
HHH must report $4,000 in gross income under the service and other activities B&O tax classification. HHH is not subject to PUT, as the log hauling services were provided entirely over private roads.
(c) Hauling logs using own equipment. In cases where a person hauls timber or wood products using their own equipment and has established hauling rates that they pay to third parties for comparable hauls, such rates may be used to establish the measure of tax for the person's hauling activity. Otherwise, the measure of the tax should be all costs attributable to the hauling activity including, but not limited to, the following costs relative to the hauling equipment: Depreciation; repair parts and repair labor; and wages and benefits for employees or compensation to contractors driving or maintaining the equipment. If appropriate records are not maintained to document these costs, the department will accept one-third of the gross income derived from a contract for all labor or mechanical services beginning with the cutting or severance of trees through the hauling services as the measure of the tax under the motor transportation or log hauling over public highways PUT classification.
(d) Deduction for hauls to export facilities. Refer to subsection (13) of this rule for information regarding the deduction available for certain log hauls to export facilities.
(6) Common timber sale arrangements. Persons who sell or take timber may be subject to various taxes including B&O tax, sales tax, use tax, timber excise tax, and REET. There are a number of ways in which harvesting activities are conducted and timber is sold. The timing of the transfer of ownership of, or the contractual right to sever, standing timber determines which taxes are due and who is liable for remitting tax.
(a) In general, when a timber sale arrangement meets the definition of "selling standing timber" as defined in RCW 82.04.260 (12)(d), the gross income is subject to B&O tax under chapter 82.04 RCW. Until July 1, 2045, persons engaging in "selling standing timber" are eligible to report gross receipts from sales of standing timber under the preferential B&O tax rate of 0.2904 percent in RCW 82.04.260 (12)(d). Persons claiming the preferential B&O tax rate in the current year must file a complete Annual Tax Performance Report with the department under RCW 82.32.534 by May 31st of the following year.
(b) RCW 82.45.195 provides a REET exemption for a sale of standing timber if the gross income from such sale is taxable under RCW 82.04.260 (12)(d); also see WAC 458-61A-113. However, when a sale of standing timber does not meet the definition of "selling standing timber" in RCW 82.04.260 (12)(d) or when a sale of standing timber is a sale, conveyance, or transfer of the ownership of or title to real property as defined in RCW 82.45.010 and WAC 458-61A-113, REET is due. "Real property" or "real estate" means any interest, estate, or beneficial interest in land or anything affixed to land, including an ownership interest or beneficial interest in any entity that owns land, or anything affixed to land, including standing timber or crops. WAC 458-61A-102(18). For more information on sales that are subject to REET, see chapters 82.45 RCW and 458-61A WAC.
(c) The following examples briefly identify two common types of timber sale arrangements. The examples are intended to provide general guidance only. The tax treatment of a particular timber sale arrangement depends on the facts and circumstances in each case. These examples presume that the trees being harvested are not Christmas trees, and that no participant is a federal, state, or local government entity. The examples do not detail the timber excise tax consequences.
Example 9. Sale of standing timber (stumpage sales).
Facts: ABC Company (ABC) owns a large tract of standing timber. ABC sells the right to cut the standing timber to XYZ Partnership (XYZ) for $100,000 on March 1, 2021. The sale agreement does not require XYZ to harvest (sever) the standing timber within 30 months from the date of the original contract. XYZ receives title to the timber from ABC prior to harvesting it. When the timber is ready for harvest on May 1, 2024, XYZ hires DEF Company (DEF) (third-party timber harvest contractor) to sever the timber on its behalf. XYZ pays DEF $50,000. After the timber is extracted, XYZ sells the harvested timber to UVW Company (an unrelated third-party Washington manufacturer) at wholesale for $250,000. UVW Company will measure, delimb, and buck the severed timber, then haul the logs from the harvest site to its own manufacturing facility, using its own trucks.
Result: ABC is not subject to B&O tax, PUT, or retail sales or use tax. ABC is liable for REET on the sale of standing timber to XYZ, because the transaction is a sale of real property. See RCW 82.45.010(1), 82.45.060, WAC 458-61A-102, and 458-61A-113. ABC is not liable for B&O tax, in this example, because the sale between ABC and XYZ does not meet the definition of "selling standing timber" in RCW 82.04.260 (12)(d). However, if the sale arrangement between ABC and XYZ were to require that XYZ sever or cut the timber within 30 months from the date of the original sale contract, ABC would then be subject to B&O tax on its proceeds from "selling standing timber" as defined in RCW 82.04.260(12), and the transaction would be exempt from REET in accordance with RCW 82.45.195.
XYZ (as the owner of the standing timber) must report $250,000 in gross income under the following B&O tax classifications: Extracting timber and wholesaling of timber or wood products. XYZ is eligible to claim the MATC equal to its extracting timber B&O tax liability. XYZ must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). XYZ is also subject to timber excise tax. See chapters 84.33 RCW and 458-40 WAC.
DEF must report $50,000 in gross income under the extracting for hire timber B&O tax classification and is not eligible for a credit or deduction. DEF must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12).
Example 10. Sale of harvested timber (logs).
Facts: Assume the facts from Example 9, except that ABC hires DEF to harvest the timber on ABC's behalf, rather than selling the standing timber to XYZ. ABC agrees to pay DEF $50,000 in exchange for DEF's harvesting and manufacturing (measuring, delimbing, and bucking of felled trees) services. After the timber has been severed, measured, delimbed, and bucked into logs by DEF, ABC sells the logs to GHI Lodge, Inc. (GHI) for $250,000. GHI is purchasing the logs to construct a new lodge (for GHI's own use) in unincorporated Skamania County (which is also the location of the harvest site).
Result: ABC (as the owner of the timber) must report $250,000 in gross income under the following B&O tax classifications: Extracting timber, manufacturing of timber products, and retailing. ABC is eligible to claim the MATC equal to its extracting timber B&O tax and manufacturing of timber products B&O tax liabilities. ABC must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). ABC is required to collect retail sales tax at the current combined state and local rate for unincorporated Skamania County. ABC is also subject to timber excise tax. See chapters 84.33 RCW and 458-40 WAC.
DEF must report $50,000 in gross income under the extracting for hire timber and processing for hire timber products B&O tax classifications. DEF must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). DEF is not eligible for the MATC.
(7) Equipment and supplies used in timber harvest operations. Retail sales tax applies to all retail sales of tangible personal property, including equipment, component parts of equipment, and supplies by persons engaging in timber operations unless a specific exemption applies. Purchases of fertilizer and spray materials (e.g., pesticides) for use in the cultivating of timber are also subject to retail sales tax, unless purchased for resale. If a seller fails to collect the retail sales tax, the buyer is required to remit what is commonly referred to as "deferred retail sales tax" directly to the department.
If a person acquires tangible personal property in a transaction that is not subject to retail sales tax, the person is subject to use tax based on the place of first use of the tangible personal property in Washington. In cases where a person has already paid a retail sales or use tax on the same tangible personal property to another state or foreign country (or political subdivision of either), that person may claim a credit for those taxes against their Washington use tax liability.
(a) Exemption available for certain manufacturing machinery and equipment. RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for certain machinery and equipment (M&E) used by manufacturers. Persons engaged in both extracting and manufacturing activities should refer to WAC 458-20-13601 for an explanation of how these exemptions may apply to them.
Example 11. Retail sales tax exemption for M&E (qualifying and nonqualifying M&E).
Facts: GHI LLC (GHI) is a timber harvester and a manufacturer, engaged in felling, delimbing, bucking, measuring, cutting, yarding, and loading logs at a logging operation site. GHI specializes in harvesting timber in remote locations with steep and challenging terrain. In performing its business activities, GHI uses a feller buncher to sever (cut) the standing timber. GHI also uses chainsaws to fell snags. After the trees are severed, GHI uses a yarder to create a cable yarding system to yard (transport or drag) the severed trees through the harvest unit to a staging area where they will be processed into logs and loaded onto trucks for transportation to an off-site mill. At the staging area, GHI uses a log processor to delimb, measure, and buck the trees, and a log loader to sort and stack the logs by species and length. The yarder, log processor, and the log loader are exclusively used by GHI as described in this example.
Result: For purposes of the retail sales and use tax exemptions in RCW 82.08.02565 and 82.12.02565, GHI may be eligible to claim an exemption for the yarder, log processor, and the log loader as (a) GHI is a manufacturer; (b) the manufacturing operation process has begun; (c) the three pieces of equipment are used directly in the manufacturing operation; (d) the three pieces of equipment are used a majority of the time in a qualifying manner; and (e) all other requirements under WAC 458-20-13601 are met (including the one year useful life requirement). In general, yarding (the process of transporting or dragging felled trees or logs to a landing area) as a standalone activity is not a manufacturing activity. Thus, whether yarding is a part of a manufacturing operation depends on whether such activity takes place at a manufacturing site. In this example, yarding occurs at the manufacturing (harvest) site.
GHI is not eligible to claim an exemption for the feller buncher or chainsaws as the majority use of both types of equipment are for extracting activities (cutting or severing trees from the land). Had the majority of use of the chainsaws and the feller buncher been for delimbing, measuring, and bucking the felled trees, both pieces of equipment may have been eligible for the M&E exemption if all the other requirements for the M&E exemption in WAC 458-20-13601 are satisfied.
Example 12. Retail sales tax exemption for M&E (majority use test).
Facts: Assume the facts from Example 11. In addition, GHI uses a bulldozer for a variety of purposes in its operations. The bulldozer is used exclusively to (a) support GHI's feller buncher in performing extracting activities (cutting or severing of timber); (b) support GHI's yarder in performing manufacturing activities upon the timber that has already been severed (yarding or transporting the severed trees to the staging area where the severed trees will be processed into logs and loaded onto trucks and transported to an off-site mill); and (c) clear debris and generally assist in the restoration of timber harvest sites. GHI does not separately state charges associated with its use of the bulldozer in its contracts with customers. GHI does maintain detailed time records that document the number of hours the bulldozer is used in the performance of each of the three activities. In its first year of use, the bulldozer was used to support the feller buncher for 200 hours, support the yarder for 400 hours, and clear debris and generally assist in harvest site restoration for 400 hours.
Result: While the use of the bulldozer to support the yarder for manufacturing activities is generally a qualifying use for purposes of the M&E exemption in RCW 82.08.02565 and 82.12.02565, the bulldozer is not eligible for the exemption because the majority of its use is for a nonqualifying purpose (supporting the feller buncher for extracting activities and clearing debris for harvest site restoration). In this case, the proper measure for determining majority use is time. A majority of the bulldozer's use, measured in time, was for nonmanufacturing activities (60 percent, or 600 of 1,000 hours used).
(b) Property manufactured for commercial use. A person who manufactures timber or wood products for commercial or industrial use is subject to B&O tax under the manufacturing of timber or wood products classification and use tax. Both taxes are imposed based on the value of the tangible personal property manufactured unless a specific exemption applies. WAC 458-20-134 defines and provides information on commercial or industrial use, and WAC 458-20-112 describes how to determine the value of products. If a person is also the harvester of the timber, the activity is subject to B&O tax under the extracting timber classification. The MATC will also apply, so long as both the extracting and manufacturing activities occur in Washington.
Example 13. Lumber manufactured for commercial use.
Facts: ABC Company (ABC) harvests timber, manufactures the timber into lumber, and then uses the lumber to construct an office building. The harvest site and manufacturing site are both located in unincorporated Clark County. The office building site is in Camas.
Result: ABC's use of the lumber to construct its office building is a commercial or industrial use. ABC is subject to use tax on the value of the lumber incorporated into the office building. Because ABC's first taxable use of the lumber occurred in Camas (the building construction site location), the combined state and local use tax is due based on the location code and rate assigned to the Camas address. ABC is also subject to B&O tax under the extracting timber and manufacturing of timber or wood products classifications and may claim the MATC.
(8) Seeds and seedlings. Persons who cultivate trees by agricultural methods (or tree cultivators) often purchase or collect tree seeds that are raised into tree seedlings. The activity of raising a seed into a seedling may be performed by the tree cultivator, or by third-party growers. In the case of third-party growers, typically the seed is provided by the tree cultivator and tree seedlings are received back after a specified growing period.
(a) Responsibility to remit retail sales or use tax. The purchase of seed or seedlings by a tree cultivator is subject to retail sales tax. If a seller fails to collect retail sales tax, the buyer must remitdeferred retail sales tax (or use tax) unless otherwise exempt by law. The use of seed collected by a tree cultivator is also subject to use tax.
(i) In the case of seed provided by a tree cultivator to a third-party grower in Washington, the tree cultivator incurs any use tax liability on the value of the seed.
(ii) In the case of seedlings brought into and used in Washington by a tree cultivator, the seedlings are subject to use tax, unless Washington retail sales or use tax was previously paid on the seedlings.
(b) Limited sales and use tax exemptions for conifer seeds.
(i) Exemption requirements. Retail sales and use tax do not apply to the sale of conifer seed that is immediately placed into freezer storage operated by the seller and is: (A) Used for growing timber outside Washington or (B) sold to an Indian tribe or tribal member and is to be used for growing timber in the tribe's or tribal member's Indian country. For the purposes of this rule, "Indian country" is defined as set forth in 18 U.S.C. Sec. 1151. See RCW 82.24.010.
The buyer must provide the seller with an exemption certificate in a form and manner prescribed by the department at the time of purchase. The seller must retain a copy of the buyer's exemption certificate. RCW 82.32.070 requires taxpayers to keep and preserve suitable records as may be necessary to determine the amount of any tax collected by the department for a period of five years.
(ii) Deferring payment of retail sales tax if unable to determine whether purchase qualifies for the retail sales tax exemption. If a buyer of conifer seed is normally engaged in growing timber both within and outside Washington and is not able to determine at the time of purchase whether the seed acquired, or the seedlings germinated from the seed acquired, will be used for growing timber within or outside Washington, the buyer may defer payment of the retail sales tax until it is determined that the seed, or seedlings germinated from the seed, will be planted for growing timber in Washington. A buyer that does not pay retail sales tax on the purchase of conifer seed and subsequently determines that the sale did not qualify for the retail sales tax exemption must remit to the department the amount of retail sales tax that would have been paid at the time of purchase. It is important to note that the retail sales tax liability may be deferred only if the seller immediately places the conifer seed into freezer storage operated by the seller.
(iii) Tax paid at source deduction. A buyer who pays retail sales tax on the purchase of conifer seed and subsequently determines that the sale qualifies for the tax paid at source deduction may claim a deduction on its combined excise tax return. The deduction is allowed only if the buyer keeps and preserves records identifying the seller, purchase date, purchase amount, and retail sales tax paid. RCW 82.32.070 requires suitable records must be kept and preserved for a period of five years. See WAC 458-20-102 for more information on the tax paid at source deduction.
(iv) Use tax exemption. Use tax does not apply to the use of conifer seed to grow seedlings if the seedlings are grown by a person other than the owner of the seed. This exemption applies only if the seedlings will be used for growing timber outside Washington, or if the owner of the conifer seed is an Indian tribe or tribal member and the seedlings will be used for growing timber in the tribe's or tribal member's Indian country. If the owner of the conifer seed is not able to determine at the time the seed is used in a growing process whether the use of the seed qualifies for this exemption, the owner may defer payment of the use tax until it is determined that the seedlings will be planted for growing timber in Washington.
(9) Activities or income incidental to timber harvest operations. This subsection addresses the tax consequences of various business activities that are incidental to timber harvest operations.
(a) Taking other natural products from timberland. The value of natural products such as boughs, mushrooms, seeds, and cones taken for sale or commercial or industrial use is subject to B&O tax under the extracting classification. Sales of these products are subject to B&O tax under the wholesaling or retailing classification, as the case may be. Persons who extract natural products in Washington and subsequently sell those products to customers that receive the products in Washington are eligible for the MATC. Sales of natural products to consumers that are sourced to Washington are subject to retail sales tax unless a specific exemption applies.
(b) Timber cruising, scaling, and access fees. Gross income from timber cruising, scaling services, and allowing others to use private roads is subject to B&O tax under the service and other activities classification. Gross income from access fees for activities such as hunting, taking firewood, bough cutting, mushroom picking, or grazing is also subject to B&O tax under the service and other activities classification. Charges that allow a person to take an identified quantity of tangible personal property from privately owned real property are considered sales of that property, and the gross income received from these charges is subject to B&O tax under the retailing or wholesaling classification, as the case may be. These charges are also subject to retail sales tax when made to a consumer and the sale is sourced to Washington, unless a specific exemption applies.
(c) Planting, thinning, and spraying. Sales of the following services are subject to B&O tax under the service and other activities classification: Planting trees or other vegetation; precommercial thinning; and spraying or applying fertilizers, pesticides, or herbicides.
(d) Sales of firewood and Christmas trees. Sales of firewood, Christmas trees, and other tangible personal property are generally subject to either the wholesaling B&O tax, or the retailing B&O tax and retail sales tax, as the case may be. These sales are often made in the nature of charges that allow the buyer to select and take an identified quantity of the property (e.g., six cords of firewood or two Christmas trees). Sales of commercially traded firewood or naturally grown trees (including Christmas trees) are also subject to timber excise tax; see WAC 458-40-610 and 458-40-660. For activities related to plantation (cultivated) Christmas trees, see subsection (10) of this rule and WAC 458-20-210.
(e) Unloading logs from logging trucks. The taxability of gross income received by persons operating equipment to unload logs from logging trucks onto rail cars at transfer points depends on the nature of the customer's activities.
(i) In cases where the customer will direct the operator of the equipment as to where and how to move the logs, the activity is considered a "rental of equipment with an operator," the charges for which are subject to retailing B&O tax and retail sales tax. See RCW 82.04.050(9) and WAC 458-20-211.
(ii) In cases where the equipment operator is responsible for loading and unloading logs at their own discretion and to contract specification, the activity is considered an "other support service," and the charges for which are subject to B&O tax under the service and other activities classification.
(iii) In cases where the equipment operator is responsible for loading and unloading logs at their own discretion and to contract specification, and where the activities are performed at an export facility as part of a waterborne export activity, the activity is considered "stevedoring," the charges for which are subject to B&O tax under the stevedoring classification. See WAC 458-20-193D.
(f) Transporting logs by water. Gross income received for transporting logs by water (e.g., log booming and rafting) or from log patrols is subject to PUT under the other public service business
classification. Commonly, log transporters use "boomsticks" (i.e., floating logs chained together in a rough hexagonal shape, which are designed to prevent log bundles or loose logs from escaping the log boom during towing) to assist in the transportation of logs over water.
(i) In cases where boomsticks are used in the transportation of logs, any separate or itemized charges for the use of boomsticks are included in the taxable measure subject to the other public service business PUT classification.
(ii) In cases where logs will be towed to a location specified by the customer for storage, separately stated or itemized charges for the use of boomsticks, while the logs are stored, are rentals of tangible personal property and are subject to B&O tax under the retailing classification and retail sales tax.
(g) Export sorting yard operations. Export sorting yard operations generally consist of a number of distinct business activities including, but not limited to, weighing, tagging, banding, appraising, and sorting of logs. Other incidental activities include debarking, removing imperfections (such as crooks, knots, splits, and seams), and trimming of log ends to remove defects. Gross income received by persons performing the types of export sorting yard activities described in this subsection is subject to B&O tax under the service and other activities classification.
(10) Harvesting Christmas trees. As described below, persons growing, producing, or harvesting Christmas trees are either farmers or extractors, depending on the facts and circumstances in each case.
(a) Plantation Christmas tree operations (farming operations). Persons growing or producing plantation Christmas trees on their own lands or on lands in which they have a present right of possession are farmers. See RCW 82.04.213 and WAC 458-20-210 for more information on farmers. Plantation Christmas trees are Christmas trees that are exempt from the timber excise tax under RCW 84.33.170, which requires that the Christmas trees be grown on land prepared by intensive cultivation and tilling, such as irrigating, plowing, or turning over the soil, and on which all unwanted plant growth is controlled continuously for the exclusive purpose of raising Christmas trees. See RCW 82.04.035 and 84.33.035.
(i) Gross income from wholesale sales of plantation Christmas trees by farmers is exempt from B&O tax. See RCW 82.04.330. Gross income from retail sales of plantation Christmas trees by farmers is subject to B&O tax under the retailing classification and retail sales tax.
(ii) Farmers growing or producing plantation Christmas trees are not subject to retail sales or use tax on their purchase of seed, seedlings, fertilizer, and spray materials. See RCW 82.04.050 and WAC 458-20-210.
(iii) Persons performing cultivation or harvesting services for farmers are generally taxable on gross income from these services under the service and other activities B&O tax classification. See WAC 458-20-209 for information on farming for hire and horticultural services performed for farmers.
(b) Other Christmas tree operations (extracting operations). Persons who, either directly or by contracting with others for the necessary labor or mechanical services, fell, cut, or take Christmas trees other than plantation Christmas trees are extractors and should refer to the provisions in this rule for timber harvesters.
(11) Timber harvest operations in conjunction with other land clearing or construction activities. Persons sometimes engage in timber harvest operations in conjunction with land clearing or construction activities, such as clearing or improving land for residential or commercial building development, golf courses, parks, or other improvements to real property. Each activity has its own tax consequences and may be subject to tax under a variety of taxes.
(a) Income derived from a timber harvest operation is subject to the provisions in this rule for timber harvesters.
(b) Income derived from clearing or improving of land for construction of residential, commercial, or other improvements is subject to wholesaling B&O tax, retailing B&O tax and retail sales tax, or public road construction B&O tax, as the case may be. Refer to WAC 458-20-170, 458-20-171, and 458-20-172 for tax-reporting information regarding these construction activities. Persons performing landscape and horticultural services such as cutting or trimming trees after the land is developed should refer to WAC 458-20-226.
Example 14. Combined contracts (land clearing and timber harvesting).
Facts: LCG Land Clearing and Grading Company (LCG) is hired by FFF Corporation (FFF), a commercial property development company, to clear and grade an unimproved parcel of land owned by FFF. Once cleared and graded, FFF intends to construct a commercial warehouse on the property, which it will lease to third-party tenants. The property contains a significant amount of standing timber, which LCG is responsible for extracting and selling the extracted timber on FFF's behalf under the terms of the contract. The contract between FFF and LCG includes a $25,000 charge for the timber extraction services and a $75,000 charge for the land clearing and grading services. LCG hires a subcontractor, HHH Logging Company (HHH) to extract the timber from the property. LCG pays HHH $20,000 for its services. FFF ultimately sells the extracted timber to JJ Mill Company (JJ) for $30,000 at wholesale.
Result: LCG is an extractor for hire with respect to the $25,000 in proceeds from FFF for the harvest of the standing timber. The gross income is subject to B&O tax under the extracting for hire timber classification. LCG is also subject to B&O tax under the retailing classification and must collect retail sales tax from FFF on the $75,000 in proceeds for the clearing and grading of the real property.
HHH is an extractor for hire with respect to the $20,000 in proceeds from LCG for the harvest of the standing timber. The gross income is subject to B&O tax under the extracting for hire timber classification.
FFF is an extractor with respect to the sale of the harvested timber to JJ. FFF must report $30,000 in gross income under the extracting timber and wholesaling of timber or wood products B&O tax classifications. FFF may also be eligible for the MATC, if the sale to JJ occurred in Washington.
(12) Logging road construction and maintenance. Constructing or maintaining logging roads (whether active or inactive) is considered an extracting activity. Income derived from this activity is subject to B&O tax under the extracting or extracting for hire classification. This income is not subject to retail sales tax. A person constructing or maintaining a logging road is a consumer of all materials incorporated into the logging road. The purchase or use of these materials is subject to either retail sales or use tax.
(a) Logging road materials provided without charge.
(i) Landowners or timber harvesters may provide materials (e.g., crushed rock) to persons constructing or maintaining logging roads without charge. In such cases, tax is due only once on the value of the materials.
(ii) The person constructing or maintaining the roads is responsible for remitting use tax on the value of the materials, unless the person documents that the landowner or timber harvester previously remitted the appropriate retail sales or use tax.
Alternatively, the person may take a written statement from the landowner or timber harvester certifying that the landowner or timber harvester has remitted (for past periods) or will remit (for future periods) all applicable retail sales or use taxes due on materials provided without charge. This statement must identify the period of time, not to exceed four years, for which the agreement is effective. The statement must identify the landowner or timber harvester's tax registration number and must be signed by an owner, member, or authorized agent of the timber harvester.
(b) Extracted or manufactured logging road materials. Persons constructing or maintaining logging roads are subject to B&O tax and use tax on the value of applied materials they extract or manufacture from private pits, quarries, or other locations. The measure of tax is the value of the extracted or manufactured products. See WAC 458-20-112 for additional information regarding how to determine the "value of products."
(i) If a person directly, or by contracting with others, extracts and crushes, washes, screens, or blends materials to be incorporated into the logging road, B&O tax under the extracting classification is due on the raw value of the extracted products. B&O tax under the manufacturing classification and use tax are also due, measured by the value of the manufactured product. If the "cost basis" is the appropriate method for determining the value of products under WAC 458-20-112, this value includes the cost of transportation to a processing point but does not include any transportation from a processing point to a road site. The MATC may be taken when computing the B&O tax as explained in WAC 458-20-19301.
(ii) In the case of fill dirt, sand, gravel, or rock that is extracted from a location away from a logging road site, but not further processed, extracting B&O tax and use tax are due based upon the value of the extracted product. If the "cost of production basis" is the appropriate method for determining the value of products under WAC 458-20-112, this value does not include transportation costs to a road site.
(iii) The mere severance of fill dirt, sand, gravel, or rock from outcroppings at the side of a logging road for placement in the road is a part of the logging road construction or maintenance activity. The person incorporating these materials into the road does not incur a tax liability for the extracting or use of these materials.
(13) Deduction for hauling logs to export yards. RCW 82.16.050 provides a PUT deduction for amounts derived from the transportation of commodities from points of origin within this state to an export elevator, wharf, dock, or shipside ("export facility") on tidewater or navigable tributaries of tidewaters. The commodities must be forwarded from the facility, without intervening transportation, by vessel and in their original form, to an interstate or foreign destination. No deduction is allowed when the point of origin and the point of delivery are located within the corporate limits of the same city or town.
(a) Conditions for deduction. This deduction is available only to the person making the last haul, not including hauls within the export facility before the logs are placed on the ship. This deduction is not available if the haul starts in the same city or town where the export facility is located.
The deduction is available only if both of the following criteria are met:
(i) The logs eventually go by vessel to another state or country; and
(ii) The form of the logs does not change between the time the logs are delivered to the export facility and the time the logs are placed on the ship. The mere removal of bark from the logs (debarking) or the incidental removal of imperfections (see subsection (9)(g), of this rule) while the logs are at the export facility is not itself a manufacturing activity, nor does it result in a change in the "original form" of the logs as contemplated by RCW 82.16.050.
(b) Documentation requirements for deduction. The log hauler must prove entitlement to the deduction. Delivery tickets that show delivery to an export facility are not, alone, sufficient proof. A certificate from the export facility operator is acceptable additional proof if it is substantially in the following form. Rather than a certificate covering each haul, a "blanket certificate" may be used for a one-year period if no significant changes in operation will occur within this period of time.
Exemption certificate for logs delivered to an export facility
The undersigned export facility operator hereby certifies:
That              percentage or more of all logs hauled to the storage facilities at                , the same located on tidewater or navigable tributaries thereto, will be shipped by vessel directly to an out-of-state or foreign destination and the following conditions will be met:
 
1. The logs will not go through a process to change the form of the logs before shipment to another state or country.
 
2. There will be no intervening transportation of these logs from the time of receipt at the export facility until loaded on the vessel for the interstate or foreign journey.
 
Trucking Firm _____
 
Trucking Firm Address _____
 
Trucking Firm UBI# _____
 
Export Facility Operator _____
 
Operator UBI# _____
 
Person Giving Statement _____
 
Title of Person Giving Statement _____
(c) Examples. For Examples 16 through 18, presume that the logs are shipped directly to another country from the export facility.
Example 16. Qualifying PUT deduction for transportation to an export facility.
Facts: MMM Hauling Company (MMM) is hired to haul logs from a harvest site to an export facility over public roads. The logs will immediately be loaded upon a ship for export at the export facility. As part of its services, MMM will remove bark from 50 percent of the logs; no other processing activities will occur. MMM receives $10,000 in exchange for its services.
Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may also claim a $10,000 deduction from the measure of its PUT, as the logs will be shipped directly to another country from the export facility, provided the appropriate exemption certificate is obtained.
NOTE: Because the mere removal of bark is not considered a change in the form of the logs, the export facility may provide a certificate in the above form indicating that all logs at this facility will ultimately be shipped to another country.
Additionally, this means that MMM is not engaged in a processing for hire activity.
Example 17. Activities that do not qualify for PUT deduction for transportation to an export facility.
Facts: Assume the facts from Example 16, except that MMM hauls the logs to an export sorting area, approximately one mile from the export facility. At this location further sorting takes place and 80 percent of the logs are hauled approximately one mile over public roads for export to another country. The other 20 percent of the logs are sold and delivered to local sawmills.
Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may not claim a deduction from the measure of its PUT, as the logs will not be shipped directly to another country from the export facility. It is immaterial that MMM may be paid an "export" rate for its services.
Charges for the haul of the logs from the export sorting area to the export facility may be deductible if the transportation route does not start and end within the corporate limits of the same city or town, and the hauler obtains the appropriate exemption certificate. The haul to the local sawmills is not deductible.
Example 18. Qualifying PUT deduction for transportation to an export facility.
Facts: Assume the facts from Example 16, except that once the logs are delivered by MMM to an export facility, the logs will still need to be transported approximately half of a mile to reach the ship for loading (all within the export facility).
Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may also claim a $10,000 deduction from the measure of its PUT, as the logs will be shipped directly to another country from the export facility, provided the appropriate exemption certificate is obtained. Movement of the logs within the export facility is not an intervening haul.
(14) Small timber harvesters - Business and occupation tax exemption. RCW 82.04.333 provides a limited exemption from B&O tax for small harvesters. A small harvester may take a deduction for an amount not to exceed $100,000 per tax year from the gross receipts or value of products proceeding or accruing from timber harvested. A deduction may not reduce the amount of tax due to less than zero.
(a) Definition of small harvester. "Small harvester" means every person, who from his or her 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, fells, cuts, or takes timber for sale or for commercial or industrial use in an amount not exceeding 2,000,000 board feet in a calendar year. When a government entity (i.e., the United States or any instrumentality thereof, the state, including its departments and institutions and political subdivisions, or any municipal corporation therein) fells, cuts, or takes timber for sale or for commercial or industrial use, not exceeding these amounts, the small harvester is the first person other than the government entity who acquires title to or a possessory interest in the timber. "Small harvester" does not include persons performing under contract the necessary labor or mechanical services for a harvester, and it does not include the harvesters of Christmas trees or short-rotation hardwoods. RCW 84.33.035.
(b) Registration - Tax return. A person whose only business activity is as a small harvester of timber is required to register with the department for B&O tax purposes, unless otherwise specified in WAC 458-20-101 (2)(a) or under chapter 82.32 RCW. A small harvester must also register with the forest tax program in the department's audit division for payment of the timber excise tax. See chapters 84.33 RCW and 458-40 WAC for more information regarding the timber excise tax.
(c) Examples. In each of the following examples, the harvester must register with the department's forest tax program for the payment of timber excise tax, and must report under the appropriate tax classifications as described above in this rule.
Example 19. Unregistered small harvester.
Facts: A small harvester, not currently registered with the department for B&O tax purposes, harvests timber in June 2023 and again in August 2023, receiving $10,000 for the June 2023 sale and $200,000 for the August 2023 sale of the harvested logs. Each sale is made to a lumber mill who presents the small harvester with a reseller permit.
Result: The small harvester must register with the department in August when the receipts from the timber harvesting business exceed the gross revenue threshold in WAC 458-20-101, assuming the other registration conditions in that rule have not otherwise been met prior to August.
An excise tax return must be filed according to the tax reporting frequency assigned by the department (e.g., monthly, quarterly, or annually). The small harvester must report $210,000 in gross revenue under extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products B&O tax classifications. The small harvester taxpayer is eligible to report a $100,000 "small harvester" B&O tax deduction from the measure of all three B&O tax classifications. In addition, the taxpayer is eligible to take the MATC for both the extracting timber and manufacturing of timber or wood products. As a result, the wholesaling of timber or wood products B&O tax is due.
Example 20. Registered small harvester.
Facts: RRR Construction Company (RRR) is primarily in the business of commercial building construction and is currently registered with the department. In July 2023, RRR generates $250,000 in gross wholesaling income from its construction activities. RRR is also a small harvester as defined in RCW 84.33.035. RRR's timber harvesting operation includes extracting standing timber from its own land and processing the extracted timber into logs before wholesaling the logs to third-party mills. In July 2023, RRR receives $60,000 from the sale of logs from its timber harvesting operation to a local mill for resale. Year to date, RRR has not had any other sales of harvested timber or wood products.
Results: RRR is required to report $250,000 in gross revenue under the wholesaling B&O tax classification for its construction activities.
RRR (as a smaller harvester and a manufacturer) is required to report $60,000 in proceeds from the sale of logs under three B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. RRR is eligible for a $60,000 "small harvester" B&O tax deduction from all three B&O tax classifications. RRR is eligible for additional "small harvester" B&O tax deductions up to $40,000 ($100,000-$60,000) for the remainder of the reporting calendar year.
Example 21. Unregistered small harvester (deduction carryover).
Facts: Don Janson, a small harvester not otherwise registered with the department for B&O tax purposes contracts with NNN Logging Company (NNN) to extract standing timber from real property owned by Mr. Janson and process the extracted timber into logs. Mr. Janson retains ownership of the timber until it is sold. Under the agreement, Mr. Janson receives 60 percent and the logging company receives 40 percent of the log sale proceeds.
In September 2021, the harvested timber is sold at wholesale for $250,000, $150,000 (60 percent of $250,000) of which is received by Mr. Janson.
Result: Mr. Janson (as a smaller harvester and a manufacturer) is required to register with the department for B&O tax purposes and must report the entire $250,000 in sales proceeds under the following B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. Mr. Janson is not allowed to deduct the $100,000 (40 percent of $250,000) Mr. Janson paid to NNN. However, Mr. Janson is eligible to take a $100,000 "small harvester" B&O tax deduction from the measure of the B&O tax classifications reported, reducing the B&O taxable income to $150,000. Assuming the sale occurred in Washington, Mr. Janson is also eligible to claim the MATC for both the extracting timber and manufacturing of timber or wood products. Mr. Janson is subject to B&O tax under the wholesaling of timber or wood products classification.
NNN (as a logging contractor for Mr. Janson) must report the $100,000 gross income received from its extracting standing timber and processing for hire activities under the following B&O tax classifications: Extracting for hire timber and processing for hire timber products. NNN may also be subject to other taxes, depending on the activities NNN conducted.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.45.150. WSR 24-14-101, § 458-20-13501, filed 7/1/24, effective 8/1/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.16.020. WSR 20-02-058, § 458-20-13501, filed 12/24/19, effective 1/24/20; WSR 16-02-063, § 458-20-13501, filed 1/4/16, effective 2/4/16. Statutory Authority: RCW 82.32.300. WSR 01-13-042, § 458-20-13501, filed 6/14/01, effective 7/15/01.]


PDF458-20-136

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 (M&E) 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. Effective June 12, 2014, chapter 140, Laws of 2014 (SB 6505), machinery and equipment used directly in the manufacturing, research and development, or testing of cannabis, including related services, are not eligible for the M&E retail sales and use tax exemption. For purposes of this rule, "cannabis" is any product with a THC concentration greater than .03 percent. Persons engaging in both extracting and manufacturing activities should also refer to WAC 458-20-135 (Extracting natural products) and 458-20-13501 (Timber harvest operations).
(2) Manufacturing activities. RCW 82.04.120 explains that the phrase "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 articles of tangible personal property is produced for sale or commercial or industrial use. The phrase includes the production or fabrication of special-made or custom-made articles.
(a) "To manufacture" includes, but is not limited to:
(i) The production or fabrication of dental appliances, devices, restorations, substitutes, or other dental laboratory products by a dental laboratory or dental technician;
(ii) The cutting, delimbing, and measuring of felled, cut, or taken trees;
(iii) The crushing and/or blending of rock, sand, stone, gravel, or ore;
(iv) The cleaning (removal of the head, fins, or viscera) of fish; and
(v) The production of compressed or liquefied natural gas for use as transportation fuel as defined in RCW 82.16.310.
(b) "To manufacture" does not include:
(i) The conditioning of seed for use in planting;
(ii) The cubing of hay or alfalfa;
(iii) The growing, harvesting, or producing of agricultural products;
(iv) The cutting, grading, or ice glazing of seafood which has been cooked, frozen, or canned outside this state;
(v) The packing of agricultural products, including sorting, washing, rinsing, grading, waxing, treating with fungicide, packaging, chilling, or placing in controlled atmospheric storage; and
(vi) The repairing and reconditioning of tangible personal property for others.
(3) Manufacturers and processors for hire. RCW 82.04.110 defines "manufacturer" to mean every person who, either directly or by contracting with others for the necessary labor or mechanical services, manufactures for sale or for commercial or industrial use from his or her own materials or ingredients any articles, substances, or commodities. However, a nonresident of the state of Washington who is the owner of materials processed for it in this state by a processor for hire is not deemed to be a manufacturer in this state because of that processing. Additionally, 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.
(a) The term "processor for hire" means a person who performs labor and mechanical services upon property 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 his or her own materials.
(b) If a particular activity is excluded from the definition of "to manufacture," a person performing the labor and mechanical services upon materials owned by another is not a processor for hire. For example, the cutting, grading, or ice glazing of seafood that has been cooked, frozen, or canned outside this state is excluded from the definition of "to manufacture." Because of this exclusion, a person who performs these activities on seafood belonging to others is not a "processor for hire."
(c) A person who produces aluminum master alloys, regardless of the portion of the aluminum provided by that person's customer, is considered a "processor for hire." RCW 82.04.110. For the purpose of this specific provision, the term "aluminum master alloy" means an alloy registered with the Aluminum Association as a grain refiner or a hardener alloy using the American National Standards Institute designating system H35.3.
(d) In some instances, a person furnishing the labor and mechanical services undertakes to produce an article, substance, or commodity from materials or ingredients furnished in part by the person and in part by the customer. Depending on the circumstances, this person will either be considered a manufacturer or a processor for hire.
(i) If the person furnishing the labor and mechanical services furnishes materials constituting less than 20 percent of the value of all of the materials or ingredients which become a part of the produced product, that person will be presumed to be processing for hire.
(ii) The person furnishing the labor and mechanical services will be presumed to be a manufacturer if the value of the materials or ingredients furnished by the person is equal to or greater than 20 percent of the total value of all materials or ingredients which become a part of the produced product.
(iii) If the person furnishing the labor and mechanical services supplies, sells, or furnishes to the customer, before processing, 20 percent or more in value of the materials or ingredients from which the product is produced, the person furnishing the labor and mechanical services will be deemed to be the owner of the materials and considered a manufacturer.
(e) There are occasions where a manufacturing facility and ingredients used in the manufacturing process are owned by one person, while another person performs the actual manufacturing activity. The person operating the facility and performing the manufacturing activity is a processor for hire. The owner of the facility and ingredients is the manufacturer.
(4) Tax-reporting responsibilities for income received by manufacturers and processors for hire. Persons who manufacture products in this state are subject to the manufacturing B&O tax upon the value of the products, including by-products (see also WAC 458-20-112 regarding "value of products"), unless the activity qualifies for one of the special tax rates discussed in subsection (5) of this rule. See also WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property).
For example, Corporation A stains door panels that it purchases. Corporation A also affixes hinges, guide wheels, and pivots to unstained door panels. Corporation B shears steel sheets to dimension, and slits steel coils to customer's requirements. The resulting products are sold and delivered to out-of-state customers. Corporation A and Corporation B are subject to the manufacturing B&O tax upon the value of these manufactured products. These manufacturing activities take place in Washington, even though the manufactured product is delivered out-of-state. A credit may be available if a gross receipts tax is paid on the selling activity to another state. (See also WAC 458-20-19301 on multiple activities tax credits.)
(a) Manufacturers who sell their products at retail or wholesale in this state are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases, the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) classifications of the B&O tax, and claim a multiple activities tax credit (MATC). See also WAC 458-20-19301 for a more detailed explanation of the MATC reporting requirements. Manufacturers are making wholesale sales when their buyer will resell the tangible personal property without intervening use, or includes the tangible personal property as a component or ingredient in another product for sale by the buyer to another customer. Sellers in these wholesale sales must obtain a reseller permit from the buyer. Reseller permits replaced resale certificates effective January 1, 2010. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014, whichever first occurs. For additional information on reseller permits see WAC 458-20-102.
For example on January 1, 2010, Raw Fish Incorporated purchases raw fish that it manufactures into fillets. The resulting product is then sold at wholesale to its customer, Fish Distributor LLC. Fish Distributor LLC resells the fillets without intervening use to its customers and provides Raw Fish Incorporated with a copy of its reseller permit. Raw Fish Incorporated is subject to both the manufacturing raw seafood B&O tax upon the value of the manufactured product, and the wholesaling B&O tax upon the gross proceeds of sale. Raw Fish Incorporated is entitled to claim a MATC.
(b) Processors for hire are subject to the processing for hire B&O tax upon the total charge made for those services, including any charge for materials furnished by the processor. The B&O tax applies whether the resulting product is delivered to the customer within or outside this state.
(c) The measure of tax for manufacturers and processors for hire with respect to "cost-plus" or "time and material" contracts includes the amount of profit or fee above cost received, plus the reimbursements or prepayments received on account of materials and supplies, labor costs, taxes paid, payments made to subcontractors, and all other costs and expenses incurred by the manufacturer or processor for hire.
(d) A manufacturing B&O tax exemption is available for the cleaning of fish, 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. Processors for hire performing these cleaning activities remain subject to the processing for hire B&O tax.
(e) Amounts received by hop growers or dealers for hops shipped outside the state of Washington for first use, even though the hops have been processed into extract, pellets, or powder in this state are exempt from the B&O tax. RCW 82.04.337. However, a processor for hire with respect to hops is not exempt on amounts charged for processing these products.
(f) Manufacturers and processors for hire 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). A manufacturer or processor for hire making wholesale sales must obtain a reseller permit from the buyer. Reseller permits replaced resale certificates effective January 1, 2010. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014, whichever first occurs. For additional information on reseller permits see WAC 458-20-102.
(g) Effective July 1, 2015, a gas distribution business manufacturing or selling liquefied natural gas or compressed natural gas for use as transportation fuel is exempt from state and local public utility taxes. The sale of natural gas from which the buyer manufactures compressed natural gas or liquefied natural gas, where the compressed natural gas or liquefied natural gas is to be sold or used as transportation fuel, is also exempt from state and local public utility taxes. The gross receipts from these activities are subject to the manufacturing, wholesaling, or retailing B&O tax and local taxes, as applicable. The retail sale of compressed natural gas or liquefied natural gas is also subject to fuel taxes, if it is used in a motor vehicle. If the fuel is not used in a motor vehicle (off-road, boat, etc.) the fuel is subject to retail sales or use tax.
(5) Manufacturing - Special tax rates/classifications. RCW 82.04.260 provides several special B&O tax rates/classifications for manufacturers engaging in certain manufacturing activities. In all such cases the principles set forth in subsection (4) of this rule concerning multiple activities and the resulting credit provisions are also applicable.
Special tax classifications/rates are provided for the activities of:
(a) Manufacturing wheat into flour, barley into pearl barley, soybeans into soybean oil, canola into canola oil, meal, or canola by-products, or sunflower seeds into sunflower oil;
(b) Splitting or processing dried peas;
(c) Manufacturing seafood products, which remain in a raw, raw frozen, or raw salted state;
(d) Manufacturing by canning, preserving, freezing, processing, or dehydrating fresh fruits and vegetables ("fruits" and "vegetables" does not include cannabis);
(e) Slaughtering, breaking, and/or processing perishable meat products and/or selling the same at wholesale and not at retail; and
(f) Manufacturing nuclear fuel assemblies.
(6) Repairing and/or refurbishing distinguished from manufacturing. The term "to manufacture" does not include the repair or refurbishing of tangible personal property. To be considered "manufacturing," the application of labor or skill to materials must result in a "new, different, or useful article." If the activity merely restores an existing article of tangible personal property to its original utility, the activity is considered a repair or refurbishing of that property. (See WAC 458-20-173 for tax-reporting information on repairs.)
(a) In making a determination whether an activity is manufacturing as opposed to a repair or reconditioning activity, consideration is given to a variety of factors including, but not limited to:
(i) Whether the activity merely restores or prolongs the useful life of the article;
(ii) Whether the activity significantly enhances the article's basic qualities, properties, or functional nature; and
(iii) Whether the activity is so extensive that a new, different, or useful article results.
(b) The following example illustrates the distinction between a manufacturing activity resulting in a new, different, or useful article, and the mere repair or refurbishment of an existing article. This example should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances. In cases of uncertainty, persons should contact the department for a ruling.
(i) Corporation rebuilds engine cores. When received, each core is assigned an individual identification number and disassembled. The cylinder head, connecting rods, crankshaft, valves, springs, nuts, and bolts are all removed and retained for reassembly into the same engine core. Unusable components are discarded. The block is then baked to burn off dirt and impurities, then blasted to remove any residue. The cylinder walls are rebored because of wear and tear. The retained components are cleaned, and if needed straightened and/or reground. Corporation then reassembles the cores, replacing the pistons, gaskets, timing gears, crankshaft bearings, and oil pumps with new parts. The components retained from the original engine core are incorporated only into that same core.
(ii) Corporation is under these circumstances not engaging in a manufacturing activity. The engine cores are restored to their original condition, albeit with a slightly larger displacement because of wear and tear. The cores have retained their original functional nature as they run with approximately the same efficiency and horsepower. The rebuilding of these cores is not so extensive as to result in a new, different, or useful article. Each engine core has retained its identity because all reusable components of the original core are reassembled in the same core. Corporation has taken an existing article and extended its useful life.
(7) Combining and/or assembly of products to achieve a special purpose as manufacturing. The physical assembly of products from various components is manufacturing because it results in a "new, different, or useful" product, even if the cost of the assembly activity is minimal when compared with the cost of the components. For example, the bolting of a motor to a pump, whether bolted directly or by using a coupling, is a manufacturing activity. Once physically joined, the resulting product is capable of performing a pumping function that the separate components cannot.
(a) In some cases the assembly may consist solely of combining parts from various suppliers to create an entirely different product that is sold as a kit for assembly by the purchaser. In these situations, the manufacturing B&O tax applies even if the person combining the parts does not completely assemble the components, but sells them as a package. For example, a person who purchases component parts from various suppliers to create a wheelbarrow, which will be sold in a "kit" or "knock-down" condition with some assembly required by purchaser, is a manufacturer. The purchaser of the wheelbarrow kit is not a manufacturer, however, even though the purchaser must attach the handles and wheel.
(b) The department considers various factors in determining if a person combining various items into a single package is engaged in a manufacturing activity. Any single one of the following factors is not considered conclusive evidence of a manufacturing activity, though the presence of one or more of these factors raises a presumption that a manufacturing activity is being performed:
(i) The ingredients are purchased from various suppliers;
(ii) The person combining the ingredients attaches his or her own label to the resulting product;
(iii) The ingredients are purchased in bulk and broken down to smaller sizes;
(iv) The combined product is marketed at a substantially different value from the selling price of the individual components; and
(v) The person combining the items does not sell the individual items except within the package.
(c) The following examples should be used only as a general guide. The specific facts and circumstances of each situation must be carefully examined to determine if the combining of ingredients is a manufacturing activity or merely a packaging or marketing activity. In cases of uncertainty, persons combining items into special purpose packages should contact the department for a ruling.
(i) Combining prepackaged food products and gift items into a wicker basket for sale as a gift basket is not a manufacturing activity when:
(A) The products combined in the basket retain their original packaging;
(B) The person does not attach his or her own labels to the components or the combined basket;
(C) The person maintains an inventory for sale of the individual components and does sell these items in this manner as well as the combined baskets.
(ii) Combining bulk food products and gift items into a wicker basket for sale as a gift basket is a manufacturing activity when:
(A) The bulk food products purchased by the taxpayer are broken into smaller quantities; and
(B) The taxpayer attaches its own labels to the combined basket.
(iii) Combining components into a kit for sale is not a manufacturing activity when:
(A) All components are conceived, designed, and specifically manufactured by and at the person's direction to be used with each other;
(B) The person's label is attached to or imprinted upon the components by supplier;
(C) The person packages the components with no further assembly, connection, reconfiguration, change, or processing.
(8) Tax liability with respect to purchases of equipment or supplies and property manufactured for commercial or industrial use. The retail sales tax applies to purchases of tangible personal property by manufacturers and processors for hire unless the property becomes an ingredient or component part of a new article produced for sale, or is a chemical used in the processing of an article for sale. 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. Refer to WAC 458-20-113 for additional information about what qualifies as an ingredient or component or a chemical used in processing.
(a) RCW 82.08.02565 and 82.12.02565 provide a retail sales and use tax exemption for certain machinery and equipment used by manufacturers and/or processors for hire. Effective June 12, 2014, machinery and equipment used directly in the manufacturing, research and development, or testing of cannabis, including related services, are not eligible for the M&E retail sales and use tax exemption. Refer to WAC 458-20-13601 for additional information regarding how these exemptions apply.
(b) Persons manufacturing tangible personal property for commercial or industrial use are subject to both the manufacturing B&O and use taxes upon the value of the property manufactured, unless a specific exemption applies. (See also WAC 458-20-134 on commercial or industrial use.) Persons who also extract the product used as an ingredient in a manufacturing process should refer to WAC 458-20-135 for additional information regarding their tax-reporting responsibilities.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-24-096, § 458-20-136, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.120, 82.04.213, 82.04.260, 82.04.4266, 82.08.02565, 82.12.022, and 82.12.02565. WSR 15-01-005, § 458-20-136, filed 12/4/14, effective 1/4/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-136, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 00-11-096, § 458-20-136, filed 5/17/00, effective 6/17/00; WSR 88-21-014 (Order 88-7), § 458-20-136, filed 10/7/88; WSR 86-20-027 (Order 86-17), § 458-20-136, filed 9/23/86; WSR 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. WSR 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.]


PDF458-20-13601

Manufacturers and processors for hire—Sales and use tax exemptions for machinery and equipment.

(1) Introduction.
(a) This rule explains the retail sales and use tax exemptions 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 (M&E) 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 sales and use tax deferral for manufacturing and research/development activities in high unemployment counties, 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.
(b) Effective June 12, 2014, the retail sales and use tax exemptions provided by RCW 82.08.02565 and 82.12.02565 do not apply to:
(i) Sales of machinery and equipment used directly in the manufacturing, research and development, or testing of cannabis; and
(ii) Sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving such machinery and equipment.
(c) Effective August 1, 2015, an ineligible person, as defined in subsection (2)(e) of this rule, does not qualify for the retail sales and use tax exemptions provided by RCW 82.08.02565 and 82.12.02565, unless the taxpayer first used the qualifying machinery and equipment in this state prior to August 1, 2015.
(2) Definitions. For purposes of the manufacturing machinery and equipment tax exemptions, the following definitions apply:
(a) Affiliated group. "Affiliated group" means a group of two or more entities that are either:
(i) Affiliated as defined in RCW 82.32.655; or
(ii) Permitted to file a consolidated return for federal income tax purposes.
(b) Cogeneration. "Cogeneration" means the simultaneous generation of electrical energy and low-grade heat from the same fuel. See RCW 82.08.02565.
(c) Device. "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.
(d) Industrial fixture. "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 at the time of attachment are classified as real property, not personal property. Examples of "industrial fixtures" are fuel oil lines, boilers, craneways, and certain concrete slabs.
(e) Ineligible person. "Ineligible person" means all members of an affiliated group if all of the following apply:
(i) At least one member of the affiliated group was registered with the department of revenue (department) to do business in Washington state on or before July 1, 1981;
(ii) As of August 1, 2015, the combined employment in this state of the affiliated group exceeds 40,000 full-time and part-time employees, based on data reported to the employment security department by the affiliated group; and
(iii) The business activities of the affiliated group primarily include development, sales, and licensing of computer software and services.
(f) Machinery and equipment (M&E). "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. M&E includes pollution control equipment installed and used in a qualifying operation to prevent air pollution, water pollution, or contamination that might otherwise result from the operation.
(g) Manufacturer. "Manufacturer" has the same meaning as provided in chapter 82.04 RCW. Manufacturer also includes a person that prints newspapers or other materials; and effective August 1, 2015, a person engaged in the development of prewritten computer software that is not transferred to purchasers by means of tangible storage media. RCW 82.08.02565, chapter 5, Laws of 2015 3rd sp. sess. (ESSB 6138).
(h) Manufacturing. "Manufacturing" has the same meaning as "to manufacture" in chapter 82.04 RCW.
(i) Manufacturing operation. "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 manufacturing operation is defined in terms of a process occurring at a location. To be eligible as a qualifying use of M&E, the use must take place within the manufacturing operation, unless specifically exempted by law. Storage of raw material or other tangible personal property, packaging of tangible personal property, and other activities that potentially qualify under the "used directly" criterion, and that do not constitute manufacturing in and of themselves, are not within the scope of the exemption unless they take place at a manufacturing site. The statute specifically allows testing to occur away from the site.
The term "manufacturing operation" 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" if the activity in which the person is engaged is manufacturing. Rock crushing equipment that deposits material onto a roadway is not used in a manufacturing operation because this is a part of the constructing activity, not a manufacturing activity. Likewise, a concrete mixer used at a construction site is not used in a manufacturing operation because the activity is constructing, not manufacturing. Other portable equipment used in nonmanufacturing activities, such as continuous gutter trucks or trucks designed to deliver and combine aggregate, or specialized carpentry tools, do not qualify for the same reasons.
(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 an article, substance, or commodity for sale.
(j) Cannabis. "Cannabis" is any product with a THC concentration greater than .3 percent.
(k) Processor for hire. "Processor for hire" has the same meaning as used in chapter 82.04 RCW and as explained in WAC 458-20-136 Manufacturing, processing for hire, fabricating.
(l) Qualifying operation. "Qualifying operation" means a manufacturing operation, a research and development operation, or a testing operation.
(m) Research and development operation. "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.
(n) Sale. "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.
(o) Site. "Site" means the location at which the manufacturing or testing takes place.
(p) Support facility. "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.
(q) Tangible personal property. "Tangible personal property" has its ordinary meaning.
(r) Testing. "Testing" means activities performed to establish or determine the properties, qualities, and limitations of tangible personal property.
(s) Testing operation. "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. The testing operation is defined in terms of a process occurring at a location. To be eligible as a qualifying use of M&E, the use must take place within the testing operation, unless specifically excepted by law.
(3) Retail sales and use tax exemptions. The M&E exemptions provide retail sales and use tax exemptions for machinery and equipment used directly in a manufacturing operation or research and development operation, except for such sales or use relating to cannabis effective June 12, 2014. Sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving qualifying machinery and equipment are also exempt from sales tax, except for such sales or charges relating to cannabis effective June 12, 2014. However, because the exemption is limited to items with a useful life of one year or more, some charges for repair, labor, services, and replacement parts may not be eligible for the exemption. In the case of labor and service charges that cover both qualifying and nonqualifying repair and replacement parts, the labor and services charges are presumed to be exempt. If all of the parts are nonqualifying, the labor and service charge is not exempt, unless the parts are incidental to the service being performed, such as cleaning, calibrating, and adjusting qualifying machinery and equipment.
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, with the exception of such testing relating to cannabis effective June 12, 2014.
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 certificates are valid for as long as the buyer and seller have a recurring business relationship. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months. RCW 82.08.050 (7)(c).
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.
A copy of an M&E certificate form may be obtained from the department's website at dor.wa.gov, or by contacting the department's taxpayer services division at:
Taxpayer Services
Department of Revenue
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 on 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. For additional information on use tax see chapter 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 the use tax directly to the department unless the purchase and/or use is exempt from the retail sales and/or use taxes. A qualifying person using eligible machinery and equipment in Washington in a qualifying manner is exempt from the use tax. If an item of machinery and equipment that was eligible for use tax or sales tax exemption fails to overcome the majority use threshold or is entirely put to use in a nonqualifying manner, use tax is due on the fair market value at the time the item was put to nonqualifying use. See subsection (9) of this rule for an explanation of the majority use threshold.
(4) 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 (excluding cannabis), and who, for the item in question, meets the used directly test and overcomes the majority use threshold. (See subsection (8) of this rule for a discussion of the "used directly" criterion and see subsection (9) of this rule for an explanation of the majority use threshold.) However, for research and development operations, there is no requirement that the operation produce tangible personal property for sale. 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. For example, a person who is a processor for hire but who is manufacturing with regard to tangible personal property that will be used by the manufacturer, rather than sold by the manufacturer, is not eligible. For additional information on manufacturing, processing for hire, or fabricating, see WAC 458-20-136 and RCW 82.04.110. Persons who engage in testing for manufacturers or processors for hire are eligible for the exemption. To be eligible for the exemption, the taxpayer need not be a manufacturer or processor for hire in the state of Washington, but must meet the definition of manufacturer provided in subsection (2)(g) of this rule.
(5) What is eligible for the exemption? Machinery and equipment used directly in a qualifying operation by a qualifying person is eligible for the exemption, subject to overcoming the majority use threshold.
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 qualifying operation to prevent air pollution, water pollution, or contamination that might otherwise result from the operation.
(6) What is not eligible for the exemption? In addition to items that are not eligible because they do not meet the used directly test or fail to overcome the majority use threshold, the following four categories of property are statutorily excluded from eligibility:
(a) Hand-powered tools. Screw drivers, hammers, clamps, tape measures, and wrenches are examples of hand-powered tools. Electric powered, including cordless tools, are not hand-powered tools, nor are calipers, plugs used in measuring, or calculators.
(b) Property with a useful life of less than one year. All eligible machinery and equipment must satisfy the useful life criterion, 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 one year or more, such as certain sawmill blades, are eligible. See subsection (7) of this rule for thresholds to determine useful life.
(c) Buildings. 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 or tangible personal property. The building itself is not eligible, however some of its components might be eligible for the exemption. 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 and support facilities does not affect eligibility for the exemption.
(d) Building fixtures. 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. Fixtures that are integral to the manufacturing operation might be eligible, depending on whether the item meets the other requirements for eligibility, such as the used directly test.
(7) The "useful life" threshold. RCW 82.08.02565 has a per se exception for "property with a useful life of less than one year." Property that meets this description is not eligible for the M&E exemption. The useful life threshold identifies items that do not qualify for the exemption, such as supplies, consumables, and other classes of items that are not expected or intended to last a year or more. For example, tangible personal property that is acquired for a one-time use and is discarded after use, such as a mold or a form, has a useful life of less than one year and is not eligible. If it is clear from taxpayer records or practice that an item is used for at least one year, the item is eligible, regardless of the answers to the four threshold questions. A taxpayer may work directly with the department to establish recordkeeping methods that are tailored to the specific circumstances of the taxpayer. The following steps should be used to determine whether an item meets the "useful life" threshold. The series of questions progress from simple documentation to complex documentation. To substantiate qualification under any step, a taxpayer must maintain adequate records or be able to establish by demonstrating through practice or routine that the threshold is overcome. 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 and does not have a single one-time use or is not discarded during the first year, useful life should be determined by answering the following questions for an individual piece of machinery and equipment:
(a) Is the machinery and equipment 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.
(8) 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 of these descriptions. Examples of items that are not used directly in a qualifying operation are cafeteria furniture, safety equipment not part of qualifying M&E, 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 on or interacts with. It acts on or interacts with an item of tangible personal property. Examples include drill presses, concrete 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 criterion if:
(i) They direct or control machinery or equipment that acts on or interacts with tangible personal property; or
(ii) If they act on or interact with an item of tangible personal property.
(b) Conveys, transports, handles, or temporarily stores. It conveys, transports, handles, or temporarily stores an item of tangible personal property at the manufacturing site or the testing site. Examples include wheelbarrows, handcarts, storage racks, forklifts, tanks, vats, robotic arms, piping, and concrete storage pads. Floor space in buildings does not qualify under this criterion. Also not eligible under this criterion 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. It 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 criterion. Machinery and equipment used to take readings or measurements is eligible under this criterion.
(d) Provides physical support. It provides physical support for or access to tangible personal property. Examples include 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 or doors, is not eligible under this criterion.
(e) Produces power or lubricates. It produces power for or lubricates machinery and equipment. A generator providing power to a sander is an example of machinery and equipment that produces such power. An electrical generating plant that provides power for a building is not eligible under this criterion. Lubricating devices, such as hoses, oil guns, pumps, and meters, whether or not attached to machinery and equipment, are eligible under this criterion.
(f) Produces another item. It produces another item of tangible personal property for use in the manufacturing operation, testing operation, or research and development operation. Examples include machinery and equipment that make dies, jigs, or molds, and printers that produce camera-ready images.
(g) Packs. It places tangible personal property in the container, package, or wrapping in which the tangible personal property is normally sold or transported.
(h) Is integral to research and development. It is integral to "research and development" as it is defined in RCW 82.63.010.
(9) The majority use threshold.
(a) M&E used both in a qualifying and nonqualifying manner. Machinery and equipment used both directly in a qualifying operation and also in a nonqualifying manner is eligible for the exemption only if the qualifying use satisfies the majority use requirement. Examples of situations in which an item of machinery and equipment is used for qualifying and nonqualifying purposes include: The use of machinery and equipment in manufacturing and repair activities, such as using a power saw to make cabinets in a shop versus using it to make cabinets at a customer location; the use of machinery and equipment in manufacturing and constructing activities, such as using a forklift to move finished sheet rock at the manufacturing site versus using it to unload sheet rock at a customer location; and the use of machinery and equipment in manufacturing and transportation activities, such as using a mixer truck to make concrete at a manufacturing site versus using it to deliver concrete to a customer. Majority use can be expressed as a percentage, with the minimum required amount of qualifying use being greater than 50 percent compared to overall use. To determine whether the majority use requirement has been satisfied, the person claiming the exemption must retain records documenting the measurement used to substantiate a claim for exemption or, if time, value, or volume is not the basis for measurement, be able to establish by demonstrating through practice or routine that the requirement is satisfied. Majority use is measured by looking at the use of an item during a calendar year using any of the following:
(i) Time. Time is measured using hours, days, or other unit of time, with qualifying use of the M&E the numerator, and total time used the denominator. Suitable records for time measurement include employee time sheets or equipment time use logs.
(ii) Value. Value means the value to the person, measured by revenue if both the qualifying and nonqualifying uses produce revenue. Value is measured using gross revenue, with revenue from qualifying use of the M&E the numerator, and total revenue from use of the M&E the denominator. If there is no revenue associated with the use of the M&E, such as in-house accounting use of a computer system, the value basis may not be used. Suitable records for value measurement include taxpayer sales journals, ledgers, account books, invoices, and other summary records.
(iii) Volume. Volume is measured using amount of product, with volume from qualifying use of the M&E the numerator and total volume from use of the M&E the denominator. Suitable records for volume measurement include production numbers, tonnage, and dimensions.
(iv) Other comparable measurement for comparison. The department may agree to allow a taxpayer to use another measure for comparison, provided that the method results in a comparison between qualifying and nonqualifying uses. For example, if work patterns or routines demonstrate typical behavior, the taxpayer with the department's approval can satisfy the majority use test using work site surveys as proof.
(b) Bundling similar M&E into classes. Each piece of M&E does not require a separate record if the taxpayer can establish that it is reasonable to bundle M&E into classes. Classes may be created only from similar pieces of machinery and equipment and only if the uses of the pieces are the same. For example, forklifts of various sizes and models can be bundled together if the forklifts are doing the same work, as in moving wrapped product from the assembly line to a storage area. An example of when not to bundle classes of M&E for purposes of the majority use threshold is the use of a computer that controls a machine through numerical control versus use of a computer that creates a camera ready page for printing.
(c) Industry-wide standards. Typically, whether the majority use threshold is met is decided on a case-by-case basis, looking at the specific manufacturing operation in which the item is being used. However, for purposes of applying the majority use threshold, the department may develop industry-wide standards. For instance, the aggregate industry uses concrete mixer trucks in a consistent manner across the industry. Based on a comparison of selling prices of the processed product picked up by the customer at the manufacturing site and delivery prices to a customer location, and taking into consideration the qualifying activity (interacting with tangible personal property) of the machinery and equipment compared to the nonqualifying activity (delivering the product) of the machinery and equipment, the department has determined that concrete trucks qualify under the majority use threshold. Only in those limited instances where it is apparent that the use of the concrete truck is atypical for the industry would the taxpayer be required to provide recordkeeping on the use of the truck to support the exemption.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-13601, filed 6/21/23, effective 7/22/23; WSR 22-24-096, § 458-20-13601, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-07-046, § 458-20-13601, filed 3/14/16, effective 4/14/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.120, 82.04.213, 82.04.260, 82.04.4266, 82.08.02565, 82.12.022, and 82.12.02565. WSR 15-01-005, § 458-20-13601, filed 12/4/14, effective 1/4/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.02565, and 82.12.02565. WSR 08-14-024, § 458-20-13601, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300. WSR 00-11-096, § 458-20-13601, filed 5/17/00, effective 6/17/00.]


PDF458-20-138

Personal services rendered to others.

The term "personal services," as used herein, refers generally to the activity of rendering services as distinct from making sales of tangible personal property or of services which have been defined in the law as "sales" or "sales at retail." (See RCW 82.04.040 and 82.04.050.)
The following are illustrative of persons performing personal services which are within the scope of this rule: Attorneys, doctors, dentists, architects, engineers, public accountants, public stenographers, barbers, beauty shop operators. (See also WAC 458-20-224.)
Business and Occupation Tax
Persons engaged in the business of rendering personal services to others are taxable under the service and other activities classification upon the gross income of such business.
There must be included within gross amounts reported for tax all fees for services rendered and all charges recovered for expenses incurred in connection therewith, such as transportation costs, hotel, restaurant, telephone and telegraph charges, etc.
Retail Sales Tax
The retail sales tax does not apply to the amount charged or received for the rendition of personal services to others, even though some tangible personal property in the form of materials and supplies is furnished or used in connection with such services.
Persons performing such services are consumers of all materials and supplies used in connection therewith and must pay the retail sales tax upon the purchase of such material and supplies.
If persons engaged in a personal service business sell articles of tangible personal property apart from the rendition of personal services, the retail sales tax must be collected upon the sale of such articles.
Revised June 1, 1970.
[Order ET 70-3, § 458-20-138 (Rule 138), filed 5/29/70, effective 7/1/70.]


PDF458-20-139

Trade shops—Printing plate makers, typesetters, and trade binderies.

The term "printing plate makers" includes, among others, photoengravers, electrotypers, stereotypers, and lithographic plate makers.
Business and Occupation Tax
Printing plate makers, typesetters and trade binderies (referred to in the trade as "trade shops") are primarily engaged in the business of altering or improving tangible personal property owned by them for sale or altering or improving tangible personal property owned by their customers. In either case the gross proceeds (including the value of any property exchanged by the customer in kind) from sales of, or services rendered to, plates, mats, engravings, type, etc., which are delivered in this state are taxable under retailing if the sale is to a "consumer" or wholesaling-all others if the sale is to one who will resell the property in the regular course of business without intervening "use." (See WAC 458-20-102A Resale certificates and WAC 458-20-102 Reseller permits.) Neither of these classifications is applicable however, if the article sold is delivered to an out-of-state customer at an out-of-state point or if an article is produced for commercial or industrial use (see WAC 458-20-134). In these cases tax is due under the manufacturing classification on the "value of products."
Retail Sales Tax
Sales to the printing industry and others of tangible personal property, or of services of altering or improving tangible personal property, by printing plate makers, typesetters, and trade binderies are sales at retail and subject to the retail sales tax unless the purchaser resells the article in the regular course of business without any intervening "use." For example, a trade shop must collect and account for the retail sales tax where a printing plate is sold to a printer who uses the plate to produce copy for a customer, even though he subsequently sells and delivers both the plate and the copy to the customer. In this situation the printer has made "intervening use" of the plate as a printing tool and is a "consumer" liable for payment of the retail sales tax to the trade shop.
Sales of plates, engravings, etc., to advertising agencies are retail sales and subject to the retail sales tax.
Sales by supply houses to trade shops of metal or other materials becoming a component part of an article produced for sale are not subject to the retail sales tax. As evidence of this, trade shops are required to furnish their vendors resale certificates for purchases made before January 1, 2010, or reseller permits for purchases made on or after January 1, 2010, to document the wholesale nature of any purchase as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). On the other hand, sales to trade shops of items for use such as machinery, equipment, tools, and other articles or materials, including chemicals which are used in the production of plates, mats, engravings, type, etc., are retail sales subject to the retail sales tax.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-139, filed 2/25/10, effective 3/28/10; Order ET 70-3, § 458-20-139 (Rule 139), filed 5/29/70, effective 7/1/70.]


PDF458-20-140

Photofinishers and photographers.

Business and Occupation Tax
Retailing. The gross proceeds of all sales taxable under the retail sales tax are taxable under the retailing classification.
Wholesaling. Taxable under the wholesaling classification upon the gross proceeds from sales for resale.
Manufacturing. Photofinishers who produce negatives, prints, or slides in Washington and who transfer or deliver such articles to points outside this state are subject to business tax under the manufacturing classification upon the value of products (see Rule 112) [WAC 458-20-112] and are not subject to tax under the retailing or wholesaling classification.
Processing for hire. Photofinishers who develop film for others and who make delivery of the film to points outside the state are subject to business tax under the processing for hire classification upon the total charge for the work done. It is immaterial that the customers are located outside the state or that the film was sent in from outside the state for processing.
Service. Taxable under the service and other activities classification upon gross income from sales to publishers of newspapers, magazines and other publications of the right to publish photographs.
Retail Sales Tax
Photofinishers. Photofinishers developing films and selling to consumers the prints made therefrom are making taxable retail sales, and the retail sales tax must be collected upon the full charge made to the customer. Photofinishers developing films and selling to other than consumers the prints made therefrom are sales for resale and not subject to the retail sales tax.
Sales by supply houses to photofinishers of paper upon which prints are made and of chemicals which are to be used in making the prints are sales for resale and are not taxable under the retail sales tax. Sales by supply houses to photofinishers of equipment and materials which do not become a component part of the prints are taxable under the retail sales tax.
Portrait and commercial photographers. Photographers who make negatives on special order and sell photographs to customers (other than dealers for resale) must collect the retail sales tax upon such sales.
Sales by supply houses to a portrait or commercial photographer of the paper upon which such photographs are printed are not taxable because such material becomes an ingredient of the final product sold for consumption. Sales of chemicals, such as developing agents, fixing solutions, etc., for use in such process are also nontaxable. However, sales to a photographer of materials and equipment used in processing, whenever such materials do not become a component part of the final photograph or are not chemicals used in processing are taxable under the retail sales tax.
Sales to consumers by photographers of pictures, frames, camera films and other articles are subject to the retail sales tax.
Sales by photographers of the right to publish photographs are primarily licenses to use and not sales of tangible personal property. Such sales are not subject to the retail sales tax.
Photographers tinting and coloring pictures or prints belonging to customers are making retail sales upon which the retail sales tax applies to the total charge made therefor. Sales of oil and water colors to a photographer for use in tinting and coloring pictures or prints belonging to a customer are sales for resale and are not subject to the retail sales tax.
[Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-140, filed 3/15/83; Order ET 70-3, § 458-20-140 (Rule 140), filed 5/29/70, effective 7/1/70.]


PDF458-20-141

Duplicating activities and mailing bureaus.

(1) Introduction. This rule discusses the business and occupation (B&O) tax and retail sales and use tax reporting responsibilities of persons who engage in duplicating activities or who provide mailing bureau services in Washington. Persons engaged in printing activities should refer to WAC 458-20-144 (Printing industry).
(2) Duplicating activities. Duplicating is the copying of typed, written, drawn, photographed, previously duplicated, or printed materials using a photographic process such as photocopying, color copying, or blueprinting.
(a) Sales of duplicated products. Income from the sale of photostats, photocopies, blueprint copies and other duplicated tangible personal property to consumers is subject to the retailing B&O tax. The measure of tax is the gross proceeds of sale. The seller is also responsible for collecting and remitting retail sales tax on the selling price when making sales to consumers, unless a specific exemption applies. The wholesaling B&O tax applies to the gross proceeds of sale when the buyer purchases the duplicated property for resale without intervening use. The seller must obtain a resale certificate from the buyer to document the wholesale nature of any sale as provided in WAC 458-20-102 (Resale certificates).
If the seller is also the manufacturer of the duplicated products, the seller may be eligible for a multiple activities tax credit. Refer to WAC 458-20-19301 (Multiple activities tax credits) for more information about the credit.
(b) Duplicating as a manufacturing activity. A person duplicating tangible personal property for sale or commercial or industrial use (the use of manufactured property as a consumer) is subject to the manufacturing B&O tax classification. For further information about manufacturing activities, refer to WAC 458-20-112 (Value of products), WAC 458-20-134 (Commercial or industrial use), and WAC 458-20-136 (Manufacturing, processing for hire, fabricating).
(c) Self-service copying. Some persons provide consumers with access to duplicating equipment to make their own copies (frequently referred to "self-service copying"). These customers are generally charged on a per page basis. The gross proceeds of sales made to consumers for self-service copying is subject to the retailing B&O tax. The seller is also responsible for collecting retail sales tax, unless a specific exemption applies. In such cases, the person providing access to duplicating equipment is not engaged in a manufacturing activity and charges for self-service copying are not subject to the manufacturing B&O tax.
(d) Potential litter tax liability. Chapter 82.19 RCW imposes a litter tax on manufacturers (including duplicators), wholesalers, and retailers of certain products. These products include, but are not limited to, newspapers, magazines, and household paper and paper products. Thus, persons who duplicate tangible personal property for sale or who provide facilities for self-service copying may incur a litter tax liability. The measure of the litter tax is the gross proceeds of sale. For further information about the litter tax, refer to chapter 82.19 RCW and WAC 458-20-243 (Litter tax).
(e) Purchases for resale. The purchase of tangible personal property for resale as tangible personal property or as a component or ingredient of duplicated property is a purchase at wholesale. Examples of items that may be purchased at wholesale include paper, ink, toner, and staples. Refer to WAC 458-20-113 (Ingredients or components, chemicals used in processing new articles for sale). Wholesale purchases are not subject to retail sales tax when the buyer provides a resale certificate to the seller as provided by WAC 458-20-102 (Resale certificates).
(f) Purchases subject to retail sales or use tax. A person who engages in duplicating activities and acquires tangible personal property for use as a consumer must pay retail sale tax (commonly referred to as "deferred sales tax") or use tax directly to the department when the seller fails to collect retail sales tax. Examples of purchases by a person engaged in duplicating activities that are subject to retail sales tax or use tax include photocopiers, cutting boards, computers, cash registers, and office furniture. For further information about the use tax, refer to WAC 458-20-178 (Use tax).
Persons who engage in duplicating products for sale should refer to WAC 458-20-13601 (Manufacturers and processors for hire—Sales and use tax exemption for machinery and equipment) for information about the sales and use tax exemptions for certain machinery and equipment used directly in a manufacturing operation.
(g) Example. Copy Company provides a public area with photocopying equipment and materials (paper, toner, and staples) to allow customers to make their own copies. Copy Company has a separate area where Copy Company employees make copies for customers. The income attributable to copies made both by the customers and by Copy Company employees is subject to the retailing B&O and retail sales taxes. The value of the copies made by Copy Company employees is also subject to the manufacturing B&O tax, and Copy Company may claim a multiple activities tax credit as described above in subsection (2)(a). Litter tax may be due as explained above in subsection (2)(d).
Copy Company may purchase the paper, toner, and staples that are used or provided in both areas at wholesale, if the seller receives a resale certificate. Retail sales or use tax applies to the purchase of photocopying equipment in both areas. The purchase and/or use of the equipment where Copy Company employees make copies may qualify for the machinery and equipment exemption described in WAC 458-20-13601.
(3) Mailing bureau services. Mailing bureaus, also referred to as mail houses, prepare for distribution mail pieces such as bulletins, form letters, advertising material, political publications, and flyers as directed by their customers. The customer may provide the mail pieces to be prepared for distribution or the mailing bureau itself may sell the material to the customer. Mailing bureaus that duplicate the material being prepared should also refer to subsection (2), above. Mailing bureaus that print the material being prepared should also refer to WAC 458-20-144.
(a) Mailing bureau activities. Activities conducted by mailing bureaus include, but are not limited to, picking up, addressing, labeling, binding, folding, enclosing, sealing, tabbing, and mailing the mail pieces. The mailing bureau generally charges the customer on a per-piece basis for each separate service provided plus the actual cost of any postage.
Charges for labor and services rendered in respect to altering, imprinting, or improving tangible personal property of or for consumers are retail sales. RCW 82.04.050 (2)(a). Thus, the retailing B&O tax applies to income received from consumers for services that include addressing, labeling, binding, folding, enclosing, sealing, and/or tabbing. Mailing bureau businesses are also responsible for collecting and remitting retail sales tax when making sales to consumers, unless a specific exemption applies.
(b) Measure of tax. The measure of the B&O and retail sales taxes is the gross proceeds of sale and selling price, respectively. These terms include all consideration paid by the buyer, however identified, without any deduction for costs of doing business, such as material, labor, and delivery costs. RCW 82.04.070 and 82.08.010.
(i) Postage. Charges for postage or other delivery costs are included in the measure of tax for both B&O tax and retail sales tax if the costs are part of the consideration paid by the customer. It is immaterial if the amounts charged for postage are stated or shown separately on the sales invoice or reflect actual mailing costs to the mailing bureau. Amounts charged for postage and other delivery costs are not included in the measure of tax only if the amounts are not part of the consideration paid by the customer.
(A) When is postage part of the consideration paid? Charges for postage costs are considered part of the consideration paid if the permit to use precancelled stamps, a postage meter, or an imprint account for bulk mailings is in the name of the mailing bureau. The mailing bureau is liable to the post office for payment and the customer's payment of such amounts represents a payment on the sale of tangible personal property or the services provided. For further information, refer to WAC 458-20-111 (Advances and reimbursements).
(B) When is postage not part of the consideration paid? Charges for postage are not considered part of the consideration paid if the permit to use precancelled stamps or a permit imprint account for bulk mailings is in the customer's name. The mailing bureau in these cases has no primary or secondary liability for payment of the postage costs. (Refer to WAC 458-20-111 for information about advances and reimbursements.)
(ii) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of any situation must be determined after a review of all facts and circumstances. For purposes of the following examples, sales invoices to the customer separately identify charges for postage.
(A) Example 1. Mailing Bureau receives mail pieces from Department Store to prepare and mail. Mailing Bureau advises Department Store of the estimated amount of postage. Department Store deposits an amount equal to the estimated cost of postage in its own permit imprint account. The estimated postage is not part of the total consideration paid because the Department Store is personally liable to the post office for postage. The total charge, excluding postage, is the consideration paid by Department Store and subject to tax.
(B) Example 2. Assume facts as described above in Example 1. The post office determines that the actual cost of postage exceeds the estimated amount deposited by Department Store in its permit imprint account. Post office transfers the additional amount for postage from Mailing Bureau's account. Mailing Bureau invoices Department Store for the additional amount. The additional amount for postage is not part of the consideration paid and is not included in the measure of tax because Mailing Bureau's liability for payment of the additional postage is limited to that of an agent.
(C) Example 3. Mailing Bureau receives from Political Candidate B mail pieces to prepare and mail. Mailing Bureau uses its own postage meter to apply metered postage. Postage is a part of the consideration paid by Candidate B and is included in the measure of tax.
(D) Example 4. Mailing Bureau receives prestamped mail pieces from Medical Clinic to prepare and mail. The mail pieces qualify for the lower bulk mail rates after Mailing Bureau prepares the mail pieces. The post office refunds the difference between the single piece rate and the bulk mail rate to Mailing Bureau. Mailing Bureau retains the amount due for services rendered and in turn remits the balance of the refunded postage to Medical Clinic. Postage is not a part of the consideration paid and is not included in the measure of tax.
(E) Example 5. Mailing Bureau prints, prepares, and mails mail pieces for Non-Profit Organization's fund-raising drive. Mailing Bureau applies metered postage using its own postage meter. The charge for postage is a part of the consideration paid and included in the measure of tax.
(F) Example 6. Mailing Bureau duplicates, prepares, and mails advertising for Restaurant. Mailing Bureau applies precancelled stamps that it purchases from the post office. The charge for postage is a part of the consideration paid and included in the measure of tax.
(G) Example 7. Mailing Bureau picks up mail pieces from Washington City to prepare and mail. Mailing Bureau applies metered postage using its own postage meter. The charge for postage is a part of the consideration paid by Washington City and included in the measure of tax.
(H) Example 8. Mailing Bureau prepares and mails advertising for Insurance Company. To apply postage, Mailing Bureau uses a postage meter leased by Insurance Company from a third party vendor. Insurance Company is liable to the third party vendor for payment of postage. The consideration does not include charges for postage.
(I) Example 9. Assume same facts as described in Example 8 above. The postage meter account contains insufficient funds required for mailing pieces. Mailing Bureau advances sufficient funds to Insurance Company's metering account. Mailing Bureau invoices Insurance Company for the additional amount. The consideration does not include postage because Mailing Bureau's liability for payment is limited to that of an agent.
(c) Retail sales tax exemptions. Certain sales tax exemptions may apply to the sale of tangible personal property or labor and services rendered to tangible personal property.
(i) Interstate sales of tangible personal property. The sale of tangible personal property is not subject to retail sales tax when the seller agrees to and does deliver the property outside the state. Refer to WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property) for further information about interstate sales.
(ii) Labor and services rendered in respect to tangible personal property of or for a nonresident. RCW 82.08.0265 provides a retail sales tax exemption for charges made for labor and services rendered in respect to any installing, repairing, cleaning, altering, or improving tangible personal property of or for a nonresident when the seller agrees to and does deliver the property to the purchaser at a point outside this state or delivers the property to a common or bona fide private carrier consigned to the purchaser at a point outside this state. For further information about this exemption, refer to WAC 458-20-173 (Installing, cleaning, repairing or otherwise altering or improving personal property of consumers).
(d) Purchases for resale. The purchase of tangible personal property for resale as tangible personal property or to become a component or ingredient of property upon which mailing bureau services will be performed is a purchase at wholesale. Examples of items that may be purchased at wholesale include paper, printing ink, envelopes, and staples. Wholesale purchases are not subject to retail sales tax when the buyer provides a resale certificate to the seller as provided by WAC 458-20-102 (Resale certificates). Refer to WAC 458-20-113 (Ingredients or components, chemicals used in processing new articles for sale) for further information regarding ingredients and components.
(e) Purchases subject to retail sales or use tax. A mailing bureau business that purchases, leases, or otherwise acquires tangible personal property for use as a consumer must pay retail sale tax (commonly referred to as "deferred sales tax") or use tax directly to the department when the seller fails to collect the retail sales tax. Examples of such property include photocopiers, cutting boards, computers, office furniture, and equipment to address, label, fold, seal, insert, meter, stamp, or sort. For further information about the use tax, refer to WAC 458-20-178 (Use tax).
(f) Purchases of mailing lists. Persons acquiring mailing lists are purchasing an information service regardless of the medium used to provide or transfer the information. Thus, the purchase of a mailing list by a mailing bureau business is not subject to either retail sales or use tax.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-03-053, § 458-20-141, filed 1/11/05, effective 7/1/05. Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-141, filed 3/15/83; Order ET 70-3, § 458-20-141 (Rule 141), filed 5/29/70, effective 7/1/70.]


PDF458-20-142

Photographic equipment and supplies.

Sales of tangible personal property by a photographic supply house to persons who purchase such property for personal consumption or use are subject to the retail sales tax. Illustrative of such sales are the following:
Photographic films, paper, chemicals, frames, repair parts for cameras and other equipment sold to customers for personal use.
X-ray materials and equipment sold to doctors, dentists, hospitals, dental and X-ray laboratories.
Equipment sold to photofinishers, portrait and commercial photographers and photoengravers such as cameras, lenses, backgrounds, graduates, trays, utensils, lamps, retouching dope, leads, pencils and sundry materials which do not become an ingredient or component part of the pictures produced for sale.
Photographic films, chemicals and equipment sold to a newspaper publisher.
Photographic films sold to portrait and commercial photographers for use in their business.
Sales of tangible personal property by a photographic supply house to persons who resell such property in the regular course of business or consume the same in producing for sale a new article of which such property is an ingredient or component, or a chemical used in processing the same, are not subject to the retail sales tax. Illustrative of such sales are the following:
Photographic films, photo mailers, cameras, art-corners, etc., sold to a dealer or photographer for the purpose of resale;
Photographic paper, mounts, frames, adhesives, card board, oil and water colors, India ink sold to a photofinisher, portrait or commercial photographer or photoengraver to be used in producing photographic prints for sale.
Envelopes, paper and twine sold to a photographer or photofinisher for use in delivering photographic prints sold.
Chemicals, such as developing agents, fixing agents, etc., sold to a photofinisher, portrait or commercial photographer or photoengraver, which chemicals are used in producing pictures for sale.
The retail sales tax applies upon the charge made for repairing cameras and other equipment, the retouching or alteration of photographs or films, when done for consumers.
[Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-142, filed 3/15/83; Order ET 70-3, § 458-20-142 (Rule 142), filed 5/29/70, effective 7/1/70.]


PDF458-20-143

Printers and publishers of newspapers, magazines, and periodicals.

(1) Introduction. This section explains the application of the business and occupation (B&O), retail sales, and use taxes to printers and/or publishers of newspapers, magazines, periodicals, and other printed materials. The department of revenue (department) has adopted other sections providing tax reporting information to persons printing, publishing, or selling these publications and other printed materials.
• Persons selling newspapers, magazines, and periodicals that are not printed and/or published by the seller should also refer to WAC 458-20-127;
• For information regarding the printing industry in general, see WAC 458-20-144;
• For information regarding the tax-reporting responsibilities of persons selling direct mail or engaging in business as a mailing bureau, see WAC 458-20-141;
• For information regarding the tax-reporting responsibilities of persons duplicating printed materials for others, see WAC 458-20-141;
• For information regarding potential litter tax liability, see WAC 458-20-243.
(2) Definitions. The following definitions apply throughout this section:
(a) "Newspaper."
(i) Effective July 1, 2008, "newspaper" means a publication issued regularly at stated intervals at least twice a month and printed on newsprint in tabloid or broadsheet format folded loosely together without stapling, glue, or any other binding of any kind, including any supplement of a printed newspaper; and an electronic version of a printed newspaper that:
• Shares content with the printed newspaper; and
• Is prominently identified by the same name as the printed newspaper or otherwise conspicuously indicates that it is a complement to the printed newspaper. See RCW 82.04.214.
(ii) Prior to July 1, 2008, "newspaper" means a publication issued regularly at stated intervals at least twice a month and printed on newsprint in tabloid or broadsheet format folded loosely together without stapling, glue, or any other binding of any kind.
(b) "Supplement" means a printed publication, including a magazine or advertising section, that is:
(i) Labeled and identified as part of the printed newspaper; and
(ii) Circulated or distributed:
• As an insert or attachment to the printed newspaper; or
• Separate and apart from the printed newspaper so long as the distribution is within the general circulation area of the newspaper.
(c) "Periodical or magazine" means a printed publication, other than a newspaper, issued regularly at stated interval at least once every three months, including any supplement or special edition of the publication.
(d) For purposes of this section, "other printed material" refers to printed materials other than newspapers, magazines, or periodicals.
(3) General tax guidance.
(a) Publishing newspapers. Effective July 1, 2009, publishers of newspapers are taxable under the publication of newspapers classification of the B&O tax upon the gross income (including advertising income) derived from publishing newspapers. See (d) of this subsection and RCW 82.04.260(13). Prior to July 1, 2009, publishers of newspapers are taxable under the printing and publishing classification of the B&O tax upon the gross income (including advertising income) derived from publishing newspapers.
Persons reporting income under the publication of newspapers classification of the B&O tax must file a complete annual tax performance report with the department. In addition, such persons must electronically file with the department all reports, returns, and any other forms. Refer to RCW 82.32.600 and WAC 458-20-267 for the specific guidelines and requirements.
Retail sales of newspapers, whether by publishers or others, are exempt from retail sales tax. See RCW 82.08.0253.
(b) Publishing periodicals or magazines. Publishers of periodicals or magazines are taxable under the printing and publishing classification of the B&O tax upon the gross income (including advertising income) derived from publishing periodicals or magazines. See (d) of this subsection and RCW 82.04.280(1).
Retail sales of printed magazines and periodicals are subject to retail sales tax. Magazines and periodicals transferred electronically to the end user are also subject to the retail sales tax regardless of how they are accessed. For more information on the sale of digital products, refer to RCW 82.04.050, 82.04.192, and 82.04.257.
(c) Publishing other printed materials. Retail and wholesale sales of other printed materials by persons who both print and publish the items, are taxable under the printing and publishing classification. Persons who publish but do not print other printed materials, are subject to:
• Either the wholesaling or retailing B&O tax, measured by gross sales of the other printed materials; and
• The service and other activities B&O tax, measured by the gross income received from advertising.
(d) Doing business inside and outside the state. RCW 82.04.460 requires that advertising income earned by printers and by publishers of newspapers, periodicals, and magazines derived from business activities performed within Washington be apportioned to this state for tax purposes. Refer to chapter 23 (E2SSB 6143), Laws of 2010 1st sp. sess. Part I for information on apportioning advertising income.
(e) Wholesale sales of printed materials. Sales of magazines, periodicals, and other printed materials by the publisher to newsstands, book stores, department stores, and others who resell such items are wholesale sales. Such sales are not subject to retail sales tax when the buyer provides a resale certificate (WAC 458-20-102A) for sales made before January 1, 2010, or a reseller permit (WAC 458-20-102) for sales made on or after January 1, 2010, to the seller.
(4) Sales to publishers.
(a) Sales to newspaper, magazine and periodical publishers of paper and printers ink which become a part of the publications sold, and sales by printers of printed publications to publishers for sale, are wholesale sales and are not subject to the retail sales tax when the buyer provides a resale certificate (WAC 458-20-102A) for sales made before January 1, 2010, or a reseller permit (WAC 458-20-102) for sales made on or after January 1, 2010, to the seller.
(b) With respect to community newspapers which are distributed free of charge, where the publisher has a contract with his advertisers to distribute the newspaper to the subscriber in consideration for the payments made by the advertisers, it will be construed that the publisher sells the newspaper to the advertiser, and, therefore, the retail sales tax will not apply with respect to the charge made by the printer to the publisher for printing the newspaper or with respect to the purchase of ink and paper when the publisher prints his own newspaper.
(c) Sales to newspaper, magazine or periodical publishers of equipment and of supplies and materials which do not become a part of the finished publication that is sold are subject to the retail sales tax unless specifically exempt (see subsection (5) of this section). This includes, among others, sales of fuel, furniture, lubricants, and office supplies.
(d) Sales to newspaper, magazine or periodical publishers of baseball bats, bicycles, dolls and other articles of tangible personal property which are to be distributed by the publisher as gifts, premiums or prizes are sales for consumption and subject to the retail sales tax.
(e) Sales by authors and artists to publishers of the right to publish scripts, paintings, illustrations and cartoons are mere licenses to use, not sales of tangible personal property and are not subject to the retail sales tax.
(5) Exemption for sales of computer equipment to printers and/or publishers. RCW 82.08.806 and 82.12.806 provide printers and publishers retail sales and use tax exemptions for computer equipment that is used primarily in the printing or publishing of any printed material. The exemption includes repair parts and replacement parts for such equipment and sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving the computer equipment. The exemption also includes maintenance agreements (service contracts), as defined in WAC 458-20-257, on such equipment. This exemption applies only to computer equipment not otherwise exempt under RCW 82.08.02565.
(6) Use tax. Publishers of newspapers, magazines and periodicals are subject to tax upon the value of articles printed or produced for use in conducting such business. Tax also applies to materials, supplies, and other items which do not become part of the finished publication or which are not resold. Where retail sales tax is not paid, the publisher must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. Deferred sales or use tax should be reported on the use tax line of the buyer's excise tax return. For detailed information about use tax, refer to WAC 458-20-178, Use tax.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-143, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-18-067, § 458-20-143, filed 8/30/10, effective 9/30/10. Statutory Authority: RCW 82.32.300. WSR 83-16-053 (Order ET 83-5), § 458-20-143, filed 8/1/83; WSR 83-07-034 (Order ET 83-17), § 458-20-143, filed 3/15/83; Order ET 70-4, § 458-20-143 (Rule 143), filed 6/12/70, effective 7/12/70.]


PDF458-20-144

Printing industry.

(1) Introduction. This rule discusses the taxability of the printing industry. Readers may want to refer to other rules for additional information, including:
(a) WAC 458-20-141 Duplicating activities and mailing bureaus;
(b) WAC 458-20-143 Printers and publishers of newspapers, magazines, and periodicals;
(c) WAC 458-20-102 Reseller permits;
(d) WAC 458-20-13601 Manufacturers and processors for hire—Sales and use tax exemptions for machinery and equipment.
(2) Definition. The phrase "printing industry" includes letterpress, offset-lithography, and gravure processes as well as multigraph, mimeograph, autotyping, addressographing and similar activities.
(3) Business and occupation (B&O) tax.
(a) Printers are subject to the B&O tax under the printing and publishing classification upon the gross income of the business.
(b) Printers of newspapers. From July 1, 2009, through December 31, 2023, printers of newspapers are taxable under the publication of newspapers classification of the B&O tax upon the gross income of the business.
Effective January 1, 2024, printers of newspapers are exempt from B&O tax under RCW 82.04.759 on the amounts received from engaging in printing a newspaper. The exemption amount is reduced by an amount equal to the value of any expenditure made by the person during the tax reporting period. For purpose of this section, "expenditure" has the meaning provided in RCW 42.17A.005.
Persons reporting income under the publication of newspapers classification of the B&O tax, or claiming the B&O tax exemption for income received from engaging in printing a newspaper on or after January 1, 2024, are required to electronically file an annual tax performance report with the department by May 31st of the following year. Refer to RCW 82.32.534 and WAC 458-20-267 (Annual tax performance reports for certain tax preferences) for the specific guidelines and requirements.
(c) Doing business inside and outside the state. RCW 82.04.460 requires that advertising income earned by printers derived from business activities performed within Washington be apportioned to this state for tax purposes. Refer to chapter 23 (E2SSB 6143), Laws of 2010 1st sp. sess. Part I for information on apportioning advertising income.
(4) Retail sales tax.
(a) The printing or imprinting of advertising circulars, books, briefs, envelopes, folders, posters, racing forms, tickets, and other printed matter, whether upon special order or upon materials furnished either directly or indirectly by the customer is a retail sale and subject to the retail sales tax, provided the customer either consumes, or distributes such articles free of charge, and does not resell such articles in the regular course of business. The retail sales tax is computed upon the total charge for printing, and the printer may not deduct the cost of labor, author's alterations, or other service charges in performing the printing, even though such charges may be stated or shown separately on invoices.
(b) Sales of printed matter to advertising agencies who purchase for their own use or for the use of their clients, and not for resale in the regular course of business, are sales for consumption and subject to the retail sales tax.
(c) Sales of tickets to theater owners, amusement operators, transportation companies and others are sales for consumption and subject to the retail sales tax. Such tickets are not resold by theater owners or amusement proprietors as tangible personal property but are used merely as a receipt to the patrons for payment and as evidence of the right to admission or transportation.
(d) Sales of school annuals and similar publications by printers to school districts, private schools or student organizations therein are subject to the retail sales tax.
(e) Sales by printers of books, envelopes, folders, posters, racing forms, stationery, tickets and other printed matter to dealers for resale in the regular course of business are wholesale sales. Such sales are not subject to retail sales tax when the seller obtains a reseller permit from the buyer to document the wholesale nature of the sale as provided in WAC 458-20-102 (Reseller permits).
(f) Charges made by bookbinders or printers for imprinting, binding or rebinding of materials for consumers are subject to the retail sales tax.
(g) Sales to printers of equipment, supplies and materials which do not become a component part or ingredient of the finished printed matter sold or which are put to "intervening use" before being resold are subject to the retail sales tax unless specifically exempt (see subsection (5) of this section). This includes, among others, sales of fuel, furniture, and lubricants.
(h) Sales to printers of paper stock and ink which become a part of the printed matter sold are sales for resale and are not subject to retail sales tax when the buyer provides a reseller permit (WAC 458-20-102) to the seller.
(5) Exemption for sales of computer equipment to printers. RCW 82.08.806 and 82.12.806 provide a retail sales and use tax exemption to a printer or publisher for the following:
(a) Purchase and use of computer equipment primarily used in printing or publishing of any printed materials. This includes for repair parts and replacement parts of such qualifying equipment. "Computer equipment" has the same meaning as defined in RCW 82.08.806 (3)(b). "Primarily" means greater than 50 percent as measured by time. RCW 82.08.806 (3)(d).
(b) Sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving the computer equipment.
These exemptions apply only to computer equipment not otherwise exempt under RCW 82.08.02565.
(6) Commissions and discounts.
(a) There is a general trade practice in the printing industry of making allowances to advertising agencies of a certain percentage of the gross charge made for printed matter ordered by the agency either in its own name or in the name of the advertiser. This allowance may be a "commission" or may be a "discount."
(b) A "commission" paid by a seller constitutes an expense of doing business and is not deductible from the measure of B&O tax or retail sales tax. On the other hand, a "discount" is a deduction from an established selling price allowed to buyers, and a bona fide discount is deductible under both B&O tax and retail sales tax.
(c) In order that there may be a definite understanding, printers, advertising agencies and advertisers are advised that tax liability in such cases is as follows:
(i) The allowance taken by an advertising agency will be deductible as a discount in the computation of the printer's liability only in the event that the printer bills the charge on a net basis; i.e., less the discount.
(ii) Where the printer bills the gross charge to the agency, and the advertiser pays the sales tax measured by the gross charge, no deduction will be allowed, irrespective of the fact that in payment of the account the printer actually receives from the agency the net amount only; i.e., the gross billing, less the commission retained by the agency. In all cases the commission received is taxable to the agency.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 24-12-008, § 458-20-144, filed 5/23/24, effective 6/23/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-144, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 11-04-010, § 458-20-144, filed 1/21/11, effective 2/21/11; WSR 06-04-033, § 458-20-144, filed 1/26/06, effective 2/26/06; WSR 05-03-052, § 458-20-144, filed 1/11/05, effective 7/1/05; Order ET 70-4, § 458-20-144 (Rule 144), filed 6/12/70, effective 7/12/70.]


PDF458-20-145

Sourcing retail sales for business and occupation tax and state and local retail sales tax—Sourcing of use tax for purchasers.

Part 1. General Information.
(101) Introduction. This rule explains how to determine where sales of tangible personal property, retail services, extended warranties, digital products, digital codes, and leases of tangible personal property are sourced for purposes of the business and occupation (B&O) tax and the combined state and local retail sales tax. See RCW 82.32.730. This rule also explains how to determine where use occurs for purposes of sourcing combined state and local use tax.
(102) Organization of rule. This rule is divided into five parts as follows:
Part 1. General information.
Part 2. General sourcing rules for most retail sales of tangible personal property, extended warranties, digital products, digital codes, and other retail services.
Part 3. Special sourcing rules for retail sales of certain goods and services.
Part 4. Sourcing rules for leases and rentals of tangible personal property.
Part 5. Sourcing rules for use tax purposes - Purchasers.
(103) Other rules may apply. Readers may also want to refer to the following rules:
(a) WAC 458-20-153 Funeral establishments.
(b) WAC 458-20-15502 Taxation of computer software.
(c) WAC 458-20-15503 Digital products.
(d) WAC 458-20-158 Florists and nurserymen.
(e) WAC 458-20-211 Leases or rentals of tangible personal property, bailments.
(f) WAC 458-20-245 Taxation of competitive telephone service, telecommunications service, and ancillary service.
(104) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances.
(105) Definitions. The following definitions apply to this rule:
(a) "Extended warranty" means an agreement for a specified duration to perform the replacement or repair of tangible personal property at no additional charge or at a reduced charge for tangible personal property, labor, or both, or to provide indemnification for the replacement or repair of tangible personal property, based on the occurrence of specified events. The term "extended warranty" does not include an agreement otherwise meeting the definition of extended warranty in this subsection, if no separate charge is made for the agreement and the value of the agreement is included in the sales price of the tangible personal property covered by the agreement. See RCW 82.04.050(7).
(b) "Florist" means a person whose primary business activity is the retail sale of fresh cut flowers, potted ornamental plants, floral arrangements, floral bouquets, wreaths, or any similar products, used for decorative and not landscaping purposes. See RCW 82.32.730 (9)(e). "Primary business activity" means more than 50 percent of a person's gross sales revenue is derived from the activity.
(c) "Lease" and "rental" mean any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration. See RCW 82.04.040 for a complete definition of the term "lease or rental."
(d) "Motor vehicle" generally means every vehicle that is self-propelled and every vehicle that is propelled by electric power obtained from overhead trolley wires, but not operated upon rails. See RCW 46.04.320. A vehicle is a device capable of being moved upon a public highway. See RCW 46.04.670.
(e) "Primary property location" means the property's physical address as provided by the lessee and kept in the lessor's records maintained in the ordinary course of business, provided use of this address does not constitute bad faith. The primary property location will not change merely by intermittent use of the leased property in different local jurisdictions, e.g., use of leased business property on business trips or service calls to multiple jurisdictions.
(f) "Purchaser" has the same meaning as in RCW 82.08.010 and 82.12.010, and includes the purchaser's agent.
(g) "Purchaser's donee" means a person, other than the purchaser, to whom the purchaser directs shipment of goods (e.g., a gift recipient).
(h) "Receive" and "receipt" mean taking possession of, or having dominion and control over, tangible personal property and making first use of services. "Receive" and "receipt" do not include possession by a shipping company on behalf of the purchaser. See RCW 82.32.730 (9)(f). The term also means making first use of digital automated services, or taking possession or making first use of digital goods or digital codes, whichever comes first.
(i) "Retail sale" has the same meaning as provided in RCW 82.04.050 and includes, but is not limited to, sales and leases of tangible personal property, sales of retail services, sales of extended warranties, digital goods, digital codes, and digital automated services.
(j) "Retail service" means those services described in RCW 82.04.050 as retail sales. This definition includes retail sales of labor and services rendered with respect to tangible personal property.
(k) "Semi-trailer" means every vehicle without motive power designed to be drawn by a vehicle, motor vehicle, or truck tractor and so constructed that an appreciable part of its weight and that of its load rests upon and is carried by such other vehicle, motor vehicle, or truck tractor. See RCW 46.04.530.
(l) "Shipping company" means a separate legal entity that ships, transports, or delivers tangible personal property on behalf of another, such as a common carrier, contract carrier, or private carrier either affiliated or unaffiliated with the seller or purchaser. A "shipping company" is not a division or branch of a seller or purchaser that carries out shipping duties for the seller or purchaser, respectively.
(m) "Source," "sourced," or "sourcing" refer to the location (as in a local taxing district, jurisdiction, or authority) where a sale or lease is deemed to occur and is subject to retail sales tax. It also, for purposes of this rule, refers to the location where "use" is deemed to occur for purposes of use tax paid by purchaser as a consumer. The department assigns location codes to identify the specific taxing locations that receive the local taxes. These location codes are used on tax returns to accurately identify the correct taxing location and tax rate.
Sellers and their agents are responsible for determining the appropriate tax rate for all their taxable retail sales in Washington. Sellers and their agents are also responsible for collecting from their purchasers the correct amount of tax due upon each sale and remitting that tax to the department.
(n) "Tangible personal property" means property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses and, for sales and use tax purposes, includes prewritten software. See RCW 82.08.010(7), 82.08.950, and 82.12.950 for more information.
(o) "Trailer" means every vehicle without motive power designed for being drawn by or used in conjunction with a motor vehicle constructed so that no appreciable part of its weight rests upon or is carried by such motor vehicle, but does not include a municipal transit vehicle, or any portion thereof. See RCW 46.04.620.
(p) "Transportation equipment" means:
(i) Locomotives and railcars used to carry people or property in interstate commerce;
(ii) Trucks and truck tractors with gross vehicle weight ratings of 10,000 pounds or greater, trailers, and semi-trailers, or passenger buses that are:
(A) Registered through an International Registration Plan (International Registration Plan is a reciprocity agreement among states of the United States and provinces of Canada providing for payment of license fees on the basis of total distance operated in all jurisdictions);
(B) Operated under authority of a carrier authorized and certificated by the U.S. Department of Transportation (or other federal authority) to engage in carrying people or property in interstate commerce;
(iii) Aircraft operated by air carriers authorized and certificated by the U.S. Department of Transportation (or other federal or foreign authority) to carry people or property by air in interstate or foreign commerce; and
(iv) Containers designed for use on, and component parts attached or secured on, the items described in (p)(i) through (iii) of this subsection. RCW 82.32.730 (8)(e).
(106) Other resources. The department offers a number of resources to assist taxpayers in sourcing retail sales. These resources include:
(a) The "Local Sales & Use Tax Flyer." This publication is updated every quarter and is available online on the department's website at www.dor.wa.gov. The publication provides a listing of all local taxing jurisdictions, location codes, and their corresponding tax rates.
(b) The online sales and use tax rate look up application (GIS). This is an online application that provides current and past sales and use tax rates and location codes based on an address or a selected location on a map. It also allows users to download data that they can incorporate into their own systems to retrieve the proper tax rate for a specific address. Visit the department's website at dor.wa.gov for more information on this topic.
Part 2. General Sourcing Rules for Most Retail Sales.
(201) State and local retail sales tax sourcing rules for most retail sales. Part 2 of this rule describes Washington's retail sales tax general sourcing rules for sales of tangible personal property, extended warranties, other retail services, and transportation equipment. The sourcing provisions for Washington's retail sales tax in this Part 2 also apply to retailing B&O tax for retail sales. Part 3 of this rule details exceptions to the general sourcing guidance in this Part 2.
This part also generally applies to retail sales of digital products and digital codes. Readers should refer to WAC 458-20-15503, which extensively addresses the sourcing of digital products and codes. This rule does not address sourcing under facts that are unique to sales of digital products and codes.
General sourcing rules apply in a descending order of priority, meaning that if the seller has information necessary to satisfy the requirement in (a) of this subsection, then those sourcing provisions must be applied. If the requirement in (a) of this subsection does not apply, the seller must consider whether the requirement in (b) of this subsection applies, and apply those sourcing provisions to the sale. If the requirement in (b) of this subjection does not apply, then the seller must use the same method in determining whether the requirements first in (c), second (d), or third (e) of this subsection apply respectively, and then apply the applicable sourcing provision. Retail sales must be sourced in this manner as follows:
(a) Business location of the seller;
(b) Other location of receipt by the purchaser;
(c) Purchaser's address maintained in the seller's ordinary business records;
(d) Purchaser's address obtained at the consummation (i.e., completion) of the sale;
(e) Origin sourcing.
(202) Business location of the seller. If a purchaser or a purchaser's donee receives tangible personal property, a retail service, an extended warranty, or a digital product at the seller's business location, the sale is sourced to that business location.
In the case of retail services, this sourcing rule will generally apply where a purchaser receives retail services at the seller's place of business, e.g., an auto repair shop where purchasers pick up the repaired goods at the repair shop location.
Example 1. Tangible personal property received at seller's Washington business location.
Facts: Bill, a Tacoma resident, travels to Renton and purchases a ring from a jeweler located in Renton. Bill receives the ring at the Renton location.
Conclusion: The seller must source the sale to its Renton business location.
Example 2. Tangible personal property received at seller's Washington business location, purchaser is a resident of another state.
Facts: Jane, an Idaho resident, purchases and takes receipt of a mattress at a retailer's physical store in Spokane, Washington.
Conclusion: Even though Jane takes the mattress back to Idaho for her use, the seller must source the sale to its Spokane business location.
Example 3. Tangible personal property received at seller's out-of-state business location, purchaser is a Washington resident.
Facts: Luggage Retailer has retail stores located in Washington and Oregon. John, a Washington resident, goes to Luggage Retailer's store in Portland, Oregon to purchase luggage. John takes possession of the luggage at the store.
Conclusion: The seller must source the sale to its Portland business location where John took possession of the luggage. John is subject to use tax on the luggage upon his use of the luggage in Washington. Refer to Part 5 of this rule for more information regarding sourcing requirements for use tax imposed on the purchaser as a consumer.
Example 4. Tangible personal property received at seller's Washington business location using purchaser's own trucks, purchaser is an out-of-state business.
Facts: An out-of-state purchaser takes possession of tangible personal property in Vancouver, Washington and immediately delivers the tangible personal property to the purchaser's out-of-state location.
Conclusion: The sale is sourced to Washington because the purchaser received the tangible personal property in Washington.
Example 5. Tangible personal property received at seller's Washington business location by an affiliated shipping company (separate legal entity), receipt by purchaser is outside of Washington.
Facts: The purchaser in Example 4 uses a wholly owned "shipping company" (a legal entity separate from the purchaser) to receive purchased goods in Vancouver, Washington and immediately deliver them to the purchaser's out-of-state location.
Conclusion: Because "receive" and "receipt" do not include possession by the "shipping company," including a "shipping company" that is affiliated with the purchaser, the sale is sourced to the location where the purchaser receives the goods outside of Washington. The seller should maintain records that support the sourcing of the sale outside of Washington. See subsection (203)(b) of this rule for more details on recordkeeping requirements.
Example 6. Retail service received at seller's Washington business location.
Facts: Barbara, a Longview resident, takes her car to a mechanic shop located in Centralia. The mechanic services the car at the Centralia location. Several days later Barbara picks up the car from the Centralia location.
Conclusion: The seller must source the sale to its Centralia business location.
Example 7. Extended warranty received at seller's Washington business location.
Facts: Saffron, a Des Moines resident, buys a computer from a Burien computer retailer. When purchasing the computer, Saffron also purchases and receives a five-year extended warranty for the computer at the Burien location.
Conclusion: The seller must source the sale of the extended warranty and computer to its Burien business location.
(203) Other location of receipt by the purchaser. If the purchaser receives tangible personal property, retail services, digital products or codes, or an extended warranty at a location other than the seller's place of business, then the sale must be sourced to the location where the purchaser, or the purchaser's donee, receives the property, retail service, digital product or code, or extended warranty. This location may be indicated in instructions, known to the seller, for delivery to the purchaser or the purchaser's donee.
(a) Delivery terms, such as "FOB shipping point" and "FOB origin," and the Uniform Commercial Code's provisions defining sale or where risk of loss passes, do not determine where the place of receipt occurs.
(b) The seller must retain documents used in the ordinary course of the seller's business to show how the seller knows the location where the purchaser or purchaser's donee received the goods. Acceptable proof includes, but is not limited to, the following documents:
(i) Instructions for delivery to the seller indicating where the purchaser wants the goods delivered, provided on a sales contract, sales invoice, or any other document used in the seller's ordinary course of business showing the instructions for delivery;
(ii) If shipped by a shipping company, a waybill, bill of lading, or other contract of carriage indicating where delivery occurs; or
(iii) If shipped by the seller using the seller's own transportation equipment, a trip-sheet signed by the person making delivery for the seller and showing:
(A) The seller's name and address;
(B) The purchaser's name and address;
(C) The place of delivery, if different from the purchaser's address; and
(D) The time of delivery to the purchaser together with the signature of the purchaser or its agent acknowledging receipt of the goods at the place designated by the purchaser.
Example 8. Tangible personal property delivered to purchaser's address.
Facts: Wade, a Seattle resident, buys furniture from a store located in Everett. Wade has the furniture delivered to his Seattle residence, where he will receive it.
Conclusion: The seller must source the sale to Seattle, the location where the purchaser received the furniture.
Example 9. Remotely accessed prewritten software.
Facts: Joanne, a Port Angeles business owner, purchases a prewritten software program online from a store located in Sequim. Joanne receives access to the software remotely, at her home address in Port Angeles. The seller has information identifying Port Angeles as the location where the software is accessed by the customer.
Conclusion: The seller must source the sale to Joanne's Port Angeles home location.
Example 10. Tangible personal property delivered to purchaser via third-party shipping company.
Facts: An out-of-state seller uses a third-party shipping company to ship goods to a customer located in Ellensburg. The seller first delivers the goods to the shipping company outside Washington using its own transportation equipment. The shipping company delivers the goods to Ellensburg.
Conclusion: The seller must source the sale to Ellensburg, the location of receipt by the purchaser. Even though the shipping company took possession of the goods outside of Washington, possession by the shipping company is not receipt by the purchaser for Washington tax purposes.
Example 11. Tangible personal property received by purchaser's affiliated shipping company outside Washington then delivered to purchaser.
Facts: A purchaser's affiliated shipping company arranges to pick up goods from an out-of-state seller's business location and deliver the goods to the purchaser's Yakima facility. The affiliated shipping company has the authority to accept and inspect the goods prior to transport on behalf of the buyer.
Conclusion: The seller must source the sale to Yakima, the location of receipt by the purchaser. Possession by a shipping company on behalf of a purchaser, including a shipping company affiliated with the purchaser, is not receipt for purposes of this rule. A shipping company's authority to accept and inspect goods on behalf of a buyer does not constitute receipt by the buyer.
Example 12. Purchaser exercises dominion and control over tangible personal property outside Washington, prior to receiving the tangible personal property in Washington.
Facts: An out-of-state manufacturer with nexus in Washington sells coffee mugs to a Washington-based purchaser in the business of selling small quantities of the goods under its own label in its own packaging. The purchaser directs the seller to deliver the goods to a third-party packaging plant located out-of-state for repackaging of the goods in the purchaser's own packaging. The purchaser then has a third-party shipping company pick up the goods at the packaging plant.
Conclusion: The purchaser takes constructive possession of the goods outside of Washington because it has exercised dominion and control over the goods by having them repackaged at an out-of-state packaging facility before shipment to Washington. The seller must source the sale to the location of the out-of-state packaging plant.
Example 13. Retail service received at location of the purchaser.
Facts: Brett, a Tacoma resident, hires ABC Painting Co., located in Olympia, to paint his home. ABC's employees perform the painting services at Brett's home in Tacoma.
Conclusion: The seller must source the sale to Tacoma, the location where the customer received the retail service.
Example 14. Retail repair service received at the location where repaired goods are received.
Facts: Gabe, a Shoreline resident, sends a clock to a repair business located in Auburn. The business repairs the clock and then delivers the clock to Gabe's home in Shoreline.
Conclusion: The seller must source the sale to Shoreline, the location where the customer received the repaired clock.
Example 15. Retail repair service received at the location where repaired goods are received (repair service in state, receipt of repaired goods out-of-state).
Facts: Assume the facts in Example 14, except that Gabe is a resident of Nevada, and that the repaired clock will be delivered by the seller to Gabe's home in Las Vegas.
Conclusion: The seller must source the sale to Las Vegas, NV, the location where the customer received the repaired clock.
Example 16. Extended warranty delivered to location of the purchaser.
Facts: Tara, a Chelan resident, buys a computer over the internet. The retailer offers a five-year extended warranty. Tara decides to purchase the extended warranty and sends the seller the appropriate paperwork. The seller then sends the extended warranty documents to Tara's home in Chelan.
Conclusion: The seller must source the sale to Chelan, the location where the customer received the extended warranty documents.
Example 17. Tangible personal property delivered to location of purchaser's donee.
Facts: Sandra, a Vancouver, Washington resident, buys a computer online from a merchant in Seattle. The computer is a gift for Tim, a student attending college in Pullman. The purchaser directs the seller to ship the computer to Tim's home address in Pullman. Tim receives the computer at the Pullman location.
Conclusion: The seller must source the sale to Pullman, the location of receipt by the purchaser's donee.
(204) Purchaser's address maintained in the seller's ordinary business records. If the sourcing rules described in subsections (202) and (203) of this rule do not apply, a retail sale is sourced to the purchaser's address as indicated in the seller's records maintained in the ordinary course of the seller's business, provided use of this address does not constitute bad faith.
Example 18. Tangible personal property picked up by unaffiliated shipping company from seller's business location, no delivery information available.
Facts: A hotel located in Shelton purchases bathroom towels from a seller located in Bremerton. Rather than having the towels delivered by the seller, the purchaser uses an unaffiliated shipping company to pick up the towels at the seller's business location and deliver them to the purchaser in Shelton. The seller is not able to obtain delivery information for the purchase; however, the seller maintains the address of the purchaser for billing purposes.
Conclusion: The seller must source the sale to Shelton using the purchaser's address information retained in the seller's ordinary business records.
(205) Purchaser's address obtained at the consummation of sale. If the sourcing rules described in subsections (202), (203), and (204) of this rule do not apply, the sale must be sourced to the purchaser's address obtained during the consummation of sale. If no other address is available, this address may be the address included on the purchaser's payment instrument (e.g., check, credit card, or money order), provided use of this address does not constitute bad faith.
Example 19. Prewritten software delivered electronically, location of purchaser's receipt is unknown, billing address information available to seller.
Facts: Eric buys prewritten software over the internet from a retail outlet located on Vashon Island. The seller transmits the prewritten software to an email address designated by Eric. The email address does not disclose Eric's location. Eric pays for the software by credit card. When entering the relevant credit card information, Eric discloses a residential address in Port Angeles to which the credit card is billed.
Conclusion: The seller must source the sale to Port Angeles, the purchaser's credit card billing address obtained by the seller at the consummation of the sale.
(206) Origin sourcing. If the sourcing rules described in subsections (202), (203), (204), and (205) of this rule do not apply, the sale must be sourced to the physical address from which the:
(a) Tangible personal property was shipped;
(b) Digital product, digital code, or computer software was first available for transmission by the seller; or
(c) Extended warranty, digital automated service, or other retail service was provided, disregarding any location that merely provided the digital transfer of the product sold.
Example 20. Prewritten software delivered electronically, location of purchaser's receipt is unknown, purchaser address information is not available.
Facts: Rebecca purchases prewritten computer software electronically and requests that the software be delivered to a specified email address. The seller operates from a retail store located in Tacoma. The seller does not know the location where the software will be received and further does not have information about Rebecca's location in its ordinary business records. Additionally, Rebecca does not supply the seller with address information during the consummation of the sale.
Conclusion: The seller must source the sale to Tacoma, the location where the computer software was first available for transmission by the seller. This result will not change if the software is routed from a Tacoma server through a second server (either operated by the seller or some third party) located outside of Tacoma. Routing as used in this context refers to the transfer of prewritten software from one location to another location for retransmission to a final destination, and does not include transfers to another location where additional services or products may be added.
Part 3. Special Sourcing Rules for Retail Sales of Certain Goods and Services.
(301) Sales of watercraft; sales of modular, mobile, and manufactured homes; and sales of motor vehicles, trailers, semi-trailers, and aircraft that do not qualify as transportation equipment.
(a) Seller's location within Washington. Sales of the types of tangible personal property described in this subsection must be sourced to the location at or from which delivery is made in cases where the seller's location is within Washington.
(b) Seller's location outside Washington, participating seller representative within Washington. Sales of the types of tangible personal property described in this subsection that are delivered into Washington from a point outside the state, where a local in-state facility, office, outlet, agent or other representative (even though not formally characterized as a "salesperson") of the seller participates in the transaction in some way, such as by taking the order, must be sourced to the location of the local facility, etc., for purposes of the local sales tax.
(c) Seller's location outside Washington, no participating seller representative within Washington. Sales of the types of tangible personal property described in this subsection that are delivered into Washington from a point outside the state, where no local in-state facility, office, outlet, agent or other representative (even though not formally characterized as a "salesperson") of the seller participates in the transaction, must be sourced to the location of the customer for purposes of the local sales tax.
Example 21. Motor vehicle delivered to the location of the purchaser.
Facts: Ben, a Federal Way purchaser, buys a car from a dealer in Fife. The customer has the option of picking up the car on the lot in Fife or having it delivered to his residential address in Federal Way. Ben asks to have the car delivered to the Federal Way location.
Conclusion: The seller must source the sale to Fife, the dealer's location from which the car was delivered.
(302) Florist sales.
(a) Florist sales must be sourced in a manner consistent with:
(i) The sourcing requirements described in subsection (301)(a) and (b) of this section; or
(ii) In the case of a sale in which one florist takes an order from a customer and then communicates that order to another florist who delivers the items purchased to the place designated by the customer, the location at or from which the delivery is made to the customer is deemed to be the location of the florist originally taking the order. See RCW 82.32.730 (7)(d).
(b) Collection of retail sales tax: On all orders taken by a Washington florist and communicated to a second florist, either in Washington or at a point outside the state, the florist taking the order will be responsible for the collection of the retail sales tax from the customer placing the order. See WAC 458-20-158.
Example 22. Floral arrangement delivered to a purchaser's donee in Washington, seller located in Washington.
Facts: Wade, an out-of-state resident, purchases a floral arrangement directly from a florist in Renton. The purchase arrangement does not involve multiple florists. Wade arranges for the florist to deliver the arrangement to a hospital located in Seattle, where his brother Frank is a patient.
Conclusion: The seller must source the sale to Renton, the location at or from which delivery is made. Because the seller is physically located in Washington and the purchase was made directly between the buyer and the florist, the sale is sourced to the location from which delivery was made.
Example 23. Floral arrangement delivered to a purchaser in Washington, originating florist located in Washington, delivering florist located out-of-state.
Facts: Michelle, a Tacoma resident, purchases a floral arrangement from an online florist, Beautiful Flowers, LLC. Beautiful Flowers, LLC is located in Seattle, but has contractual agreements with florists throughout the country, whereby the contracted florist will prepare and deliver floral arrangements to Beautiful Flowers LLC's customers as a subcontractor. Michelle arranges for the flowers to be delivered to her brother in Camas. The floral arrangement is prepared and delivered by a florist located in Portland, Oregon.
Conclusion: The seller would source the sale to Seattle and collect retail sales tax as the location at which the florist originally took the order was in Washington. RCW 82.32.730 (7)(d) specifies that the sale is sourced to the location of the florist originally taking the order.
(303) Telecommunications service and ancillary services. Sales of telecommunications service and ancillary services are defined as retail sales in RCW 82.04.050. Sellers must source these services under the sourcing provisions located in RCW 82.32.520. See RCW 82.04.065, 82.04.530, and 82.04.535 for more information about telecommunication services and ancillary services, and the calculation of gross proceeds for purposes of B&O tax.
Part 4. Sourcing Rules for Leases and Rentals of Tangible Personal Property.
(401) The terms "lease" and "rental" are used interchangeably throughout this subsection. This subsection provides state and local retail sales tax sourcing guidance for lessors of tangible personal property. Persons who rent or lease tangible personal property to consumers are required to collect retail sales tax on the amount of each rental or lease payment at the time the payment becomes due. In addition, persons who rent or lease tangible personal property are generally subject to Washington's B&O tax. See WAC 458-20-211.
(a) How do I source lease payments attributable to the lease of transportation equipment? If you are leasing transportation equipment, you must source the lease payments attributable to that transportation equipment as follows:
(i) For purposes of retail sales tax, you must source the lease payments attributable to the lease of transportation equipment following the sourcing requirements for retail sales discussed in Part 2 of this rule. The sourcing requirements for retail sales discussed in Part 2 of this rule apply to both single payment leases and periodic payment leases of transportation equipment. See RCW 82.32.730(4).
(ii) For purposes of B&O tax, you must source the lease payments attributable to the lease of transportation equipment as described in Excise Tax Advisory 3185.2014.
(b) How should I source lease payments attributable to the lease of motor vehicles, trailers, semi-trailers, and aircraft that do not qualify as transportation equipment? If you are leasing a motor vehicle, trailer, semi-trailer, or aircraft that does not qualify as transportation equipment, you must source the lease payments as follows:
(i) Leases that require recurring periodic payments. If the lease requires recurring periodic payments, you must source each periodic payment to the "primary property location" of the leased property. The "primary property location" will not change by intermittent use of the leased property in different jurisdictions, e.g., use of leased business property on business trips or service calls to multiple local jurisdictions.
(ii) Leases that do not require recurring periodic payments. If the lease does not require recurring periodic payments, you must source the single lease payment following the sourcing requirements discussed in Part 2 of this rule.
Example 24. Motor vehicle lease with recurring periodic payments.
Facts: Rich, a Fall City customer, leases a car from a dealer in Duvall. Rich leases the car for a period of one year. The car does not qualify as transportation equipment. Rich provides the dealer with his residential address in Fall City where he keeps the car. Rich makes monthly periodic payments throughout the term of the lease. Rich indicates the primary property location for the car is his residence in Fall City. The Fall City location is recorded in the store's business records. The first monthly lease payment is due at the end of the month following the date in which Rich acquired the vehicle.
Conclusion: The seller (lessor) must source the periodic lease payments to Fall City, the residential primary property location of the purchaser (lessee). If Rich changes the vehicle's primary location during the term of the lease and notifies the lessor, the lessor must source any subsequent lease payments to the primary location of the vehicle.
Example 25. Vehicle trailer lease that does not involve recurring periodic payments.
Facts: Amanda, a Tacoma business owner, rents a trailer for a period of one week and no periodic payments are required under the lease. The trailer does not qualify as transportation equipment. Amanda receives the trailer at a business location in Tacoma.
Conclusion: The seller (lessor) must source the sale to Tacoma, the seller's business location where the trailer was received by the purchaser (lessee).
(c) How do I source lease payments for all other tangible personal property? For leases of tangible personal property not described in (a) or (b) of this subsection, sellers must source lease payments as follows:
(i) Lease that requires recurring periodic payments. If a lease of tangible personal property requires recurring periodic payments, sellers must source the first periodic lease payment following the sourcing requirements discussed in Part 2 of this rule. Sellers must source subsequent periodic payments to the primary property location for the relevant payment period. The primary property location will not change by intermittent use of the leased property in different local jurisdictions, e.g., use of leased business property on business trips or service calls to multiple local jurisdictions.
(ii) Leases that do not require recurring periodic payments. If a lease of tangible personal property does not require recurring periodic payments, sellers must source the single payment following the sourcing requirements described in Part 2 of this rule.
Example 26. Lease of tangible personal property with periodic lease payments, tangible personal property picked up at seller's location, tangible personal property intermittently used out-of-state.
Facts: Alison, a Seattle business owner, leases equipment from a store in Issaquah. Alison picks up the equipment in Issaquah and makes an initial periodic payment on the lease. The equipment is used primarily in Washington, but the equipment is intermittently used in Oregon throughout the term of the lease. Alison indicates the primary property location for the equipment is a business address in Seattle. The Seattle location is recorded in the store's business records. The equipment is leased for a period of one year.
Conclusion: The seller (lessor) must source the initial periodic payment to Issaquah, the location where the equipment was received. The seller must source the subsequent periodic payments to Seattle, the primary property location of the equipment. Alison's intermittent use of the equipment in other jurisdictions does not change the primary property location of the equipment.
Example 27. Lease of tangible personal property with periodic lease payments, tangible personal property delivered to purchaser, primary location of property changes during the term of the lease.
Facts: Amelia, a Pasco business owner, leases equipment from a store located in Pasco for a period of one year. The leased equipment is delivered by the lessor to Amelia and received at the primary property location of the equipment in Walla Walla. Amelia indicates this will be the primary property location for a period of six months. For the second six months of the lease, Amelia indicates the primary property location is a business address in Leavenworth. The store records the primary property locations in its business records.
Conclusion: The seller (lessor) must source the initial periodic payment to Walla Walla, the location where Amelia received the equipment. The seller must source subsequent periodic lease payments covering the first six months of the lease to Walla Walla, the primary property location. The seller must source periodic lease payments covering the last six months of the lease to Leavenworth, the primary property location.
Part 5. Sourcing Rules for Use Tax Purposes - Purchasers.
(501) Use tax imposed on the consumer. Where an article of tangible personal property, an extended warranty, retail service, prewritten computer software, digital product, or digital code is acquired by a consumer in this state in any manner, including through a casual or isolated sale, or as a by-product used by the manufacturer thereof, use tax is generally due, unless an exemption applies or retail sales tax has been paid. RCW 82.12.020. The rate of use tax is cumulative of a state and local component, where the local component varies by local jurisdiction.
(502) Sourcing rules. Sourcing rules for use tax vary depending on the object of use, as follows:
(a) Tangible personal property, except for natural gas and manufactured gas, is sourced to the location where the taxpayer makes first taxable use of the article of tangible personal property as a consumer. This includes the location of installation, storage, withdrawal from storage, distribution, or any other act preparatory to subsequent actual use or consumption of the article of tangible personal property within this state. RCW 82.12.010. "First taxable use" is described in the examples below.
Example 28. Use of a motor vehicle by a Washington resident, vehicle registration and location of the vehicle's primary use.
Facts: Sandra, a Spokane resident, purchases a motor vehicle from a private seller located in Seattle. Retail sales tax was not collected by the private seller. Title to the vehicle is transferred in the King County Auditor's office. Sandra will primarily use the vehicle in Spokane and will drive the vehicle to her residence in Spokane upon completion of the sale. Sandra will list the Spokane address on her vehicle registration and new vehicle insurance policy.
Conclusion: The King County Auditor's office will collect use tax from Sandra based on the combined state and local use tax rate for Spokane, as Sandra's use of the vehicle in Seattle is insufficient to establish first taxable use in that location for purposes of the local portion of the use tax.
Example 29. Use of a motor vehicle by a Washington resident, purchase of vehicle out-of-state.
Facts: Jerry, a Seattle resident, purchases a motor vehicle from a car dealership located in Oregon. The dealership is not registered with the department and does not collect retail sales tax from Jerry at the time of sale. Jerry drives the vehicle via Interstate 5, from Portland, Oregon to Seattle. Jerry subsequently registers the vehicle with the King County Auditor's office upon returning with the vehicle to Seattle.
Conclusion: The King County Auditor's office will collect use tax from Jerry based on the combined state and local use tax rate for Seattle. Although Jerry drove the vehicle in Clark County, the use was insufficient to establish first taxable use in that location for purposes of the local portion of the use tax.
Example 30. Use of a personal watercraft in Washington, purchase of watercraft out-of-state.
Facts: Cameron, a Port Townsend resident, purchases a 42-foot sailboat from a boat dealer in Portland, Oregon. Cameron takes possession of the sailboat at the dealer's location in Portland and does not pay Washington's retail sales tax. Cameron navigates the watercraft down the Columbia River and around the Olympic Peninsula, ultimately arriving in Port Townsend. Cameron entered into a long-term moorage agreement and lists the Port Townsend marina as an additional insured party on his current watercraft insurance policy.
Conclusion: The sailboat is subject to use tax based on the combined state and local use tax rate for Port Townsend. Although Cameron sailed the watercraft in Washington on the Columbia River, the use was insufficient to establish first taxable use in that location for purposes of the local portion of the use tax.
Example 31. Use of a personal aircraft in Washington by a Washington resident, possession taken outside of Washington.
Facts: John, a Bremerton resident, purchases an aircraft from a dealer located in Sacramento, California. John takes possession of the aircraft in California and flies it back to Washington. Prior to arriving at the Bremerton airport, where John has secured a permanent hangar or storage space for the aircraft, John lands the aircraft in Pullman, Washington. While in Pullman he refuels the aircraft before continuing on to the final destination in Bremerton.
Conclusion: The aircraft is subject to use tax based on the combined state and local use tax rate for Bremerton. Although John fueled the aircraft in Pullman, the use was insufficient to establish first taxable use in that location for purposes of the local portion of the use tax.
Example 32. Use of tangible personal property by a Washington business, purchase of tangible personal property out-of-state.
Facts: Grace, an Issaquah business owner, purchases a trailer-mounted generator from a dealer located in Oregon without paying retail sales tax. Grace tows the generator with her own motor vehicle to the company warehouse located in Issaquah. The company stores the generator at their warehouse throughout the year and operates it at various worksites throughout the state.
Conclusion: The King County Auditor's office will collect use tax based on the combined state and local use tax rate for Issaquah, the location where the taxpayer stores the generator. Although Grace towed the generator through other jurisdictions prior to arriving at the business' Issaquah warehouse, the use was insufficient to establish first taxable use in another location for purposes of the local portion of the use tax. Even though Grace operates the generator in multiple locations, the company warehouse is the location where first taxable use as a consumer occurs.
Example 33. Use of tangible personal property by a Washington resident, purchase of tangible personal property out-of-state.
Facts: Alex, a Wenatchee resident, purchases an electric bicycle from a dealer in Montana, without paying retail sales tax. Alex takes possession of the electric bicycle in Montana and transports it back to Wenatchee in their own motor vehicle where it will be stored in their garage. Alex rides the electric bicycle in Wenatchee and various other locations throughout the state.
Conclusion: The electric bicycle is subject to use tax based on the combined state and local use tax rate for Wenatchee, the location where Alex stores the electric bicycle. Transporting the electric bicycle to Wenatchee was insufficient to establish first taxable use in another location for purposes of the local portion of the use tax.
Example 34. Use of tangible personal property by an out-of-state service provider.
Facts: ABC Testing, an out-of-state medical testing company, provides services to Washington customers. ABC sends a customer of its services, a Sequim resident, a container that the customer uses to provide a saliva sample. The container is shipped to Sequim and back out of Washington using unaffiliated shipping companies. ABC owns the container at all times and its customers are subject to ABC terms and conditions regarding their use of the containers. ABC discards the container upon receipt and testing of the customer's sample at their out-of-state business location.
Conclusion: Use tax is due and sourced to Sequim, the location where the testing company made the tangible personal property available for their customer's use.
(b) Retail services, which include the installing, repairing, cleaning, altering, imprinting, or improving of tangible personal property for consumers, are sourced to the location where the taxpayer takes or assumes dominion or control over the article of tangible personal property upon which the service was performed. Dominion and control includes installation, storage, withdrawal from storage, distribution, or any other act preparatory to subsequent actual use or consumption of the article within this state.
Example 35. Tangible personal property repaired by out-of-state business who is not required to register or collect Washington taxes.
Facts: Pamela, a resident of Sequim, sends an antique oil painting to an out-of-state business who will refurbish and repair the painting. The out-of-state repairer does not have nexus with Washington and is not required to register with the state or collect Washington's sales tax. Upon completion of the restoration, the repairer sends the painting to Pamela's residence, via a third-party shipping company.
Conclusion: Pamela must report and pay use tax. Pamela must source the repair services to Sequim, the location where first taxable use of the repaired painting occurred as a consumer.
(c) Extended warranties are sourced to the location where the taxpayer, after acquiring the extended warranty, first takes or assumes dominion or control over the article of tangible personal property to which the extended warranty applies.
Example 36. Extended warranty purchased from an out-of-state business who is not required to register or collect Washington taxes.
Facts: Michael, a resident of Longview, purchases a laptop computer from an online retailer, who is not registered with the state or required to collect Washington's taxes. The retailer sends Michael the laptop computer to his residential address in Longview via a third-party shipping company. At the time of the laptop's purchase, Michael also purchases an extended warranty. The retailer sends Michael an email which contains the extended warranty in electronic form.
Conclusion: Michael must report and pay use tax. Michael must source his use of the laptop computer and the extended warranty to Longview, the location where Michael first assumed dominion and control over the property and extended warranty, establishing first taxable use in this state as a consumer.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-01-026, § 458-20-145, filed 12/9/22, effective 1/9/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 08-12-035, § 458-20-145, filed 5/30/08, effective 6/30/08. Statutory Authority: RCW 82.32.300. WSR 83-07-032 (Order ET 83-15), § 458-20-145, filed 3/15/83; Order ET 75-1, § 458-20-145, filed 5/2/75; Order ET 70-3, § 458-20-145 (Rule 145), filed 5/29/70, effective 7/1/70.]


PDF458-20-146

National and state banks, mutual savings banks, savings and loan associations and other financial institutions.

(1) Introduction. This rule explains how Washington's business and occupation (B&O) tax, retail sales tax, and use tax applies to banks, savings and loan associations, and other financial institutions. Readers may want to refer to other rules for additional information, including the following:
(a) WAC 458-20-19404 Financial institutions—Income apportionment - For periods beginning January 1, 2016.
(b) WAC 458-20-19404A Financial institutions—Income apportionment - For the period June 1, 2010, through December 31, 2015.
(c) WAC 458-20-19402 Single factor receipts apportionment—Generally.
(d) WAC 458-20-19401 Minimum nexus thresholds for apportionable activities and selling activities.
(e) WAC 458-20-106 Casual or isolated sales—Business reorganizations.
(f) WAC 458-20-102 Reseller permits.
(g) WAC 458-20-178 Use tax and the use of tangible personal property.
(h) WAC 458-20-199 Accounting methods.
(2) Definitions. The following definitions apply to this rule:
(a) "Affiliated," for purposes of (e) of this subsection and subsection (3)(c) of this rule, means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person.
(b) "Consolidated financial institution group" means all financial institutions that are affiliated with each other, as that term is defined in RCW 82.04.29004.
(c) "Consolidated financial statement" means a consolidated financial institution group's consolidated reports of condition and income filed with the Federal Financial Institutions Examination Council, or successor agency.
(d) "Control" means the possession, directly or indirectly, of more than 50 percent of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise.
(e) "Financial institution" has, for purposes of subsection (3)(c) of this rule, the same meaning as "financial institution" in RCW 82.04.29004:
(i) Any business entity chartered under Titles 30A, 30B, 31, 32, and 33 RCW, or registered under the Federal Bank Holding Company Act of 1956, as amended, or registered as a savings and loan holding company under the Federal National Housing Act, as amended;
(ii) A national bank organized and existing as a national bank association pursuant to the provisions of the National Bank Act, 12 U.S.C. Sec. 21 et seq.;
(iii) A savings association or federal savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1813(b)(1);
(iv) Any bank or thrift institution incorporated or organized under the laws of any state;
(v) Any corporation organized under the provisions of 12 U.S.C. Sec. 611 through 631;
(vi) Any agency or branch of a foreign depository as defined in 12 U.S.C. Sec. 3101 that is not exempt under RCW 82.04.315;
(vii) A production credit association organized under the Federal Farm Credit Act of 1933, all of whose stock held by the Federal Production Credit Corporation has been retired;
(viii) Any business entity that receives gross income taxable under RCW 82.04.290, the voting interests in which are more than 50 percent owned, directly or indirectly, by any person or business entity described in (e)(i) through (vii) of this subsection other than a company taxable under chapter 48.14 RCW;
(ix)(A) A business entity that receives more than 50 percent of its total gross income for federal income tax purposes from finance leases. For purposes of this subsection, a "finance lease" means a lease that meets two requirements:
(I) It is the type of lease permitted to be made by national banks (see 12 U.S.C. Sec. 24(7) and (10), Comptroller of the Currency regulations, Part 23, leasing (added by 56 C.F.R. Sec. 28314, June 20, 1991, effective July 22, 1991), and Regulation Y of the Federal Reserve System 12 C.F.R. Part 225.25, as amended; and
(II) It is the economic equivalent of an extension of credit, i.e., the lease is treated by the lessor as a loan for federal income tax purposes. In no event does a lease qualify as an extension of credit where the lessor takes depreciation on such property for federal income tax purposes.
(B) For the definition in (e)(ix) of this subsection to apply, the average of the gross income in the current tax year and immediately preceding two tax years must satisfy the more than 50 percent requirement.
(x) Any other person, other than an insurance general agent taxable under RCW 82.04.280 (1)(e), an insurance business exempt from the business and occupation tax under RCW 82.04.320, a real estate broker taxable under RCW 82.04.255, a securities dealer or international investment management company taxable under RCW 82.04.290(2), that receives more than 50 percent of its gross receipts from activities that a person described in (e)(ii) through (vii) and (ix) of this subsection is authorized to transact.
(f) "Gross income" has the same meaning as "gross income of the business" in RCW 82.04.080 and generally includes gross proceeds of sales, compensation for services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction for expenses or losses.
(g) "Specified financial institution" means a financial institution that is a member of a consolidated financial institution group that reported on its consolidated financial statement for the previous calendar year annual net income of at least $1,000,000,000, not including net income attributable to noncontrolling interests, as the terms "net income" and "noncontrolling interest" are used in the consolidated financial statement. See RCW 82.04.29004.
(3) B&O tax - Service and other activities.
(a) Gross income. Generally, all gross income earned or received by a financial institution is subject to B&O tax under the service and other activities classification. By way of example, the following types of income are taxable under the service and other activities classification when earned or received by a financial institution: Interest; commissions; dividends; fees and carrying charges; charges for bookkeeping or data processing; safety deposit box rentals.
(b) Deductions and exemptions. The law allows certain deductions and exemptions from gross income to arrive at the taxable amount (the amount upon which the B&O tax is computed). Deductions that may apply to financial institutions include the following:
(i) Dividends received by a parent from its subsidiary corporations. See RCW 82.04.4281.
(ii) Interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties. See RCW 82.04.4292.
(iii) Interest received on obligations of the state of Washington, its political subdivisions, and municipal corporations organized pursuant to the laws thereof. See RCW 82.04.4293. A deduction may also be taken for interest received on direct obligations of the federal government, but not for interest attributable to loans or other financial obligations on which the federal government is merely a guarantor or insurer.
(iv) Gross proceeds from sales or rentals of real estate.
(v) Amounts received by a cooperative finance organization where the amounts are derived from loans to rural electric cooperatives or other nonprofit or governmental providers of utility services organized under the laws of this state. For this purpose, "cooperative finance organization" means a nonprofit organization with the primary purpose of providing, securing, or otherwise arranging financing for rural electric cooperatives; and "rural electric cooperative" means a nonprofit, customer-owned organization that provides utility services to rural areas. This deduction takes effect July 1, 2023, and expires January 1, 2034. See RCW 82.04.4276.
(c) Additional tax. Beginning January 1, 2020, in addition to other taxes imposed under chapter 82.04 RCW, an additional tax is imposed on specified financial institutions. The additional tax is equal to the gross income of the business taxable under the service and other B&O tax classification, multiplied by a rate of 1.2 percent. See RCW 82.04.29004.
(i) The department may require a person believed to be a specified financial institution to disclose whether it is a member of a consolidated financial institution group and, if so, to identify all other members of its consolidated financial institution group.
(ii) The legislature has mandated that a person failing to comply with the department's authority to require disclosure as described in (c)(i) of this subsection is deemed to have intended to evade tax payable to the state and is subject to the penalty in RCW 82.32.090(7) on any tax due under RCW 82.04.29004. For additional information, see RCW 82.04.29004(4).
(4) B&O tax - Retailing activities.
(a) In general. Sales of tangible personal property and certain services are defined as "retail sales" and are subject to B&O tax under the retailing classification. Such sales are also subject to the retail sales tax, which the seller must collect and remit to the department. Transactions taxable as sales at retail are not subject to B&O tax under the service and other activities classification.
(b) Examples. Following are examples of transactions subject to the retailing classification of the B&O tax and to the retail sales tax:
(i) Sales of meals or confections;
(ii) Sales of repossessed merchandise;
(iii) Sales of promotional material;
(iv) Leases of tangible personal property;
(v) Sales of check registers;
(vi) Sales of coin banks;
(vii) Sales of personalized checks;
(viii) Escrow fees; and
(ix) Casual sales (occasional sales of depreciated assets such as used furniture and office equipment, subject to retail sales tax but deductible from the business and occupation tax, see WAC 458-20-106).
(c) Sales for resale. When a financial institution buys tangible personal property for resale to its customers without intervening use, the sales tax is not applicable. In this case the financial institution should give the vendor a reseller permit to document the wholesale nature of any sale as provided in WAC 458-20-102 (Reseller permits).
(5) Use tax. The use tax complements the retail sales tax by imposing a tax of like amount on the use of tangible personal property purchased or acquired without payment of the retail sales tax. Thus, when office equipment or supplies are purchased or leased from an unregistered out-of-state vendor who does not collect the Washington state retail sales tax, the use tax must be paid directly to the department. Space for the reporting of this tax will be found on the excise tax return. For more information, see WAC 458-20-178.
[Statutory Authority: RCW 34.05.020, 34.05.001, 42.56.040, and 82.04.29004. WSR 24-01-095, § 458-20-146, filed 12/18/23, effective 1/18/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-146, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 83-07-032 (Order ET 83-15), § 458-20-146, filed 3/15/83; Order ET 70-3, § 458-20-146 (Rule 146), filed 5/29/70, effective 7/1/70.]


PDF458-20-14601

Financial institutions—Income apportionment.

(1) Introduction.
(a) This section provides tax reporting instructions for financial institutions doing business both inside and outside the state of Washington, and applies to tax liability incurred through May 31, 2010. Chapter 23, Laws of 2010 sp. sess. (2ESSB 6143) changed the apportionment reporting requirements for financial institutions effective June 1, 2010. Refer to WAC 458-20-19404 (Financial institutions—Income apportionment) for tax liability incurred on and after June 1, 2010.
Financial businesses that do not meet the definition of "financial institution" in subsection (3)(j) of this section and other businesses taxable under RCW 82.04.290 should refer to WAC 458-20-194 (Doing business inside and outside the state) for tax liability incurred on or before May 31, 2010.
(b) Financial institutions engaged in making interstate sales of tangible personal property should also refer to WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property).
(2) Apportionment and allocation.
(a) Except as otherwise specifically provided, a financial institution taxable under RCW 82.04.290 and taxable in another state shall allocate and apportion its apportionable income as provided in this section. All gross income that is not includable in apportionable income shall be allocated pursuant to the provisions of chapter 82.04 RCW. A financial institution organized under the laws of a foreign country, the Commonwealth of Puerto Rico, or a territory or possession of the United States, except such institutions that are exempt under RCW 82.04.315, whose effectively connected income (as defined under the Federal Internal Revenue Code) is taxable both in this state and another state, other than the state in which it is organized, shall allocate and apportion its gross income as provided in this section.
(b) The apportionment percentage is determined by adding the taxpayer's receipts factor (as described in subsection (4) of this section), property factor (as described in subsection (5) of this section), and payroll factor (as described in subsection (6) of this section) together and dividing the sum by three. If one of the factors is missing, the two remaining factors are added together and the sum is divided by two. If two of the factors are missing, the remaining factor is the apportionment percentage. A factor is missing if both its numerator and denominator are zero, but it is not missing merely because its numerator is zero.
(c) Each factor shall be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for Washington state tax purposes for the taxable period. Persons should refer to WAC 458-20-197 (When tax liability arises) and WAC 458-20-199 (Accounting methods) for further guidance on the requirements of each accounting method. Generally, financial institutions are required to file returns on a monthly basis. To enable financial institutions to more easily comply with the provisions of this section, financial institutions will file returns using factors calculated based on the most recent calendar year for which information is available. A reconciliation shall be filed for each year within thirty days of the time that the taxpayer files its federal income tax returns for that year, but not later than October 30th of the following year. For example, for returns filed for taxable activities occurring during calendar [year] 1998, a taxpayer would use factors calculated based on its 1996 information. A reconciliation would be filed for 1998 using factors based on 1998 information as soon as the information was available to the taxpayer, but not later than thirty days after the time federal income tax returns were due for 1998, or October 30, 1999. In the case of consolidations, mergers, or divestitures, a taxpayer shall make the appropriate adjustments to the factors to reflect its changed operations.
(d) If the allocation and apportionment provisions of this section do not fairly represent the extent of its business activity in this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's business activity:
(i) Separate accounting;
(ii) A calculation of tax liability utilizing the cost of doing business method outlined in RCW 82.04.460(1);
(iii) The exclusion of any one or more of the factors;
(iv) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(v) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's receipts.
(3) Definitions. The following definitions apply throughout this section:
(a) "Apportionable income" means the gross income of the business taxable under RCW 82.04.290, including income received from activities outside this state if the income would be taxable under RCW 82.04.290 if received from activities in this state, less the exemptions and deductions allowable under chapter 82.04 RCW.
(b) "Billing address" means the location indicated in the books and records of the taxpayer on the first day of the taxable period (or on such later date in the taxable period when the customer relationship began) as the address where any notice, statement and/or bill relating to a customer's account is mailed.
(c) "Borrower or credit card holder located in this state" means:
(i) A borrower, other than a credit card holder, that is engaged in a trade or business which maintains its commercial domicile in this state; or
(ii) A borrower that is not engaged in a trade or business or a credit card holder, whose billing address is in this state.
(d) "Commercial domicile" means:
(i) The headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed; or
(ii) If a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile is deemed for the purposes of this section to be the state of the United States or the District of Columbia from which such taxpayer's trade or business in the United States is principally managed and directed. It is presumed, subject to rebuttal by a preponderance of the evidence, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States or the District of Columbia to which the greatest number of employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the taxable period.
(e) "Compensation" means wages, salaries, commissions and any other form of remuneration paid to employees for personal services that are included in such employee's gross income under the Federal Internal Revenue Code. In the case of employees not subject to the Federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such payments would constitute gross income to such employees under the Federal Internal Revenue Code shall be made as though such employees were subject to the Federal Internal Revenue Code.
(f) "Credit card" means credit, travel or entertainment card.
(g) "Credit card issuer's reimbursement fee" means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit card has charged merchandise or services to the credit card.
(h) "Department" means the department of revenue.
(i) "Employee" means, with respect to a particular taxpayer, any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee of that taxpayer.
(j) "Financial institution" means:
(i) Any corporation or other business entity chartered under Titles 30, 31, 32, 33 RCW, or registered under the Federal Bank Holding Company Act of 1956, as amended, or registered as a savings and loan holding company under the Federal National Housing Act, as amended;
(ii) A national bank organized and existing as a national bank association pursuant to the provisions of the National Bank Act, 12 U.S.C. §§21 et seq.;
(iii) A savings association or federal savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. §1813 (b)(1);
(iv) Any bank or thrift institution incorporated or organized under the laws of any state;
(v) Any corporation organized under the provisions of 12 U.S.C. §§611 to 631;
(vi) Any agency or branch of a foreign depository as defined in 12 U.S.C. §3101 that is not exempt under RCW 82.04.315;
(vii) Any credit union, other than a state or federal credit union exempt under state or federal law;
(viii) A production credit association organized under the Federal Farm Credit Act of 1933, all of whose stock held by the Federal Production Credit Corporation has been retired;
(ix) Any corporation or other business entity who receives gross income taxable under RCW 82.04.290, and whose voting interests are more than fifty percent owned, directly or indirectly, by any person or business entity described in (j)(i) through (viii) of this subsection other than an insurance company liable for the insurance premiums tax under RCW 48.14.020 or any other company taxable under chapter 48.14 RCW;
(x) A corporation or other business entity that derives more than fifty percent of its total gross income for federal income tax purposes from finance leases. For purposes of this subsection, a "finance lease" means a lease which meets two requirements:
(A) It is the type of lease permitted to be made by national banks (see 12 U.S.C. 24(7), 12 U.S.C. 24(10), Comptroller of the Currency-Regulations, Part 23-Leasing (added by 56 Fed. Reg. 28314, June 20, 1991, effective July 22, 1991), and Regulation Y of the Federal Reserve System 12 C.F.R. 225.25, as amended); and
(B) It is the economic equivalent of an extension of credit, i.e., the lease is treated by the lessor as a loan for federal income tax purposes. In no event does a lease qualify as an extension of credit where the lessor takes depreciation on such property for federal income tax purposes.
For this classification to apply, the average of the gross income in the current tax year and immediately preceding two tax years must satisfy the more than fifty percent requirement;
(xi) Any other person or business entity, other than an insurance general agent taxable under RCW 82.04.280(5), an insurance business exempt from the business and occupation tax under RCW 82.04.320, a real estate broker taxable under RCW 82.04.255, a securities dealer or international investment management company taxable under RCW 82.04.290(2), that derives more than fifty percent of its gross receipts from activities that a person described in (j)(ii) through (viii) and (x) of this subsection is authorized to transact. For purposes of this subparagraph, the computation of apportionable income shall not include income from nonrecurring, extraordinary items;
(xii) The department is authorized to exclude any person from the application of (j)(xi) of this subsection upon such person proving, by clear and convincing evidence, that the activity producing the receipts of such person is not in substantial competition with those persons described in (j)(ii) through (viii) and (x) of this subsection.
(k) "Gross income of the business," "gross income," or "income" has the same meaning as in RCW 82.04.080 and means the value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses.
(l) "Gross rents" means the actual sum of money or other consideration payable for the use or possession of real property. "Gross rents" includes, but is not limited to:
(i) Any amount payable for the use or possession of real property whether designated as a fixed sum of money or as a percentage of receipts, profits or otherwise;
(ii) Any amount payable as additional rent or in lieu of rent, such as interest, taxes, insurance, repairs or any other amount required to be paid by the terms of a lease or other arrangement; and
(iii) A proportionate part of the cost of any improvement to real property made by or on behalf of the taxpayer which reverts to the owner or grantor upon termination of a lease or other arrangement. The amount to be included in gross rents is the amount of amortization or depreciation allowed in computing the taxable income base for the taxable period. However, where a building is erected on leased land by or on behalf of the taxpayer, the value of the land is determined by multiplying the gross rent by eight and the value of the building is determined in the same manner as if owned by the taxpayer.
(iv) The following are not included in the term "gross rents":
(A) Reasonable amounts payable as separate charges for water and electric service furnished by the lessor;
(B) Reasonable amounts payable as service charges for janitorial services furnished by the lessor;
(C) Reasonable amounts payable for storage, provided such amounts are payable for space not designated and not under the control of the taxpayer; and
(D) That portion of any rental payment which is applicable to the space subleased from the taxpayer and not used by it.
(m) "Loan" means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another. "Loan" includes participations, syndications, and leases treated as loans for federal income tax purposes. "Loan" does not include: Properties treated as loans under Section 595 of the Federal Internal Revenue Code; futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; noninterest bearing balances due from depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a REMIC, or other mortgage-backed or asset-backed security; and other similar items.
(n) "Loan secured by real property" means that fifty percent or more of the aggregate value of the collateral used to secure a loan or other obligation was real property, when valued at fair market value as of the time the original loan or obligation was incurred.
(o) "Merchant discount" means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit card is accepted in payment for merchandise or services sold to the card holder.
(p) "Participation" means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.
(q) "Person" has the meaning given in RCW 82.04.030.
(r) "Principal base of operations" with respect to transportation property means the place of more or less permanent nature from which said property is regularly directed or controlled. With respect to an employee, the "principal base of operations" means the place of more or less permanent nature from which the employee regularly:
(i) Starts his or her work and to which he or she customarily returns in order to receive instructions from his or her employer; or
(ii) Communicates with his or her customers or other persons; or
(iii) Performs any other functions necessary to the exercise of his or her trade or profession at some other point or points.
(s) "Real property owned" and "tangible personal property owned" mean real and tangible personal property, respectively:
(i) On which the taxpayer may claim depreciation for federal income tax purposes; or
(ii) Property to which the taxpayer holds legal title and on which no other person may claim depreciation for federal income tax purposes (or could claim depreciation if subject to federal income tax).
Real and tangible personal property do not include coin, currency, or property acquired in lieu of or pursuant to a foreclosure.
(t) "Regular place of business" means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.
(u) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States or any foreign country.
(v) "Syndication" means an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.
(w) "Taxable in another state" means either:
(i) That a taxpayer is subject in another state to a gross receipts or franchise tax for the privilege of doing business, a franchise tax measured by net income, a corporate stock tax (including a bank shares tax), a single business tax, or an earned surplus tax, or any other tax which is imposed upon or measured by gross or net income; or
(ii) That another state has jurisdiction to subject the taxpayer to any of such taxes regardless of whether, in fact, the state does or does not.
(x) "Taxable period" means the calendar year during which tax liability is incurred.
(y) "Transportation property" means vehicles and vessels capable of moving under their own power, such as aircraft, trains, water vessels and motor vehicles, as well as any equipment or containers attached to such property, such as rolling stock, barges, trailers or the like.
(4) Receipts factor.
(a) General. Except as provided in subsection (7) of this section, the receipts factor is a fraction, the numerator of which is the gross income of the taxpayer in this state during the taxable period and the denominator of which is the gross income of the taxpayer inside and outside this state during the taxable period. The method of calculating receipts for purposes of the denominator is the same as the method used in determining receipts for purposes of the numerator.
(b) Receipts from the lease of real property. The numerator of the receipts factor includes income from the lease or rental of real property owned by the taxpayer if the property is located within this state or income from the sublease of real property if the property is located within this state.
(c) Receipts from the lease of tangible personal property.
(i) Except as described in (c)(ii) of this subsection, the numerator of the receipts factor includes income from the lease or rental of tangible personal property owned by the taxpayer if the property is located within this state when it is first placed in service by the lessee.
(ii) Income from the lease or rental of transportation property owned by the taxpayer is included in the numerator of the receipts factor to the extent that the property is used in this state. The extent an aircraft is used in this state and the amount of income that is to be included in the numerator of this state's receipts factor is determined by multiplying all the income from the lease or rental of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(d) Interest from loans secured by real property.
(i) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the income described in this subparagraph is included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the income described in this subparagraph shall be included in the numerator of the receipts factor if the borrower is located in this state.
(ii) The determination of whether the real property securing a loan is located within this state shall be made as of the time the original agreement was made and any and all subsequent substitutions of collateral shall be disregarded.
(e) Interest from loans not secured by real property. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in this state.
(f) Net gains from the sale of loans. The numerator of the receipts factor includes net gains from the sale of loans. Net gains from the sale of loans includes income recorded under the coupon stripping rules of Section 1286 of the Federal Internal Revenue Code.
(i) The amount of net gains (but not less than zero) from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (4)(d) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(ii) The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction the numerator of which is the amount included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(g) Receipts from credit card receivables. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from credit card receivables and income from fees charged to card holders, such as annual fees, if the billing address of the card holder is in this state.
(h) Net gains from the sale of credit card receivables. The numerator of the receipts factor includes net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (g) of this subsection and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(i) Credit card issuer's reimbursement fees. The numerator of the receipts factor includes all credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (g) of this subsection and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(j) Receipts from merchant discount. The numerator of the receipts factor includes receipts from merchant discount if the commercial domicile of the merchant is in this state. Such receipts shall be computed net of any cardholder charge backs, but shall not be reduced by any interchange transaction fees or by any issuer's reimbursement fees paid to another for charges made by its card holders.
(k) Loan servicing fees.
(i)(A) The numerator of the receipts factor includes loan servicing fees derived from loans secured by real property multiplied by a fraction the numerator of which is the amount included in the numerator of the receipts factor under (d) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(B) The numerator of the receipts factor includes loan servicing fees derived from loans not secured by real property multiplied by a fraction the numerator of which is the amount included in the numerator of the receipts factor under (e) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(ii) If the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor includes such fees if the borrower is located in this state.
(l) Receipts from services. The numerator of the receipts factor includes receipts from services not otherwise apportioned under this subsection if the service is performed in this state. If the service is performed both inside and outside this state, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this section, if a greater proportion of the activity producing the receipts is performed in this state based on cost of performance.
(m) Receipts from investment assets and activities and trading assets and activities.
(i) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities are included in the receipts factor. Investment assets and activities and trading assets and activities include but are not limited to: Investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in (m)(i)(A) and (B) of this subsection, the receipts factor includes the following:
(A) The receipts factor includes the amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.
(B) The receipts factor includes the amount by which interest, dividends, gains and other receipts from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends, and losses from such assets and activities.
(ii) The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other receipts from investment assets and activities and from trading assets and activities described in (m)(i) of this subsection that are attributable to this state.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (m)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such funds and such securities.
(C) The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions, (but excluding amounts described in (m)(ii)(A) or (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (m)(i)(B) of this subsection by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(D) For purposes of this paragraph, average value shall be determined using the rules for determining the average value of tangible personal property set forth in subsection (5) of this section.
(iii) In lieu of using the method set forth in (m)(ii) of this subsection, the taxpayer may elect, or the department may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this paragraph.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross receipts from such assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (m)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such funds and such securities.
(C) The amount of interest, dividends, gains and other receipts from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions, (but excluding amounts described in (m)(ii)(a)[(A)] or (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (m)(i)(B) of this subsection by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(iv) If the taxpayer elects or is required by the department to use the method set forth in (m)(iii) of this subsection, it shall use this method on all subsequent returns unless the taxpayer receives prior permission from the department to use, or the department requires a different method.
(v) The taxpayer has the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside this state. If the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity is considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Such policies and guidelines are presumed, subject to rebuttal by preponderance of the evidence, to be established at the commercial domicile of the taxpayer.
(n) Attribution of certain receipts to commercial domicile. All receipts which would be assigned under this section to a state in which the taxpayer is not taxable are included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.
(5) Property factor.
(a) General. Except as provided in subsection (7) of this section, the property factor is a fraction, the numerator of which is the average value of real property and tangible personal property rented to the taxpayer that is located or used within this state during the taxable period, the average value of the real and tangible personal property owned by the taxpayer that is located or used within this state during the taxable period, and the average value of the taxpayer's loans and credit card receivables that are located within this state during the taxable period, and the denominator of which is the average value of all such property located or used inside and outside this state during the taxable period.
(b) Value of property owned by the taxpayer.
(i) The value of real property and tangible personal property owned by the taxpayer is the original cost or other basis of such property for federal income tax purposes without regard to depletion, depreciation or amortization.
(ii) Loans are valued at their outstanding principal balance, without regard to any reserve for bad debts. If a loan is charged-off in whole or in part for federal income tax purposes, the portion of the loan charged off is not outstanding. A specifically allocated reserve established under regulatory or financial accounting guidelines which is treated as charged-off for federal income tax purposes shall be treated as charged-off for purposes of this section.
(iii) Credit card receivables are valued at their out-standing principal balance, without regard to any reserve for bad debts. If a credit card receivable is charged-off in whole or in part for federal income tax purposes, the portion of the receivable charged-off is not outstanding.
(c) Average value of property owned by the taxpayer. The average value of property owned by the taxpayer is computed on an annual basis by adding the value of the property on the first day of the taxable period and the value on the last day of the taxable period and dividing the sum by two. If averaging on this basis does not properly reflect average value, the department may require averaging on a more frequent basis. The taxpayer may elect to average on a more frequent basis. When averaging on a more frequent basis is required by the department or is elected by the taxpayer, the same method of valuation must be used consistently by the taxpayer with respect to property inside and outside this state and on all subsequent returns unless the taxpayer receives prior permission from the department or the department requires a different method of determining average value.
(d) Average value of real property and tangible personal property rented to the taxpayer.
(i) The average value of real property and tangible personal property that the taxpayer has rented from another and which is not treated as property owned by the taxpayer for federal income tax purposes, shall be determined annually by multiplying the gross rents payable during the taxable year by eight.
(ii) Where the use of the general method described in this subsection results in inaccurate valuations of rented property, any other method which properly reflects the value may be adopted by the department or by the taxpayer when approved in writing by the department. Once approved, such other method of valuation must be used on all subsequent returns unless the taxpayer receives prior approval from the department or the department requires a different method of valuation.
(e) Location of real property and tangible personal property owned by or rented to the taxpayer.
(i) Except as described in (e)(ii) of this subsection, real property and tangible personal property owned by or rented to the taxpayer is considered to be located within this state if it is physically located, situated or used within this state.
(ii) Transportation property is included in the numerator of the property factor to the extent that the property is used in this state. The extent an aircraft will be deemed to be used in this state and the amount of value that is to be included in the numerator of this state's property factor is determined by multiplying the average value of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft everywhere during the tax reporting period. If the extent of the use of any transportation property within this state cannot be determined, then the property is deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle is deemed to be used wholly in the state in which it is registered. Thus, a motor vehicle will not be considered as used in Washington if there is no requirement for the vehicle to be licensed or registered in Washington.
(f) Location of loans.
(i)(A) A loan is located within this state if it is properly assigned to a regular place of business of the taxpayer within this state.
(B) A loan is properly assigned to the regular place of business with which it has a majority of substantive contacts. A loan assigned by the taxpayer to a regular place of business outside the state shall be presumed to have been properly assigned if:
(I) The taxpayer has assigned, in the regular course of its business, such loan on its records to a regular place of business consistent with federal or state regulatory requirements;
(II) Such assignment on its records is based upon substantive contacts of the loan to such regular place of business; and
(III) The taxpayer uses said records reflecting assignment of loans for the filing of all state and local tax returns for which an assignment of loans to a regular place of business is required.
(ii) The presumption of proper assignment of a loan provided in (f)(i)(A) of this subsection may be rebutted by a preponderance of the evidence, showing that the majority of substantive contacts regarding such loan did not occur at the regular place of business to which it was assigned on the taxpayer's records. When such presumption has been rebutted, the loan is located within this state if: The taxpayer had a regular place of business within this state at the time the loan was made; and the taxpayer fails to show, by a preponderance of the evidence, that the majority of substantive contacts regarding such loan did not occur within this state.
(A) If a loan is assigned by the taxpayer to a place outside this state which is not a regular place of business, it is presumed, subject to rebuttal on a preponderance of evidence, that the majority of substantive contacts regarding the loan occurred within this state if, at the time the loan was made the taxpayer's commercial domicile, as defined in subsection (3)(d) of this section, was within this state.
(B) To determine the state in which the majority of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as the solicitation, investigation, negotiation, approval and administration of the loan. The terms "solicitation," "investigation," "negotiation," "approval" and "administration" are defined as follows:
(I) Solicitation. Solicitation is either active or passive. Active solicitation occurs when an employee of the taxpayer initiates the contact with the customer. Such activity is located at the regular place of business which the taxpayer's employee is regularly connected with or working out of, regardless of where the services of such employee were actually performed. Passive solicitation occurs when the customer initiates the contact with the taxpayer. If the customer's initial contact was not at a regular place of business of the taxpayer, the regular place of business, if any, where the passive solicitation occurred is determined by the facts in each case.
(II) Investigation. Investigation is the procedure whereby employees of the taxpayer determine the credit worthiness of the customer as well as the degree of risk involved in making a particular agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.
(III) Negotiation. Negotiation is the procedure whereby employees of the taxpayer and its customer determine the terms of the agreement (e.g., the amount, duration, interest rate, frequency of repayment, currency denomination and security required). Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.
(IV) Approval. Approval is the procedure whereby employees or the board of directors of the taxpayer make the final determination whether to enter into the agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed. If the board of directors makes the final determination, such activity is located at the commercial domicile of the taxpayer.
(V) Administration. Administration is the process of managing the account. This process includes bookkeeping, collecting the payments, corresponding with the customer, reporting to management regarding the status of the agreement and proceeding against the borrower or the security interest if the borrower is in default. Such activity is located at the regular place of business which oversees this activity.
(g) Location of credit card receivables. For purposes of determining the location of credit card receivables, credit card receivables are treated as loans and are subject to the provisions of (f) of this subsection.
(h) Period for which properly assigned loan remains assigned. A loan that has been properly assigned to a state shall remain assigned to that state for the length of the original term of the loan, absent any change in material fact. If the original term of the loan is modified (extended or reduced), the loan may be properly assigned to another state if the loan has a majority of substantive contact to a regular place of business there.
(6) Payroll factor.
(a) General. Except as provided in subsection (7) of this section, the payroll factor is a fraction, the numerator of which is the total amount paid in this state during the taxable period by the taxpayer for compensation of employees and the denominator of which is the total compensation paid both inside and outside this state during the taxable period. The payroll factor shall include all compensation paid to employees.
(b) Compensation relating to independent contractors. Payments made to any independent contractor or any other person not properly classifiable as an employee is excluded from both the numerator and denominator of the factor.
(c) When compensation paid in this state. Compensation is paid in this state if any one of the following tests, applied consecutively, is met:
(i) The employee's services are performed entirely within this state.
(ii) The employee's services are performed both inside and outside the state, but the service performed without the state is incidental to the employee's service within the state. The term "incidental" means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction.
(iii) If the employee's services are performed both inside and outside this state, the employee's compensation will be attributed to this state:
(A) If the employee's principal base of operations is inside this state; or
(B) If there is no principal base of operations in any state in which some part of the services are performed, but the place from which the services are directed or controlled is in this state; or
(C) If the principal base of operations and the place from which the services are directed or controlled are not in any state in which some part of the service is performed but the employee's residence is in this state.
(7) Alternative factor calculation.
(a) General. A taxpayer may elect to use the alternative factors calculation as provided in this subsection. The alternative factors calculation requires the use of all three factors provided below. A taxpayer making such an election must keep books and records sufficient to explain the calculations. Such an election, once made, must continue for a full calendar year.
(b) Receipts factor. The alternative receipts factor may be calculated by excluding from both the numerator and the denominator of the receipts factor as calculated in subsection (4) of this section gross income attributable to items that would not be subject to tax under the provisions of RCW 82.04.290, whether from activities inside or outside of the state. For example, a taxpayer making the election to use the alternative factors calculation must exclude all receipts from the rental of tangible personal property in Washington from the numerator and all receipts from the rental of tangible personal property, wherever located, in the denominator.
(c) Property factor. The alternative property factor may be calculated by excluding from both the numerator and the denominator of the property factor as calculated in subsection (5) of this section property, the income from which would be considered wholesale or retail sales under chapter 82.04 RCW, whether from activities inside or outside the state. For example, a taxpayer making the election to use the alternative factors calculation must exclude all tangible personal property rented to customers in Washington from the numerator and all tangible personal property rented to customers, wherever located, in the denominator.
(d) Payroll factor. The alternative payroll factor may be calculated by excluding from both the numerator and the denominator of the payroll factor as calculated in subsection (6) of this section that amount paid to employees in connection with earning gross income which would not be subject to tax under RCW 82.04.290, whether earned from activities inside or outside of the state. For example, a taxpayer making the election to use the alternative factors calculation must exclude all compensation paid to employees in connection with activities that are not taxable under RCW 82.04.290 from the numerator and all compensation paid to employees wherever located that would not be taxable under RCW 82.04.290 if it had been earned in Washington.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-22-089, § 458-20-14601, filed 11/1/10, effective 12/2/10. Statutory Authority: RCW 82.04.460(2) and 82.32.300. WSR 97-11-033, § 458-20-14601, filed 5/15/97, effective 7/1/97.]


PDF458-20-148

Barber and beauty shops.

Business and Occupation Tax
Barber and beauty shops are subject to the business and occupation tax as follows:
Retailing. Taxable under the retailing classification upon charges for styling of wigs or hairpieces and upon the gross proceeds of sales of shoe shines and of packaged cosmetics, etc., sold apart from the rendition of personal services.
Service and other business activities. Taxable under the service and other business activities classification upon the gross income from charges for the rendition of personal services, such as hair cutting, shaving, shampooing, tinting, bleaching, setting and the like.
Retail Sales Tax
Barber and beauty shops primarily render personal services as to hair cutting, shaving, shampooing, tinting, bleaching, setting and the like and, therefore are not required to collect the retail sales tax from the customers paying for such services. Sales by supply houses to barber and beauty shops of such articles of equipment as clippers, razors, barber chairs, hair waving machines, etc., and of such supplies as soaps, hair tonics, lotions, cosmetics, dyes, etc., which are used incidentally in the rendering of such personal services are taxable retail sales upon which the retail sales tax must be collected. Shops must collect retail sales tax upon sales and charges shown as taxable under retailing above.
Sales by barber and beauty shops of packaged cosmetics, hair tonics, lotions and like articles are taxable retail sales when sold apart from the rendition of personal services and are subject to the retail sales tax. Sales of such articles by supply houses to barber and beauty shops are sales for resale and are not taxable under the retail sales tax.
Barber shops operating shoe shine stands are required to collect the retail sales tax upon the charges made for shoe shines rendered to customers. Sales by supply houses of shoe polish, dyes, cleaners, etc., which are resold in rendering a shoe shine service are sales for resale and not taxable under the retail sales tax. However, sales to shoe shine stands of brushes, chairs and other equipment which are not resold in rendering such services are taxable retail sales and the retail sales tax must be collected thereon.
[Statutory Authority: RCW 82.32.300. WSR 83-07-034 (Order ET 83-17), § 458-20-148, filed 3/15/83; Order ET 70-3, § 458-20-148 (Rule 148), filed 5/29/70, effective 7/1/70.]


PDF458-20-150

Optometrists, ophthalmologists, and opticians.

(1) Introduction. This rule explains the application of Washington's business and occupation (B&O), retail sales, and use taxes to the business activities of optometrists, ophthalmologists, and opticians. It explains the tax liability resulting from the rendering of professional services and the sale of prescription lenses, frames, and other optical merchandise. It also discusses the retail sales tax exemption for the sale and repair of prescription lenses and frames, and the B&O tax deduction for prescription drugs administered by a medical service provider.
(a) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(b) Other rules that may be relevant. The department of revenue (department) has adopted other rules dealing with the taxability of various activities relating to the provision of health care. Readers may want to refer to the rules in the following list for additional information.
(i) WAC 458-20-102 Reseller permits;
(ii) WAC 458-20-151 Dentists, audiologists, and other health care providers—Dental laboratories and dental technicians;
(iii) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities;
(iv) WAC 458-20-178 Use tax and the use of tangible personal property;
(v) WAC 458-20-18801 Medical substances, devices, and supplies for humans—Drugs prescribed for human use—Medically prescribed oxygen—Prosthetic devices—Mobility enhancing equipment—Durable medical equipment.
(c) Definitions for the purpose of this rule are:
(i) Optical merchandise. "Optical merchandise" includes prescription lenses, frames, springs, temples, cases, and other items or accessories to be worn or used with lenses. It also includes nonprescription lenses or eyeglasses.
(ii) Prescription lens. "Prescription lens" means any lens, including contact lens, with power or prism correction for human vision, which has been prescribed in writing by a physician or optometrist. The term includes all ingredients and component parts of the lens itself, including color, scratch resistant or ultraviolet coating, and fashion tints.
(iii) Professional services. "Professional services" includes the examination of the human eye, the examination, identification, and treatment of any defects of the human vision system, and the analysis of the process of vision. It includes the use of any diagnostic instruments or devices for the measurement of the powers or range of vision, or the determination of the refractive powers of the eye or its functions. It does not include the preparation or dispensing of lenses or eyeglasses.
(2) Taxability of professional services. Optometrists and ophthalmologists are subject to service and other activities B&O tax on their gross income from providing professional services.
(3) Purchases and sales of optical merchandise by optometrists, ophthalmologists, and opticians. Purchases of optical merchandise by optometrists, ophthalmologists, and opticians for resale without intervening use as a consumer are not subject to retail sales tax. Thus, optometrists, ophthalmologists, and opticians are not required to pay retail sales or use tax on items which will be given to customers as part of a sale of eyeglasses or contact lenses, such as cleaning supplies, carrying cases, and the like. The department considers these items to be sold along with the eyeglasses or contact lenses. An optometrist, ophthalmologist, or optician purchasing tangible personal property for resale must furnish a reseller permit to the seller to document the wholesale nature of the sale as provided in WAC 458-20-102.
Sales of optical merchandise to consumers are subject to retailing B&O tax. The seller must collect retail sales tax unless the sale is specifically exempt by law.
(a) Are sales of prescription lenses and frames subject to retail sales tax? No, sales of prescription lenses and frames for prescription lenses are exempt from retail sales tax as prosthetic devices under RCW 82.08.0283.
(b) Are repairs of prescription lenses and frames subject to retail sales tax? No, charges for the repair of prescription lenses or to prescription eyeglass frames, whether the frames are the original frames or replacement frames, are exempt from retail sales tax as labor and services rendered in respect to prosthetic devices under RCW 82.08.0283.
(c) Segregation of income from different sources. To claim a retail sales tax exemption under RCW 82.08.0281 or 82.08.0283, persons providing or selling any combination of professional services, prescription lenses, prescription eyeglass frames, or other optical merchandise must segregate and separately account for the income derived from each source.
(d) Examples.
(i) Example 1. Taxpayer is an optometrist who performs eye examinations and sells prescription eyeglasses, contact lenses, and other optical merchandise. All sales of prescription lenses are made under written prescription. Income attributable to the eye examinations, the sale of prescription lenses, and the sale of other optical merchandise is segregated in Taxpayer's books of account.
The income derived from the eye examinations is subject to service and other activities B&O tax. The gross proceeds of sales of the prescription lenses, eyeglass frames with prescription lenses, contact lenses, and other optical merchandise are subject to retailing B&O tax. The sales of prescription lenses, eyeglass frames with prescription lenses, including contact lenses, are exempt from retail sales tax. Taxpayer must collect retail sales tax on sales of other optical merchandise and remit the tax to the department.
(ii) Example 2. Taxpayer is a retail drugstore that sells preassembled "off-the-shelf" reading glasses. These eyeglasses have lenses with power or prism correction and are sold without a prescription. In addition, Taxpayer sells magnifiers, binoculars, monoculars, and sunglasses. These items are also sold without a prescription.
The gross proceeds of sales of these items are subject to retailing B&O tax. In addition, Taxpayer must collect retail sales tax on sales of these items and remit the tax to the department. Because these items are not sold under a prescription, nor are they prescribed, fitted, or furnished for the buyer by a person licensed under the laws of this state to prescribe, fit, or furnish prosthetic devices, they are not exempt from retail sales tax under either RCW 82.08.0281 or 82.08.0283.
(4) Equipment and supplies used by optometrists, ophthalmologists, and opticians. Purchases of equipment and supplies used by optometrists, ophthalmologists, and opticians are purchases at retail and are subject to retail sales tax unless specifically exempt by law. If the seller does not collect retail sales tax, the optometrist, ophthalmologist, or optician must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. Deferred sales or use tax liability should be reported on the use tax line of the buyer's excise tax return. For detailed information about use tax, refer to WAC 458-20-178.
(a) Prescription drugs. "Prescription drugs," as defined in RCW 82.08.0281, may be purchased without payment of retail sales or use tax by optometrists and ophthalmologists if all requirements for the exemption are met. For additional information regarding prescription drugs, refer to WAC 458-20-18801.
(b) Prescription drugs administered by the medical service provider. RCW 82.04.620 allows a deduction from the service and other activities classification of the B&O tax (RCW 82.04.290(2)) for amounts received by physicians or clinics for drugs for infusion or injection by licensed physicians or their agents for human use pursuant to a prescription. This deduction only applies to amounts that:
(i) Are separately stated on invoices or other billing statements;
(ii) Do not exceed the then current federal rate; and
(iii) Are covered or required under a health care service program subsidized by the federal or state government.
For purposes of this deduction only, amounts that "are covered or required under a health care service program subsidized by the federal or state government" include any required drug copayments made directly from the patient to the physician or clinic.
(A) "Federal rate" means the rate at or below which the federal government or its agents reimburse providers for prescription drugs administered to patients as provided for in the medicare, Part B drugs average sales price information resource as published by the United States Department of Health and Human Services, or any index that succeeds it. RCW 82.04.620.
(B) The deduction is available on an "all or nothing" basis against the total of amounts received for a specific drug charge. If the total amount received by the physician or clinic for a specific drug exceeds the federal reimbursement rate, none of the total amount received qualifies for the deduction (including any required copayment received directly from the patient). In other words, a physician or clinic may not simply take an "automatic" deduction equal to the federal reimbursement rate for each drug.
(c) Samples. Optometrists, ophthalmologists, and opticians are required to pay use tax on any samples, with the exception of prescription drug samples, that they acquire unless retail sales or use tax has been previously paid on these samples.
(d) Examples.
(i) Example 3. Taxpayer is an ophthalmologist who performs eye examinations, laser surgery, and cataract surgery. Taxpayer purchases equipment and supplies that are used in performing these services such as surgical instruments, eye shields, cotton swabs, sterile dressings, bandages, and gauze. Taxpayer also purchases a computer, technical publications, and magazines by mail order and over the internet.
Taxpayer is subject to retail sales tax on these purchases. If the seller does not collect sales tax, Taxpayer is liable for deferred sales tax or use tax and must remit the tax directly to the department.
(ii) Example 4. Taxpayer is an optometrist who performs eye examinations and sells prescription eyeglasses, contact lenses, and other optical merchandise. Taxpayer purchases nonprescription saline and cleaning solutions for contact lenses and carrying cases for eyeglasses and contact lenses. The saline and cleaning solutions are consumed when Taxpayer performs eye examinations. The eyeglass and contact lens carrying cases are provided to customers at the time they purchase eyeglasses or contact lenses.
The purchases of the eyeglass and contact lens carrying cases are purchases for resale and are not subject to sales tax if Taxpayer provides the seller with a reseller permit. The purchases of the saline and cleaning solutions are subject to retail sales tax. These solutions are consumed while providing professional services and cannot be considered to be purchased for resale. They also do not qualify for a sales tax exemption under RCW 82.08.0281 as prescription drugs. If retail sales tax was not paid on the saline and cleaning solutions at the time of purchase, Taxpayer must remit deferred sales tax or use tax directly to the department.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-069, § 458-20-150, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-150, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 08-16-055, § 458-20-150, filed 7/30/08, effective 8/30/08; WSR 04-17-023, § 458-20-150, filed 8/9/04, effective 9/9/04. Statutory Authority: RCW 82.32.300. WSR 93-19-020, § 458-20-150, filed 9/2/93, effective 10/3/93; WSR 83-07-034 (Order ET 83-17), § 458-20-150, filed 3/15/83; Order 74-2, § 458-20-150, filed 6/24/74; Order ET 70-3, § 458-20-150 (Rule 150), filed 5/29/70, effective 7/1/70.]


PDF458-20-151

Dentists, audiologists, and other health care providers—Dental laboratories and dental technicians.

(1) Introduction. This rule explains the application of business and occupation (B&O), retail sales, and use taxes to the business activities of dentists, audiologists, dental laboratories, dental technicians, and other health care providers.
(a) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(b) Other rules that may apply. Readers may also want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-102 Reseller permits;
(ii) WAC 458-20-150 Optometrists, ophthalmologists, and opticians;
(iii) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities;
(iv) WAC 458-20-178 Use tax and the use of tangible personal property; and
(v) WAC 458-20-18801 Medical substances, devices, and supplies for humans—Drugs prescribed for human use—Medically prescribed oxygen—Prosthetic devices—Mobility enhancing equipment—Durable medical equipment.
(c) Definitions. For the purposes of this rule the following definitions apply:
(i) Audiologists. "Audiologists" diagnose, manage, and treat a patient's hearing, balance, or related ear problems.
(ii) Gross income. "Gross income" means compensation for the rendition of health care services, and includes any separate charge for drugs, medicines, and other substances administered or provided to a patient as part of the health care services delivered to the patient. Gross income also includes any separate charges for prosthetic devices, including dental prostheses and hearing aids that are provided as part of the health care services delivered to patients.
(iii) Health care provider. A "health care provider" is a person licensed under the provisions of Title 18 RCW to provide health care services to humans in the ordinary course of business or practice of a profession.
(iv) Prosthetic device. "Prosthetic device" means a replacement, corrective, or supportive device, including repair and replacement parts for a prosthetic device, worn on or in the body to artificially replace a missing portion of the body, prevent or correct a physical deformity or malfunction, or support a weak or deformed portion of the body. RCW 82.08.0283. Dental appliances, devices, restorations, substitutes, or other dental laboratory products are also referred to as "dental prostheses" throughout this rule.
(2) Tax-reporting information for dentists, audiologists, and other health care providers. This subsection provides specific tax-reporting information for dentists, audiologists, and more generalized tax-reporting information for other health care providers. Dentists who employ dental technicians to produce or fabricate dental appliances, devices, restorations, substitutes, or other dental laboratory products should refer to subsection (3) of this rule for additional information.
(a) Business and occupation tax. Dentists, audiologists, and other health care providers are subject to the service and other activities B&O tax on their gross income from performing dental and other health care services. RCW 82.04.290.
(b) Sales of tangible personal property. A dentist, audiologist, or other health care provider may make sales of tangible personal property such as hearing aid batteries, drugs, medicines, and bandages as a convenience to a buyer apart from any health care services provided to the buyer. These are sales of tangible personal property only when the dentist, audiologist, or other health care provider does not supply or administer the drug, medicine, or other item in the course of delivering health care services to the buyer. The gross proceeds of these retail sales of tangible personal property are subject to the retailing B&O tax. In addition, the dentist, audiologist, or other health care provider must collect and remit retail sales tax, unless the sale is specifically exempt by law. For detailed information regarding retail sales tax exemptions available for sales of items commonly associated with health care services refer to WAC 458-20-18801. Adequate records must be kept by the dentist, audiologist, or other health care provider to distinguish items of tangible personal property supplied or administered to patients as part of health care services from those sold apart from health care services delivered to the buyer.
Purchases of tangible personal property for resale without intervening use are not subject to the retail sales tax. A dentist, audiologist, or other health care provider purchasing tangible personal property for resale must furnish a reseller permit to the seller to document the wholesale nature of the sale. For information on reseller permits, see WAC 458-20-102.
(c) Equipment and supplies used by dentists, audiologists, and other health care providers. Purchases of equipment and supplies used by dentists, audiologists, and other health care providers in performing diagnostic, dental, or other health care services are purchases at retail and subject to retail sales tax unless specifically exempt by law. If the seller does not collect retail sales tax, the dentist, audiologist, or other health care provider must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. Deferred sales or use tax liability should be reported on the use tax line of the buyer's excise tax return. For detailed information regarding the use tax, see WAC 458-20-178.
Dental prostheses are exempt from retail sales and use taxes if the dental prosthesis meets the definition of "prosthetic device." Exempt items include, but are not limited to, full and partial dentures, crowns, inlays, fillings, braces, retainers, collars, wire, screws, bands, splints, night guards, gold, silver, alloys, acrylic materials, filling material, reline material, cement, cavity liners, pins, and endo posts.
(d) Itemization of gross income. Audiologists who itemize invoices to their patients showing charges for tests and evaluations separate from charges for sales of hearing aids may separately report their income under the service and other activities B&O tax classification and the retailing B&O tax classification, respectively. Audiologists who do not separately charge for their services and sales of hearing aids must report their gross income under the service and other activities B&O tax classification.
(e) Examples.
(i) Example 1. Dr. A is a physician who specializes in the treatment of allergies. Dr. A treats many patients with injections of allergy extracts (antigens). Dr. A separately itemizes the charges for the antigen, the administration of the injection, and the office call in patients' billings. Dr. A is subject to service and other activities B&O tax on the entire charge for the antigen, administration of the injection, and office call. Even though Dr. A separately itemizes the charges for antigens, these are not retail sales because Dr. A administers the antigens to the patients.
(ii) Example 2. Dr. B made mail-order purchases of a computer, books, and magazines for use in Dr. B's dental practice. Dr. B did not pay retail sales tax to the sellers on these purchases. Therefore, Dr. B must remit to the department deferred retail sales or use tax on the computer, books, and magazines.
(3) Tax-reporting information for dental laboratories and dental technicians. This subsection provides tax-reporting information for dental laboratories and dental technicians.
(a) Producing or fabricating dental prostheses for sale. The production or fabrication of dental appliances, devices, restorations, substitutes, or other dental laboratory products by dental laboratories and dental technicians is a manufacturing activity. RCW 82.04.120. Thus, dental laboratories and dental technicians are subject to manufacturing B&O tax on the value of the dental prostheses they manufacture. The value of products manufactured is generally the gross proceeds of sales of such manufactured products. For additional information about the manufacturing B&O tax, see WAC 458-20-136.
(i) Sales of dental prostheses manufactured by dental laboratories and dental technicians. Dental laboratories and dental technicians that make sales within this state of dental prostheses they have manufactured are subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases, the dental laboratory or dental technician must report under the manufacturing B&O tax classification as well as the wholesaling or retailing B&O tax classification. However, a multiple activities tax credit (MATC) may be claimed. For detailed information about the MATC, see WAC 458-20-19301. Dental laboratories or dental technicians making wholesale sales must obtain a reseller permit from the buyer to document the wholesale nature of the sale.
As noted in subsection (2)(c) of this rule, sales of dental prostheses including, but not limited to, full and partial dentures, crowns, inlays, fillings, braces, and retainers are exempt from retail sales tax if the dental prosthesis meets the definition of a "prosthetic device."
(ii) Dental casts, models, and other articles of tangible personal property manufactured by dental laboratories and dental technicians for commercial or industrial use. Dental laboratories and dental technicians may manufacture dental casts, models, or other articles of tangible personal property that they use to produce or fabricate dental prostheses. In such cases, the dental laboratory or dental technician is manufacturing a product for commercial or industrial use and is subject to the manufacturing B&O tax on the value of the dental cast, model, or other article of tangible personal property. For information regarding the value of products, see RCW 82.04.450 and WAC 458-20-112. As the consumer of the dental cast, model, or other article of tangible personal property manufactured for commercial or industrial use, the dental laboratory or dental technician is also liable for use tax on the value of the dental cast, model, or other article of tangible personal property, unless the use is specifically exempt by law.
(b) In-house manufacturing of dental prostheses by dentists. As noted in this rule, the production or fabrication of dental prostheses by dental laboratories and dental technicians is a manufacturing activity. However, the production or fabrication of dental prostheses by dentists in the course of providing dental care services to their patients is not a manufacturing activity under the law and, therefore, manufacturing B&O tax does not apply to that activity. A dentist may personally produce or fabricate dental prostheses, or the dentist may have an employee who is a dental technician produce or fabricate the dental prostheses. These dental prostheses are considered a tangible representation of professional services provided to the dentist's patients. Dentists who manufacture impressions, dental casts, models, or other articles of tangible personal property that they use to produce or fabricate dental prostheses should refer to subsection (3)(a)(ii) of this rule for tax reporting instructions applicable to this activity.
(i) Example 3. Jane Doe, an employee of Dentist A, fabricates dental prostheses. Dentist A provides these products to patients in the course of rendering dental care services. Dentist A is subject to service and other activities B&O tax on the gross income received for providing dental care services, including any charge for the dental prostheses even if Dentist A separately charges patients for the dental prostheses.
(ii) Example 4. The facts are the same as in the previous example except that Dentist A also sells to Dentist B dental prostheses produced by Jane Doe in the course of Jane's employment with Dentist A. For these sales of dental prostheses to Dentist B, Dentist A is acting as a dental laboratory and, therefore, is liable for both manufacturing B&O tax and retailing B&O tax with respect to the manufacture and sale of dental prostheses to Dentist B. Dentist A may also claim a MATC. See subsection (3)(a) and (a)(i) of this rule. The sales to Dentist B are exempt from retail sales tax under RCW 82.08.0283 if the items qualify as a "prosthetic device" as defined in subsection (1)(c)(iv) of this rule.
(c) Equipment and supplies used by dental laboratories and dental technicians. Purchases of equipment and supplies by dental laboratories and dental technicians for use in manufacturing dental prostheses are generally purchases at retail and subject to retail sales tax unless specifically exempt by law. If the seller does not collect retail sales tax, the dental laboratory or dental technician must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. Deferred sales or use tax should be reported on the use tax line of the buyer's excise tax return. For detailed information regarding use tax, see WAC 458-20-178.
(i) Components of dental prostheses produced for sale. Purchases of supplies that become components of dental prostheses produced for sale are purchases at wholesale and are not subject to retail sales tax, if the buyer provides the seller with a reseller permit to document the wholesale nature of the transaction.
(ii) Example 5. A dental lab purchases equipment and supplies including gold, silver, alloys, artificial teeth, cement, and tools. The purchases of gold, silver, alloys, artificial teeth, and cement that become components of dental prostheses are wholesale purchases and are not subject to retail sales tax if the buyer provides the seller with a reseller permit. The tools are subject to retail sales or use tax unless they qualify for the manufacturing machinery and equipment sales and use tax exemptions. Additional information about these exemptions is provided in subsection (3)(d) of this rule.
(d) Sales and use tax exemptions for manufacturing machinery and equipment. RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for sales to or use by manufacturers of certain machinery and equipment used directly in a manufacturing operation. These exemptions are limited to machinery and equipment used to manufacture products for sale as tangible personal property. Thus, dental laboratories and dental technicians manufacturing dental prostheses for sale may be eligible for these exemptions. The exemptions are not available if these products are produced or fabricated by a dentist or an employee of a dentist and are provided to patients in the course of delivering dental care services to the patients (as is the case in Example 3). See WAC 458-20-13601 for detailed information regarding these exemptions.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-16-002, § 458-20-151, filed 7/20/16, effective 8/20/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-151, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 04-17-022, § 458-20-151, filed 8/9/04, effective 9/9/04; WSR 02-21-080, § 458-20-151, filed 10/17/02, effective 11/17/02. Statutory Authority: RCW 82.32.300. WSR 91-15-023, § 458-20-151, filed 7/11/91, effective 8/11/91; WSR 83-07-032 (Order ET 83-15), § 458-20-151, filed 3/15/83; Order 74-2, § 458-20-151, filed 6/24/74; Order ET 70-3, § 458-20-151 (Rule 151), filed 5/19/70, effective 7/1/70.]


PDF458-20-153

Funeral establishments.

(1) Introduction. This rule explains:
(a) The application of business and occupation (B&O), retail sales, and use taxes to the business activities of funeral establishments; and
(b) The application of tax to income derived from prearrangement funeral service contracts.
For the purposes of this rule, the term "funeral establishment" means a person licensed under RCW 18.39.145. Persons operating cemeteries should refer to WAC 458-20-154 (Cemeteries, crematories, columbaria) for tax-reporting information.
The funeral and cemetery board (board) regulates funeral establishments. For funeral establishments, refer to chapter 18.39 RCW and chapters 308-47, 308-48, and 308-49 WAC for information on the laws and administrative rules governing their business activities.
(2) General tax reporting responsibilities. The gross proceeds attributable to funeral activities are taxable when income is accrued in the books and records or when services are performed or merchandise is delivered, whichever is earlier.
The gross proceeds for funeral services are subject to tax under the service and other activities classification of the B&O tax. The gross proceeds from the retail sales of tangible personal property such as urns, caskets, clothing, outside casket cases, floral arrangements, plants, and acknowledgment cards are subject to tax under the retailing classification of the B&O tax. Funeral establishments are also responsible for collecting and remitting to the department of revenue (department) retail sales tax on retail sales of tangible personal property unless specifically exempt by law.
Funeral establishments commonly quote a lump sum price for a standard funeral service, which includes the furnishing of funeral services and tangible personal property. Where the funeral establishment quotes a lump sum price for a standard funeral service, which includes both the sale of a casket and a charge for the rendering of service, the retail sales tax is collected upon one-half of such lump sum price. Clothing, outside case (a concrete or metal box into which the casket is placed) and other tangible personal property furnished in addition to the casket must be billed separately and the retail sales tax collected thereon.
(a) Reimbursement for accommodation expenditures. Amounts received by a funeral establishment as reimbursement for goods or services provided by persons not employed by, affiliated, or associated with the funeral establishment may be deducted from the measure of the B&O tax if these amounts have been reported as gross income on the funeral establishment's excise tax return. These amounts are deductible if advanced to accommodate the customer and separately itemized on the billing statement or invoice in the exact amount of the expenditure. See RCW 82.04.4296.
(b) In-state services with out-of-state interment. A funeral establishment may perform funeral services or other services such as preparing the remains of a deceased person and placing the remains in a casket within Washington, with the remains subsequently removed to another state for interment. In these cases, the B&O and retail sales taxes generally apply to the income received from the sale of funeral merchandise and services as explained in this subsection. The merchandise (e.g., casket or urn) is delivered to the buyer within Washington when the merchandise is used in performing these services, even if interment subsequently occurs outside the state.
Neither B&O nor retail sales taxes apply to the sale of tangible personal property, without intervening use, delivered by the seller to the buyer at an out-of-state location. Refer to WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property) for more information regarding the delivery requirements for out-of-state sales of tangible personal property.
(c) Sales to the federal government. Sales of tangible personal property directly to the federal government are exempt from the retail sales tax, though the seller remains subject to B&O tax unless a specific exemption applies. Sales of tangible personal property to other persons, whether paid with federal funds or through a reimbursement arrangement, are fully subject to the retail sales tax. For additional information about the taxability of sales to the federal government, refer to WAC 458-20-190 (Sales to and by the United States—Doing business on federal reservations—Sales to foreign governments).
(3) Funeral establishments purchasing tangible personal property. Generally, retail sales tax is due when purchasing items used or consumed by funeral establishments when providing professional services. These items generally include, but are not limited to, equipment, tools, furniture, and all preparation room supplies such as embalming fluid and other chemicals, solvents, waxes, cosmetics, eye caps, gauze, and cotton.
(a) Items purchased for resale. Tangible personal property purchased for resale without intervening use is not subject to retail sales tax. Property commonly purchased for resale by funeral establishments includes, but is not limited to, urns, caskets, clothing, outside casket cases, flowers, plants, and acknowledgment cards. A funeral establishment purchasing tangible personal property for resale must provide to the seller, a reseller permit to document the wholesale nature of the sale as provided in WAC 458-20-102 (Reseller permits).
(b) Deferred sales and use tax. If the seller does not collect retail sales tax on a retail sale, the buyer must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. For detailed information regarding use tax, refer to WAC 458-20-178 (Use tax).
(4) Prearrangement contracts and trusts. Funeral establishments often enter into prearrangement contracts requiring them to provide funeral services and merchandise at some future date. Unless otherwise exempt, the law requires funeral establishments to place a portion of the cash purchase price of the contract (at least ninety percent as of the effective date of this section), excluding retail sales tax, into one or more prearrangement funeral service trusts. Withdrawal of trust funds may only occur upon fulfillment or cancellation of the contract. See chapter 18.39 RCW.
(a) When does tax liability arise? Amounts placed in prearrangement funeral service trusts are subject to excise tax upon withdrawal from the trust accounts. In other words, the amounts are taxable upon fulfillment or cancellation of the contract. Refer to subsection (2) of this section (General tax reporting responsibilities) for the tax treatment of amounts related to the fulfillment of the contract.
(b) Retail sales tax - Prearrangement funeral service trust accounts. If retail sales tax paid by the buyer is placed into a prearrangement funeral service trust account, the tax is reported upon fulfillment of the contract and remitted to the department at that time.
If retail sales tax paid by the buyer is not placed into a prearrangement funeral service trust account, the tax must be reported on the excise tax return for the current reporting period and remitted to the department.
Upon cancellation of a prearrangement contract, a refund of retail sales tax remitted by a funeral establishment to the department is subject to the time limitations on refunds in RCW 82.32.060. For example, the law prohibits the department from refunding retail sales tax to a funeral establishment for a prearrangement contract that is canceled five years after the retail sales tax associated with the contract is remitted to the department. See WAC 458-20-229 (Refunds).
(c) Contract cancellation and trust administration fees. Amounts retained by the funeral establishment when a prearrangement funeral service contract is canceled are subject to the service and other activities B&O tax, except that any amounts allocable to a retail sale of merchandise are subject to retailing B&O and retail sales taxes. Administration fees deducted from a prearrangement funeral service trust by the administrator are also subject to the service and other activities B&O tax.
(5) Sourcing. In general, the place of sale occurs where the body is placed in the casket. For other sourcing information, refer to WAC 458-20-145.
(6) Examples. The following examples identify a number of facts and state a conclusion regarding the taxability of funeral establishments. The tax results of other situations must be determined after a review of all of the facts and circumstances. Use these examples only as a general guide.
(a) John and Jane Doe contracted with ABC Funeral Home (ABC) for the funeral of a deceased relative. John and Jane also purchased a casket from ABC. Funeral services purchased from ABC included preparing the body of the deceased for viewing, arranging for the final disposition, providing facilities for the visitation and funeral service, and transporting the deceased and the mourners to the place of final disposition.
(i) ABC owes service and other activities B&O tax for the funeral services charge.
(ii) The charge for the casket is subject to retailing B&O and retail sales taxes.
(b) John and Jane Doe entered into a prearrangement funeral service contract with ABC for the purchase of funeral merchandise and services to be provided upon their deaths. John and Jane made a down payment when signing the contract and agreed to pay the balance in sixty monthly installments. The merchandise and services John and Jane purchased include a casket, preparing the body of the deceased for viewing, arranging for the final disposition, providing facilities for the visitation and funeral service, and transporting the deceased and the mourners to the place of final disposition. The contract itemizes retail sales tax and provides for a finance charge on the unpaid balance of the contract. ABC places all receipts under the contract, including finance charges, into a prearrangement funeral service trust account.
ABC must report:
(i) The charges for funeral services and the finance charges under the service and other activities B&O tax classification at the time they perform the services; and
(ii) The charge for the casket is subject to retailing B&O and retail sales tax at the time it is used.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-21-089, § 458-20-153, filed 10/21/15, effective 11/21/15. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-153, filed 3/15/83; Order ET 70-3, § 458-20-153 (Rule 153), filed 5/29/70, effective 7/1/70.]


PDF458-20-154

Cemeteries, crematories, columbaria.

(1) Introduction. This rule explains:
(a) The application of business and occupation (B&O), retail sales, and use taxes to the business activities of cemeteries;
(b) The application of B&O and retail sales taxes to amounts derived by cemeteries from prearrangement contracts (commonly referred to as "preneed" or "prepaid" arrangements) for the sale of interment rights, merchandise, and services.
For purposes of this rule, the term "cemeteries" includes cemeteries, burial parks, crematories, columbaria, and mausoleums. Refer to WAC 458-20-153 (Funeral establishments) for funeral establishment tax-reporting information.
The funeral and cemetery board regulates private cemeteries. Refer to Title 68 RCW and Title 98 WAC for information on the laws and administrative rules governing cemeteries.
(2) General tax reporting responsibilities.
(a) Sales of interment services and interment rights. The gross proceeds attributable to cemetery activities are taxable when the amounts are shown as income in the books and records or when services are performed or merchandise is delivered, whichever is earlier.
Amounts derived from interment services such as document recording, opening and closing the interment space, and placing grave liners or vaults in the interment space are subject to the service and other activities B&O tax. Sales or transfers of plots, crypts, and niches for the interment of human remains, irrespective of how the document of transfer is described (e.g., deed, certificate of ownership, or certificate of interment rights), are charges for the right of interment, an interest similar to a license to use real estate. Thus, the gross income from sales of interment rights is subject to B&O tax under the service and other activities classification.
(b) Sales of merchandise, including installing, repairing, cleaning, altering, or improving property. The gross proceeds from retail sales of tangible personal property such as monuments, markers, memorials, nameplates, outer burial containers (e.g., vaults or grave liners), boxes, urns, vases, benches, plants, shrubs, and flowers are subject to B&O tax under the retailing classification. Retailing B&O tax also applies to charges by cemeteries for installing, repairing, cleaning, altering, or improving tangible personal property of or for consumers. Cemeteries are also responsible for collecting and remitting to the department of revenue (the department) retail sales tax on retail sales of tangible personal property and charges for installing, repairing, cleaning, altering, or improving tangible personal property of or for consumers unless specifically exempt by law. Thus, charges for installing markers and monuments are subject to retailing B&O and retail sales taxes.
(c) Sales to the federal government. Sales of tangible personal property directly to the federal government are exempt from the retail sales tax, though the seller remains subject to B&O tax unless a specific exemption applies. Sales of tangible personal property to other persons, whether paid with federal funds or through a reimbursement arrangement, are fully subject to the retail sales tax. For additional information about the taxability of sales to the federal government, refer to WAC 458-20-190 (Sales to and by the United States—Doing business on federal reservations—Sales to foreign governments).
(3) Cemeteries purchasing tangible personal property. Generally, retail sales tax is due when purchasing tangible personal property such as tools and supplies used or consumed by cemeteries when providing interment services.
(a) Items purchased for resale. Tangible personal property purchased for resale without intervening use is not subject to retail sales tax. Property commonly purchased for resale by cemeteries includes, but is not limited to, monuments, markers, memorials, nameplates, liners, vaults, boxes, urns, vases, benches, plants, shrubs, and flowers. Cemeteries purchasing tangible personal property for resale must provide to the seller a reseller permit to document the wholesale nature of the sale as provided in WAC 458-20-102 (Reseller permits).
(b) Deferred sales and use tax. If the seller does not collect retail sales tax on a retail sale, the buyer must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department, unless specifically exempt by law. For detailed information about use tax, refer to WAC 458-20-178 (Use tax).
(4) Prearrangement contracts. Cemeteries often enter into prearrangement contracts with customers for the purchase of merchandise and services, unconstructed crypts or niches, or undeveloped graves to be furnished at a future date. Executed contracts are paid in either a lump sum or in installments. Unless otherwise exempt, the law requires cemeteries to place a percentage of all funds collected in payment of each prearrangement contract in a prearrangement trust account. As of the effective date of this section, the amount required in a prearrangement trust account is equal to the greater of (for merchandise) fifty percent of the contract price or the wholesale cost of the item, (for services) fifty percent of the contract price, or the direct cost of providing the service. Withdrawal of trust funds may only occur upon fulfillment or cancellation of the contract. See chapter 68.46 RCW.
(a) When does tax liability arise? Amounts placed into prearrangement trust accounts are subject to excise tax upon withdrawal from the prearrangement trust accounts. In other words, the amounts are taxable upon fulfillment or cancellation of the contract. Refer to subsection (2) of this section (General tax reporting responsibilities) for the tax treatment of amounts related to the fulfillment of the prearrangement contract.
(b) Retail sales tax - Prearrangement trust accounts. If retail sales tax paid by the buyer is placed into a prearrangement trust account, the retail sales tax is reported and remitted to the department upon fulfillment of the prearrangement contract.
If retail sales tax paid by the buyer is not placed into a prearrangement trust account, the tax must be reported on the excise tax return for the current reporting period and remitted to the department.
Upon cancellation of a prearrangement contract, a refund of retail sales tax remitted by a cemetery to the department is subject to the time limitations on refunds provided by RCW 82.32.060. For example, the law prohibits the department from refunding retail sales tax to a cemetery for a prearrangement contract that is canceled five years after the retail sales tax associated with the contract is remitted to the department. See also WAC 458-20-229 (Refunds).
(c) Contract cancellation and trust administration fees. Amounts retained by a cemetery from a canceled prearrangement contract are subject to service and other activities B&O tax, except that any amount allocable to a retail sale of merchandise is subject to retailing B&O and retail sales taxes. Administration fees deducted from a prearrangement trust fund by the administrator are also subject to the B&O tax under the service and other activities classification.
(5) Examples. The following examples identify a number of facts and then state a general conclusion regarding the taxability of cemeteries. The tax results of other situations must be determined after a review of all of the facts and circumstances. Use these examples only as a general guide.
(a) John and Jane Doe contracted with ABC Cemetery Association (ABC) for the interment of a deceased relative. The interment rights, merchandise, and services provided by ABC include an interment plot, an outer burial container, burial of the decedent, a marker, and installation of the marker. In addition, ABC charges a document-recording fee.
(i) ABC is subject to service and other activities B&O tax on charges for the interment plot, burial of the decedent, and the document-recording fee.
(ii) The charges for the outer burial container, marker, and marker installation are subject to retailing B&O and retail sales taxes.
(b) John and Jane Doe entered into a prearrangement contract with ABC for the purchase of interment rights, merchandise, and services provided upon their deaths. John and Jane made a down payment when signing the contract and agreed to pay the balance in sixty monthly installments. The interment rights, merchandise, and services purchased by John and Jane include interment plots, outer burial containers, burial of their remains, markers, and installation of the markers. The contract itemizes retail sales tax and provides for a finance charge on the unpaid balance.
ABC places all receipts under prearrangement contracts, including the finance charges, into a prearrangement trust account.
ABC must report:
(i) The amounts received for the interment plots under the service and other activities B&O tax classification at the time the income is recognized on the books and records or upon fulfillment of the contract, whichever is earlier;
(ii) The amounts received for the burial of remains, the document-recording fee, and the finance charges under the service and other activities B&O tax classification at the time they perform the services; and
(iii) Retailing B&O and retail sales taxes on the sale of the outer burial containers, markers, and marker installation in the reporting period during which they deliver the merchandise and perform the installation.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-21-089, § 458-20-154, filed 10/21/15, effective 11/21/15; WSR 78-06-083 (Order 78-3), § 458-20-154, filed 6/1/78; Order ET 70-3, § 458-20-154 (Rule 154), filed 5/29/70, effective 7/1/70.]


PDF458-20-15501

Taxation of computer systems and hardware.

(1) Taxation of computer systems.
(a) What is a computer? A "computer" is an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions. RCW 82.04.215. Examples of a computer include, but are not limited to, mainframe computer, laptop, workstation, and desktop computer. "Computer" also includes automatic data processing equipment, which is a computer used for data processing purposes. "Computer" does not include any computer software or peripheral devices.
(b) Computer systems and computer networks distinguished. A "computer system" is a functional unit, consisting of one computer and associated computer software, whereas a computer network is two or more computers and associated computer software that uses common storage. A computer system may or may not include peripheral devices.
(c) Wholesale sale of computer systems. Gross proceeds of sales of computer systems to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification. To verify the wholesale nature of the sale, the seller should obtain a reseller permit from the buyer as provided by WAC 458-20-102 (Reseller permits).
(d) Retail sale of computer systems. Gross proceeds of sales of computer systems to consumers are subject to B&O tax under the retailing classification. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law. If the seller is required to collect Washington sales tax (such as in the case of the seller having nexus with Washington), but does not collect Washington sales tax, the buyer is responsible for remitting retail sales tax (commonly referred to as deferred sales tax), unless the sale is specifically exempt by law. If the seller is not required to collect Washington sales tax, then the buyer is responsible for remitting use tax, unless the transaction is specifically exempt by law. Separately stated charges for custom software sold with the computer system are subject to service B&O tax.
(e) Manufacturing of computer systems. Persons manufacturing computer systems are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of computer systems who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC.
(i) Separately stated charges for custom programming sold with the computer system are not subject to manufacturing B&O tax, but are subject to service B&O tax.
(ii) Separately stated charges for computer software sold and installed after the sale of a computer system are not subject to manufacturing B&O tax.
(iii) The combining of a computer system with certain peripheral devices is considered a packaging activity not subject to manufacturing B&O tax, when the following occurs:
(A) The peripheral devices remain in the original packaging;
(B) The person does not attach its own label to the peripheral devices;
(C) The person maintains a separate inventory of the peripheral devices for sale apart from the sale of the computer system; and
(D) The charge for the sale of peripheral devices is separately stated from the charge for the sale of computer systems.
(2) Examples.
(a) ABC Computers, Inc., an in-state manufacturer, manufactures and sells at retail computer systems. ABC sells a computer system to Steve for one flat charge. The computer system includes a disk drive, memory, CPU, keyboard, mouse, monitor, and bundled prewritten computer software. ABC is subject to retailing B&O tax and must collect retail sales tax on the sale to Steve. In addition, ABC is subject to manufacturing B&O tax on the value of the product sold (which is generally the sales price). ABC is entitled to claim a multiple activities tax credit.
(b) ADE Computers, Inc., manufactures and sells computer systems at retail to customers. ADE sells to Julie a computer system with certain peripheral devices at separate charges. The computer system without the peripheral devices consists of a disk drive, memory, CPU, and bundled prewritten computer software. The peripheral devices include a keyboard, mouse, and monitor. All peripheral devices remain in the original packaging of the manufacturers. ADE does not attach its own label to the peripheral devices. Finally, ADE maintains a separate inventory of the peripheral devices for sale apart from the sale of ADE's computer systems. ADE is subject to retailing B&O tax and must collect retail sales tax from Julie on the sales of the computer system including the peripheral devices. ADE is subject to manufacturing B&O tax on the value of the computer system excluding the peripheral devices. ADE is entitled to claim a multiple activities tax credit. ADE is not subject to manufacturing B&O tax on the value of the peripheral devices because the combining of a computer system with the peripheral devices in this case constitutes packaging activities.
(c) AFG Computers, Inc., an in-state company, manufactures and sells at retail computer systems. AFG sells a computer system to Joe for a lump sum. Joe purchases from AFG, as part of the sales package, prewritten computer software developed by a third-party software developer. AFG installs the prewritten computer software to Joe's computer. AFG is subject to retailing B&O tax and must collect retail sales tax from Joe on the sale of the computer system, including the bundled prewritten computer software. Also, AFG is subject to manufacturing B&O tax on the value of the computer system, including the value of the prewritten computer software. AFG is entitled to claim a multiple activities tax credit.
(d) Same facts as (c) of this subsection, except that AFG sells and installs the prewritten computer software after Joe purchases and takes possession of the computer system. AFG is subject to retailing B&O tax and must collect retail sales tax from Joe on the sale of the computer system and the prewritten computer software. Also, AFG is subject to manufacturing B&O tax on the value of the computer system. AFG is entitled to claim a multiple activities tax credit. AFG is not subject to manufacturing B&O tax on the value of the prewritten computer software because the installation of the software by AFG is not a part of AFG's manufacturing activity.
(3) Taxation of computer hardware, both internal and external peripheral devices.
(a) What is computer hardware? For purposes of this section, "computer hardware" includes, but is not limited to, the mechanical, magnetic, electronic, or electrical components of a computer system such as towers, motherboards, central processing units (CPU), hard disk drives, memory, as well as internal and external peripheral devices such as compact disk read-only memory (CD-ROM) drives, compact disk rewritable (CD-RW) drives, zip drives, internal and external modems, wireless fidelity (Wi-Fi) devices, floppy disks, compact disks (CDs), digital versatile disks (DVDs), cables, mice, keyboards, printers, monitors, scanners, web cameras, speakers, and microphones.
(b) Wholesale sale of computer hardware. Gross proceeds of sales of computer hardware to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification. To verify the wholesale nature of the sale, the seller should obtain a reseller permit from the buyer as provided by WAC 458-20-102 (Reseller permits).
(c) Retail sale of computer hardware. Gross proceeds of sales of computer hardware to consumers are subject to B&O tax under the retailing classification. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.
(d) Manufacturing of computer hardware. Persons manufacturing computer hardware are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of computer hardware who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC.
(4) Examples.
(a) ALM Computers, Inc., purchases used computers. ALM replaces a built-in CD-ROM drive with a CD-RW drive and adds a zip drive, additional memory, and an upgraded CPU. ALM is engaged in manufacturing activity subject to manufacturing B&O tax with respect to that computer.
(b) AJK Computers, Inc., acquires damaged computers for refurbishment and sale. AJK removes damaged hardware components and replaces them with new components without upgrading these components. Refurbishing computers in this manner is not a manufacturing activity. Retail sales of such refurbished computers are subject to retailing B&O tax and retail sales tax.
(c) APQ Computers, Inc., purchases computers for refurbishment and sale. APQ replaces the failed zip drive on one of the computers with an upgraded zip drive because the upgrade is the nearest version of the failed component that is available. The manufacturer has discontinued manufacturing the original version of the zip drive because of a flaw in the design. APQ is not engaged in manufacturing activity with respect to that computer. Retail sale of that refurbished computer is subject to retailing B&O tax and retail sales tax.
(d) ATV Computers, Inc., is hired by a call center company to repair damaged computers. ATV removes damaged hardware components and replaces them with new components without upgrading these components. Refurbishing computers in this manner is not a manufacturing activity; however, it is a retail service. Refurbishing computers in this manner is subject to retailing B&O tax and retail sales tax must be collected. See WAC 458-20-173 (Installing, cleaning, repairing or otherwise altering or improving personal property of consumers) for more information on repairs and maintenance.
(5) Taxation of other activities associated with computer hardware.
(a) Installing computer hardware. Gross proceeds of sales for installing computer hardware are subject to wholesaling or retailing B&O tax, as the case may be. Installation of computer hardware for consumers is subject to retail sales tax. See RCW 82.32.730 (sourcing) for more information on sourcing retail sales of computer services. See WAC 458-20-173 (Installing, cleaning, repairing or otherwise altering or improving personal property of consumers) for more information on installations.
(b) Repairing or maintaining computer hardware. Gross proceeds of sales for repair or maintenance of computer hardware are subject to wholesaling or retailing B&O tax. Repair of computer hardware for consumers is subject to retail sales tax. See RCW 82.32.730 for more information on sourcing. See WAC 458-20-173 (Installing, cleaning, repairing or otherwise altering or improving personal property of consumers) for more information on repairs and maintenance. Also, see WAC 458-20-257 (Warranties and maintenance agreements) for information about repair performed as part of a warranty or maintenance agreement.
[Statutory Authority: RCW 82.32.200 and 82.01.060. WSR 13-06-015, § 458-20-15501, filed 2/25/13, effective 3/28/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 09-01-088, § 458-20-15501, filed 12/16/08, effective 1/16/09.]


PDF458-20-15502

Taxation of computer software.

(1) What is computer software? RCW 82.04.215 provides that "computer software" is a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. All software is classified as either prewritten or custom. "Computer software" includes only those sets of coded instructions intended for use by an end user and specifically excludes retained rights in software and master copies of software. Computer software does not include data.
(a) How is computer software delivered? Computer software may be delivered either by intangible means such as electronically downloaded or by tangible means such as tangible storage media.
(b) What is automatic data processing equipment? "Automatic data processing equipment" includes computers used for data processing purposes and their peripheral equipment.
(c) What are retained rights? "Retained rights" means any and all rights, including intellectual property rights such as those rights arising from copyrights, patents, and trade secret laws, that are owned or are held under contract or license by a software developer, author, inventor, publisher, licensor, sublicensor, or distributor. RCW 82.04.215.
(d) What are master copies of software? "Master copies" of software means copies of software from which a software developer, author, inventor, publisher, licensor, sublicensor, or distributor makes copies for sale or license. RCW 82.04.215.
(i) Development of a master copy of software. Development of a master copy of software by a software developer, or a third party hired by the software developer, that is used to produce copies of software for sale or commercial or industrial use, is not a manufacturing activity. A third-party charge for development of a master copy of software is a charge for custom software development and is subject to service and other activities B&O tax.
(ii) Use of prewritten computer software by software developer. The internal use of prewritten computer software by the developer of that software is not subject to use tax because the software developer is not an end user of its own internally developed software. For example, VV Software, Inc., an in-state software developer, creates accounting software generally used by small businesses. VV plans to sell its newly created software to other companies. VV also plans to make a copy of this software and use it for its accounting operation. The copy of software used by VV for its accounting operation is not subject to use tax.
(2) What is custom software? "Custom software" is computer software created for a single person. RCW 82.04.215. The use of library files in software development does not preclude the developed software from being characterized as custom software, as long as the software is created for a single person. The nature of custom software does not change when ownership is transferred to a person with no rights retained by the transferor.
For purposes of this section, "library files" are a collection of precompiled and frequently used routines that a software developer can use in developing the software. The purchase or use of such "library files" may be subject to retail sales or use tax as the sale of prewritten software.
(a) Creation of custom software. Gross income received for creating custom software is subject to service and other activities B&O tax.
(b) Duplication of custom software. Duplication of custom software for the same person, or by the same person for the person's own use, does not change the character of the custom software. RCW 82.04.29001. Duplication of custom software for the same person, or by the same person for its own use, is not subject to manufacturing B&O tax.
If a person duplicates custom software for sale to or use by another person other than the original purchaser, the software becomes prewritten computer software as defined in subsection (3) of this section and is subject to manufacturing B&O tax if the prewritten computer software is delivered by tangible storage media.
(c) Sale of custom software. If custom software is sold to another person other than the original purchaser, the software loses its character as custom software and becomes prewritten computer software as defined in subsection (3) of this section.
(d) Use of custom software. Use of custom software is not subject to use tax.
(e) The examples included in this rule identify a number of facts and then state a general conclusion; they should be used only as a general guide. Additionally, each fact pattern in each example is self contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. The tax consequences of all situations must be determined after a review of all the facts and circumstances. Examples requiring that sales tax be collected by the seller assume that the seller has "tax nexus" with Washington and no exclusions or exemptions apply and the sale is sourced to Washington.
(f) Example 1. PFC, Inc., develops software for its client. PFC is not subject to manufacturing B&O tax because the software is custom software. PFC's income from the sale of the custom software to the one specific client is subject to service and other activities B&O tax.
(3) What is prewritten computer software? RCW 82.04.215 provides that "prewritten computer software" is computer software, including prewritten upgrades, patches, fixes, etc., that is not designed and developed by the author or other creator to the specifications of a specific purchaser.
The combining of two or more prewritten computer software programs or prewritten portions thereof does not result in custom software. Configuration of prewritten computer software to work with other computer software does constitute customization of prewritten computer software.
Prewritten computer software includes software designed and developed by the author or other creator to the specifications of a specific purchaser when it is sold to a person other than such purchaser.
Where a person, who is not the author or creator, modifies or enhances prewritten computer software, that person is deemed to be the author or creator only of the modifications or enhancements made. Prewritten computer software, or a portion thereof, that is modified or enhanced to any degree, remains prewritten computer software, even though the modification or enhancement is designed and developed to the specifications of a specific purchaser. Where there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the modification or enhancement, the modification or enhancement will not be considered prewritten computer software.
(a) Wholesale sales of prewritten computer software. Gross proceeds from sales of prewritten computer software to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification, whether or not ownership or title passes to the buyer, and regardless of any express or implied restrictions upon the buyer. The method of delivery of prewritten computer software does not alter the wholesale nature of the transaction, whether it is through tangible storage media or any electronic means. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place. To verify the wholesale nature of the sale, the seller obtains a reseller permit from the buyer as provided by WAC 458-20-102 (Reseller permits).
(i) Distinction between wholesale sales of prewritten computer software and royalties received for the licensing of prewritten computer software. Sales of prewritten computer software constitute wholesale sales if the reseller, who has no right to reproduce the software for further sales, sells the same software to its customers. The true object of the sale to the reseller is the sale of the software. On the other hand, income received for granting an intangible right to reproduce and distribute copies of prewritten computer software for sale constitutes royalties. The true object of the transaction that generates royalty income is the right to reproduce and relicense the software. See subsection (8) of this section for more information on royalties.
(ii) Examples.
(A) Example 2. UM Computers, Inc., develops engineering software. UM sells the prewritten computer software at wholesale to OX Computers, Inc., in shrink-wrapped packages. UM delivers the software to OX. OX then resells the software to customers in the same shrink-wrapped packages. Sales of prewritten computer software by UM are subject to wholesaling B&O tax. Sales by OX to consumers are retail sales subject to retailing B&O tax and retail sales tax.
(B) Example 3. GB Computers, Inc., develops engineering software. GB grants SE Computers, Inc., the right to reproduce and distribute copies of the prewritten computer software for sale to end users. GB retains all of its ownership rights to the software and delivers one copy of the software to SE to reproduce and sell. Amounts received by GB from SE for granting the right to reproduce and distribute prewritten computer software are subject to royalties B&O tax. Sales by SE to consumers are retail sales subject to retailing B&O tax and retail sales tax.
(C) Example 4. DH Computers, Inc., develops engineering software. DH grants to WK Computers, Inc., the right to copy and redistribute its prewritten computer software. DH delivers the software electronically to WK. WK then sells the software to its customers, who download a copy of the software from WK. Income to DH from WK is subject to royalties B&O tax. Sales of prewritten computer software by WK to its customers are retail sales subject to retail sales tax.
(D) Example 5. AJ Soft, Inc., is a software developer of architectural drafting software. AJ Soft enters into an agreement with DJ Sales, Inc., to sell AJ Soft's drafting software. DJ Sales must pay a fee for each copy DJ Sales sells through its website. AJ Soft does not allow DJ Sales to reproduce the drafting software. Customers download the software, but are unaware the software is downloaded directly from AJ Soft. AJ Soft is making a wholesale sale of software to DJ Sales subject to wholesaling B&O tax. DJ Sales is making a retail sale to its Washington customers subject to retail sales tax.
(E) Example 6. Same facts as Example 5, however, instead of customers downloading the prewritten software, DJ Sales' customers access the prewritten software remotely on AJ Soft's servers. AJ Soft is still making a wholesale sale of remotely accessed prewritten software to DJ Sales subject to wholesaling B&O tax. DJ Sales is making a retail sale of remotely accessed prewritten software to its Washington customers subject to retail sales tax.
(b) Retail sales of prewritten computer software. Gross proceeds of sales of prewritten computer software to consumers are subject to B&O tax under the retailing classification, whether or not ownership or title passes to the buyer, and regardless of any express or implied restrictions upon the buyer. Regardless of the method of delivery, whether through tangible media or electronic means, prewritten computer software remains subject to retail sales tax and retailing B&O tax. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.
(c) Use of prewritten computer software. Prewritten computer software, regardless of the method of delivery, is generally subject to use tax upon use in this state if Washington retail sales tax was not previously paid. However, use of prewritten computer software is not taxable, if it is provided free of charge, or if it is provided for temporary use in viewing information, or both. RCW 82.12.020. This exception from use tax is limited to prewritten computer software provided free of charge or for temporary use in viewing information, such as free promotional software, donated software, free download of software, and software provided in beta testing to a third-party free of charge.
For purposes of this use tax exception, "beta testing" means the last stage of testing for prewritten computer software prior to its commercial release including the release to manufacturing (RTM). Beta testing may involve sending the software to a third party for the use of the third party. Beta testing is often preceded by a round of testing called alpha testing.
(i) Example 7. DS Computers, Inc., is a software developer. In order to perform beta testing of its new accounting software prior to commercial release, DS sends a copy of the software free of charge to KG Technologies, Inc. DS is not subject to use tax for the release of the beta software to KG. KG is not subject to use tax for the use of beta software free of charge.
(ii) Example 8. DH, Inc., provides free card games on-line to its customers. The customers, however, must download DH's free software in order to be able to play card games on-line at DH's website. Wendy downloads the software free of charge. Wendy is not subject to use tax for the use of the software.
(iii) Example 9. DW, Inc., provides free software to the public for anyone to watch videos on-line. Roger downloads the software free of charge. Roger is not subject to use tax for the use of the software.
(d) Manufacturing of prewritten computer software. Persons engaged in manufacturing prewritten computer software on tangible storage media are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and WAC 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of prewritten computer software who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC. Income from the sale of prewritten software electronically delivered or transferred is not subject to manufacturing B&O tax.
(e) Duplication of prewritten computer software. Duplication of prewritten computer software on tangible media for sales to or use by more than one person is subject to manufacturing B&O tax upon the value of products which includes both the value of the tangible media and the software. Duplication of prewritten computer software on tangible media outside this state is not subject to manufacturing B&O tax regardless of where software development takes place.
Duplication of prewritten computer software is a manufacturing activity only if the prewritten computer software is delivered from the seller to the purchaser by means of tangible storage media which is retained by the purchaser. RCW 82.04.120.
When a software developer contracts with a third party to duplicate prewritten computer software, the parties must take into account the value of all tangible and intangible materials or ingredients, including the software code, when determining the relative value of all materials or ingredients furnished by each party. If the third party furnishes less than twenty percent of the total value of all materials or ingredients that become a part of the produced product, then the third party is presumed to be a processor for hire and the software developer is presumed to be a manufacturer. See WAC 458-20-136 (Manufacturing, processing for hire, fabricating) for more information.
(4) Site license of prewritten computer software. A site license provides a consumer acquiring prewritten computer software with the right to duplicate prewritten computer software for use on its own computers, based on the number of computers, the number of workers using the computers, or some other criteria. A site license agreement may cover one site or multiple sites of a purchaser.
(a) Retail sales of a site license. Gross proceeds of sales of a site license to a consumer are subject to B&O tax under the retailing classification, whether or not ownership or title passes to the consumer, and regardless of any express or implied restrictions upon the consumer. Delivery occurs when and where the prewritten computer software subject to the site license is received by the consumer, whether it is through tangible storage media or any electronic means, regardless of the method of delivery. See RCW 82.32.730 for more information on sourcing prewritten computer software. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the consumer in determining when and where the sale takes place. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.
If the prewritten software is hosted by the licensor or a third party for remote access by the licensee, then see subsection (10) of this section.
(b) Duplication of prewritten computer software by a person under a site license. A seller of a site license is subject to manufacturing B&O tax for its own duplication of prewritten computer software. Duplication of prewritten computer software is subject to manufacturing B&O tax only if the prewritten computer software is delivered from the seller to the purchaser by means of tangible storage media which is retained by the purchaser. RCW 82.04.120. Purchaser of a site license is not subject to manufacturing B&O tax for the duplication of prewritten computer software for its own use, pursuant to a site license agreement with the seller.
(c) Use of a site license partly in this state and partly outside this state. The part of the site license used by the person in this state is subject to use tax, provided Washington state sales tax was not previously paid. For example, a person purchases and takes delivery of a site license in California. Pursuant to the multiple site license agreement, this person is licensed to use one thousand copies of prewritten computer software, of which four hundred copies will be used in Washington. Use tax is due on the four hundred copies of prewritten computer software used in this state. If the prewritten software purchased by the licensee is delivered in Washington, then the entire charge for the site license is subject to retail sales tax if purchased from a seller responsible for collecting Washington's sales tax. However, a purchaser can issue a multiple points of use exemption certificate under certain circumstances to minimize Washington tax as discussed below in subsection (11) of this section.
(d) Sales and use of additional copies of prewritten computer software under the same site license. In some cases, the buyer of a site license may subsequently purchase additional copies of prewritten computer software under the same site license agreement. The seller may or may not deliver any additional copy of the software to the buyer, because the original copy of the software has already been delivered.
(i) Retail sales of additional copies of prewritten computer software under the same site license. Retail sales of the additional copies of software occurs when and where the seller delivers any additional copy of prewritten computer software to the buyer, whether it is through tangible storage media or any electronic means, regardless of the method of delivery. If the seller does not deliver any additional copy of the software to the buyer, then the sales occur when the sales agreements are made to purchase the additional copies and where the original copy or copies of prewritten computer software was delivered. If the original sale of the site license was subject to manufacturing B&O tax, then the sale of additional licenses are also subject to manufacturing B&O tax.
Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place.
(ii) Use of additional copies of prewritten computer software under the same site license. Where the use of the additional copies of software is partly in this state and partly outside this state and was not previously subject to Washington sales tax, the part of the additional copies of software used by the person in this state is subject to use tax.
(e) Examples.
(i) Example 10. DEF Computers, Inc., is located in Washington and sells in this state, at retail, a multiple site license of its prewritten computer software to P's Design, Inc. A copy of the prewritten computer software is electronically delivered to P's Design in Washington. P's Design then electronically duplicates the software and distributes the software in Washington and several other states for its use. Neither DEF nor P's Design is subject to manufacturing B&O tax. DEF, however, is subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the entire sale of the software unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section.
(ii) Example 11. Same facts as Example 10, except that in addition, DEF delivers a backup copy of the software to P's Design outside Washington. The backup copy of the software is for disaster recovery purposes and is not downloaded to any of P's Design's computers for use. There is no separate charge for the delivery of the backup prewritten software. The software manuals are mailed to P's Design in Washington. DEF is still subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the entire sale of the software unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section. Delivery of the software manuals and the backup copy of the software are not relevant in determining when and where the sale takes place. This transaction is not subject to manufacturing B&O tax.
(iii) Example 12. Same facts as Example 10 of this subsection, except that in addition, P's Design subsequently purchases 50 additional copies of the software from DEF under the same site license agreement. P's Design merges with another company, and the additional copies are needed for the use of its new employees. No additional copy of the software is delivered to P's Design in fulfilling this new agreement. Neither DEF nor P's Design is subject to manufacturing B&O tax. DEF, however, is subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the subsequent sale of the 50 additional copies of software because the original copy of the software was delivered in Washington unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section. However, if the original sale of the license had included delivery of the prewritten software by a tangible storage device (and was therefore subject to manufacturing B&O tax), then the licensor is also subject to manufacturing B&O tax based on the value of the additional licenses.
(iv) Example 13. GH Computers, Inc., sells at retail a multiple site license of its prewritten computer software to Quick, Inc. GH is located outside Washington, while Quick is located in Washington, other states and other countries. The desktop software is licensed on an unlimited basis, which means that there are no restrictions of its use by Quick. The software is delivered to Quick outside Washington. Quick then electronically duplicates the software and distributes the software to all of its 500 employees, of which 100 employees are located in Washington. The software is electronically downloaded into the desktop computers of all employees and is immediately put into use. Use tax is due on the value of the 100 copies of prewritten computer software used in Washington.
(v) Example 14. Same facts as Example 13 of this subsection, except that under the original site license agreement, Quick is entitled to reproduce, distribute, and use up to 500 copies of the desktop software. Then Quick merges with another company, and additional copies are needed for the use of its new employees. Quick, therefore, subsequently purchases 100 additional copies of the software from GH under the same site license agreement. No additional copy of the software is delivered to Quick in fulfilling this new agreement. Quick distributes the additional copies of the software to its 100 new employees, of which 50 employees are located in Washington. Use tax is due on the value of the 50 additional copies of prewritten computer software used in Washington.
(5) Key to activate computer software. A key, or an enabling or activating code, may be required in some instances to activate computer software and put the software into use, and the key may be delivered to a purchaser after the software is already delivered and in possession of the same purchaser. In such instances, the sale of computer software occurs when both the key and the software are delivered to the purchaser. The sale takes place where the software is received by the purchaser in accordance with RCW 82.32.730. However, if the place of receipt for the software is unavailable to the vendor because the software was delivered by a third party, then the sale takes place where the key is received in accordance with RCW 82.32.730. There is no separate sale of the key from the software, regardless of how such sale may be characterized by the vendor or by the purchaser.
See subsection (4) of this section for more information if a site license of prewritten computer software is involved. If the sale of the prewritten software is subject to manufacturing B&O tax, then the sale of the key required by that prewritten software is also subject to manufacturing B&O tax. The income from the sale of a key is part of a sale of prewritten computer software, whether the sales transactions are together or separate.
(a) Example 15. JKL Computers, Inc., an in-state business, sells at retail prewritten computer software to Rebecca. JKL delivers the software to Rebecca in this state. The prewritten computer software, however, cannot be activated without a key. JKL subsequently delivers the key in this state to Rebecca for a separate price. JKL is subject to retailing B&O tax, and it must collect retail sales tax from Rebecca on the entire sale of the software including the separate charge for the key. The entire sale takes place in this state (where the software is delivered) when both the software and the key are delivered to Rebecca. There is no separate sale of the key, regardless of the fact that JKL delivers the key to Rebecca for a separate charge.
(b) Example 16. Same facts as Example 15 of this subsection, except that JKL subsequently delivers the key outside this state to Rebecca for a separate price. JKL is subject to retailing B&O tax, and it must collect retail sales tax from Rebecca on the entire sale of the software including the separate charge for the key. The entire sale takes place in this state (where the software is delivered) when both the software and the key are delivered to Rebecca. There is no separate sale of the key, regardless of the fact that JKL delivers the key to Rebecca for a separate charge.
(c) Example 17. MNO Computers, Inc., is an in-state software developer. TKO Computers, Inc., an out-of-state original equipment manufacturer of computers (OEM), agrees in contract with MNO to distribute MNO's prewritten computer software on its computers. TKO delivers MNO's inoperable software to Sally as part of the sale of the computer system. Sally, however, must purchase a key directly from MNO in order to activate and use the software. MNO has no knowledge of where the software was initially delivered to Sally, but MNO knows that the key is delivered to Sally in this state. MNO is subject to retailing B&O tax, and it must collect retail sales tax from Sally on the entire sale of the key and the inoperable software. The entire sale takes place in this state because the key is delivered in this state and MNO has no knowledge of where the inoperable software was initially delivered by TKO.
(6) Client access license and server license for the server software. A server license, paid for at the time the server software is purchased, grants the buyer the right to install the server software on the buyer's server. A client access license (CAL) grants the buyer the right to access the server software.
Charges for server licenses and CAL are a part of the sale of the server software, even if the charges are separately stated. The sales take place where the server software is delivered to the buyer.
In cases where server software is delivered to the buyer and used in multiple locations, see subsection (4) of this section on site licenses for more information.
(a) Example 18. ZZ Computers, Inc., an in-state business, sells at retail server software to Jack. ZZ delivers the server software to Jack in Washington. ZZ also provides Jack with client access licenses for free allowing Jack the right to access the server software from his personal computers. The sale of server software to Jack is subject to retailing B&O tax, and ZZ must collect retail sales tax from Jack for the same sale.
(b) Example 19. Same facts as Example 18 of this subsection, except that ZZ makes two separate sales at retail of two types of prewritten computer software to Jack. One is server software, and the other is client software (which is different from client access licenses). ZZ delivers the server software to Jack in Washington where Jack's server is located. ZZ delivers the client software to Jack outside Washington where all of Jack's personal computers are located. Only the sale of server software to Jack is subject to retailing B&O tax, and ZZ must collect retail sales tax from Jack for the same sale. Jack may use a multiple points of use exemption certificate for the server software. See subsection (11) of this section for more detail on multiple points of use.
(7) Other activities associated with computer software.
(a) Customizing prewritten computer software. Gross income received for customizing prewritten computer software is subject to service and other activities B&O tax. RCW 82.04.29001.
(i) What is customizing prewritten computer software? RCW 82.04.215 provides that "customization of prewritten computer software" is any alteration, modification, or development of applications using or incorporating prewritten computer software for a specific person.
"Customization of prewritten computer software" includes individualized configuration of software to work with other software and computer hardware but does not include routine installation. Customization of prewritten computer software does not change the underlying character or taxability of the original prewritten computer software.
(ii) One nonitemized price for prewritten computer software, customization, and routine installation. If prewritten computer software, customization of prewritten computer software, and routine installation are sold for a one nonitemized price, the entire charge is considered to be subject to retail sales tax. See (a)(iv) of this subsection for more information on routine installation.
(iii) Separately stated charge for customization of prewritten computer software. Where there is a reasonable separately stated charge on an invoice or other statement of the price given to the purchaser for customization of prewritten computer software (including installation that is not routine, see (a)(i) of this subsection), such customization is subject to service and other activities B&O tax. If a charge for customization of prewritten computer software is not separately stated from a sale of prewritten computer software, the entire charge is considered a retail sale subject to retail sales tax.
(iv) Customization of prewritten computer software versus routine installation. Customization of prewritten computer software includes custom installations but does not include routine installation. "Routine installation" means the process of loading program files and installation files onto a computer. Routine installation includes the process of "clicking through" dialog boxes to install prewritten software. Routine installation does not require any specialized knowledge or skills. Custom installation generally requires programming by a programmer to integrate customized elements of prewritten computer software.
(v) Separately stated charge for routine installation from customization of prewritten computer software. Where there is a reasonable separately stated charge on an invoice or other statement of the price given to the purchaser for routine installation from customization of prewritten computer software, routine installation is subject to retailing B&O tax and retail sales tax. If a charge for routine installation is not separately stated from customization of prewritten computer software and is de minimis, the transaction would not be subject to retail sales tax, but instead subject to service and other activities B&O tax.
(vi) Examples.
(A) Example 20. Tee, Inc., needs financial modeling software that can tie into its existing computer systems. Because of its unique business, however, Tee needs the industry-wide computer software offered by PQR Computers, Inc., to be modified to meet the needs of Tee. Both Tee and PQR are in-state corporations, and the software is delivered in this state. PQR provides a separately stated charge to Tee for customization of prewritten computer software performed in this state that is supported by the terms of the sales agreement. PQR is subject to retailing B&O tax, and it must collect retail sales tax from Tee for the sale of prewritten computer software in Washington. PQR, in addition, is subject to service and other activities B&O tax for the customization of prewritten computer software in Washington.
(B) Example 21. Same facts as Example 20 of this subsection, except that, in addition, PQR provides a separately stated charge to Tee for routine installation of prewritten computer software in this state. This charge represents installation of only the prewritten portion of the software. In addition to the tax treatments in Example 20 of this subsection, PQR is subject to retailing B&O tax and it must collect retail sales tax from Tee for the routine installation in Washington.
(b) Installing or uninstalling computer software.
(i) Gross income received from installing or uninstalling custom software is subject to service and other activities B&O tax.
(ii) Gross proceeds of sales for routine installation of prewritten computer software are subject to retailing B&O tax and retail sales tax. See (a)(iv) of this subsection for more information on routine installation. Routine installation of prewritten computer software includes charges for labor and services in respect to the installation, such as travel costs for the routine installation of the software. As of July 1, 2008, if the routine installation occurs through remote access by someone outside the state of Washington, then the installation is sourced pursuant to RCW 82.32.730.
Example 22. XYZ Computers, Inc., is hired by Dan for routine installation of prewritten software onto Dan's computers. XYZ's out-of-state employee remotely accesses Dan's computers in Washington to install the prewritten software on his computers. If XYZ has nexus with Washington, then it must collect and remit the sales tax. If XYZ does not have nexus, then Dan must pay use tax.
Gross proceeds of sales from uninstalling prewritten computer software are subject to retailing B&O tax and retail sales tax.
Example 23. XYZ Computers, Inc., is hired by Dan to remove prewritten computer software from his computers. Removal of the prewritten computer software requires uninstalling the software from the computer. XYZ sends an employee to Dan's location to remove the software from his computers. Charges for removal of the prewritten computer software are subject to retailing B&O tax and retail sales tax.
(c) Repairing, altering, or modifying computer software. Repair of prewritten computer software for more than one person may be distributed as a fix or patch by tangible storage media or electronically in the nature of software upgrades and updates. The sale of prewritten computer software upgrades and updates is a sale of prewritten computer software subject to retailing B&O tax and retail sales tax.
Alteration or modification of prewritten computer software performed for a specific person is subject to the service and other activities B&O tax. Such alteration or modification of prewritten computer software for a specific person constitutes customization of prewritten computer software. See RCW 82.04.215.
(i) Example 24. STU Computers, Inc., a Washington company, is hired by Betty to perform repairs (using primarily human effort) via remote access on her prewritten computer software in Washington. STU is performing alteration or modification of prewritten computer software for a specific person and is subject to service and other activities B&O tax.
(ii) Example 25. VW Computers, Inc., an out-of-state service provider, is hired by Clyde to perform alterations or modifications (using primarily human effort) via remote access on his prewritten computer software located in this state. VW's facility is located outside this state. VW may be subject to service and other activities B&O tax if it has nexus with Washington.
(d) Maintaining computer software. Computer software maintenance agreements typically include, but are not limited to, support activities such as telephone consulting, help desk services, remote diagnostic services, and software upgrades and updates.
(i) Tax treatment of computer software maintenance agreements in general. Sales of stand-alone computer software maintenance agreements that include telephone consulting, help desk services, remote diagnostic services, and other professional services only, are taxable under the service and other activities B&O tax. However, if the services are part of a sale of an extended warranty on or after July 1, 2005, then the sale is subject to retailing B&O tax and retail sales tax. See WAC 458-20-257 (Warranties and maintenance agreements) for information about extended warranties.
Stand-alone sales of updates or upgrades to prewritten computer software are retail sales of tangible personal property subject to retailing B&O tax and retail sales tax.
(ii) Prewritten computer software maintenance agreement with mixed elements. The sale of a prewritten computer software maintenance agreement for a single nonitemized price that includes professional service components such as telephone consulting and retail components such as upgrades and updates of prewritten computer software is generally considered a retail sale subject to retailing B&O tax and retail sales tax unless charges for the upgrades and updates are de minimis.
In cases where the charges for the professional service component(s) and the retail component(s) are separately stated within a prewritten computer software maintenance agreement and invoice, then each activity is taxed according to the nature of the activity.
(iii) Duplication of prewritten computer software upgrades and updates. Duplication of prewritten computer software upgrades and updates is subject to manufacturing B&O tax upon the value of products, if the software upgrades and updates are delivered by means of tangible storage media which is retained by the purchaser. This is the case regardless of any maintenance agreement with mixed elements involved. The measure of tax is presumed to be the contract price of the maintenance agreement, unless the person can prove otherwise. See WAC 458-20-112 (Value of products) for more information.
If the software upgrades and updates are delivered from the seller by means other than tangible storage media which is retained by the purchaser, then the software upgrades and updates are not subject to manufacturing B&O tax.
(iv) Maintenance agreement on custom software and customized elements of prewritten computer software. Sales of maintenance or support services relating to custom software or the customized elements of prewritten computer software are subject to the service and other activities B&O tax. Such services, including upgrades and updates, are rendered in respect to the custom or customized software and take on the underlying character and taxability of the custom or customized software.
(v) Examples.
(A) Example 26. On December 15, 2005, CBA Computers, Inc., sells at retail a prewritten computer software maintenance agreement to Frank for his prewritten software. The software maintenance agreement includes an extended warranty for the software, software upgrades and updates, and telephone consulting services for a single nonitemized price. The consulting services are not offered exclusively in connection with the software, nor are they essential to use of the software. CBA delivers the software upgrades and updates electronically. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the sale of the mixed agreement.
(B) Example 27. Same facts as Example 26 of this subsection, except that CBA delivers the software upgrades and updates on compact disks. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the sale of the mixed agreement. In addition, CBA is subject to manufacturing B&O tax on duplication of software upgrades and updates. The measure of tax is presumed to be the contract price of the maintenance agreement, unless CBA can prove otherwise.
(C) Example 28. Same facts as Example 26 of this subsection, except that CBA provides a separately stated charge for each component of the maintenance agreement. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the charges on prewritten software upgrades and updates and on the extended warranty purchased after July 1, 2005. CBA is subject to service and other activities B&O tax for the charge on telephone consulting services.
(D) Example 29. FED Computers, Inc., sells at retail a computer software maintenance agreement to Greta for her software. The maintenance agreement covers only software upgrades and updates. Greta's software is prewritten computer software with customized elements. FED provides the maintenance services to Greta at one nonitemized charge. FED is subject to retailing B&O tax, and it must collect retail sales tax from Greta for the sale of the entire maintenance agreement of the prewritten computer software.
(E) Example 30. Same facts as Example 29 of this subsection, except that FED provides a separately stated charge for maintaining the customized elements. FED is subject to service and other activities B&O tax on the charges for maintaining the customized elements. FED is subject to retailing B&O tax, and it must collect retail sales tax from Greta for the charge on maintaining prewritten computer software.
(e) Computer software training. Gross income received for training on the use of custom software is subject to service and other activities B&O tax. Gross income received for training on the use of prewritten computer software is subject to service and other activities B&O tax, if the charge for such training is separately stated from the sale of prewritten computer software. If the charge for software training is not separately stated from the sale of prewritten computer software and the prewritten software value is more than de minimis, the entire charge is considered to be a retail sale subject to retailing B&O tax and retail sales tax.
(8) Licensing computer software - Royalties. Income received from charges in the nature of royalties for certain licensing of computer software is taxable under the royalties B&O tax classification.
(a) What are royalties? RCW 82.04.2907 provides that "royalties" means compensation for the use of intangible property, such as copyrights, patents, licenses, franchises, trademarks, trade names, and similar items. The true object of a transaction involving royalties is to grant an intangible right to reproduce and distribute copies of computer software for sale. It does not, however, include compensation for the licensing of prewritten computer software to the end user. The manner in which computer software is sold (e.g., volume of transactions, subscription license, term license, or perpetual license) or the manner in which payment amount is determined (e.g., fixed fee per copy, percentage of receipts, lump sum, etc.) does not alter the royalty nature of the transaction.
(b) Royalties versus site license. Regarding royalties, the true object of the transaction is to grant an intangible right to reproduce and distribute copies of computer software for sale. In contrast, the true object of a site license is the sale to an end user of prewritten computer software for use on its computers. See subsection (4) of this section for more information on site licenses.
(c) Royalties versus wholesale sales of prewritten computer software. See subsection (3)(a) of this section for more information.
(d) Examples.
(i) Example 31. HG Computers, Inc., an original equipment manufacturer (OEM), acquires prewritten computer software from LL Software, Inc., under a license to reproduce and distribute the prewritten computer software as part of a bundled computer hardware and software package HG sells to end users. LL retains all of its ownership rights to the software. The gross income received by LL from granting intangible rights to reproduce and distribute prewritten computer software to HG is subject to royalties B&O tax.
(ii) Example 32. Same facts as Example 31 of this subsection, except that, in addition, HG acquires a site license from LL for the purposes of copying and using the prewritten computer software as an end user. LL delivers the software to HG. Amounts received by LL for the sale of a site license are subject to retailing B&O tax and retail sales tax.
(9) Special use tax exemption for computer hardware and computer software donated to certain schools or colleges. Use tax does not apply to the use of computer hardware and prewritten software irrevocably donated to any public or private nonprofit school or college, as defined under chapter 84.36 RCW. RCW 82.12.0284.
(10) Sales of remote access software.
(a) Remote access custom software. Sales of remote access custom software on the seller's (or a third-party's) servers are subject to service and other B&O tax.
(b) Remote access prewritten software. Sales of remote access prewritten software on the seller's (or a third-party's) servers are subject to retail sales tax, when the sale is sourced to Washington pursuant to RCW 82.32.730. Sale of remote access prewritten software prior to July 26, 2009, were subject to service and other activities B&O tax.
Example 33. BE Software, Inc., a Washington corporation, offers a variety of prewritten software products on-line, but not for download, to its customers for a monthly subscription fee. BE Software must charge Washington customers retail sales tax and is subject to retailing B&O tax for the subscription fees received from its Washington customers.
(c) Exemptions from retail sales or use tax for remote access prewritten software. The following exemptions only apply to remote access prewritten software, and not other types of prewritten software sold.
(i) Offered free. Purchases of prewritten software that will be offered remotely by the purchaser to its own customers is exempt from retail sales tax. RCW 82.04.190 (2)(f). The purchaser of the prewritten software must provide an exemption certificate to the seller in order to receive the exemption. The income from the sale of the prewritten software is subject to retailing B&O tax.
Example 34. BE Software, a Washington company, purchases prewritten software from Joe's Software Developer Co., that BE will provide remotely to its customers. BE provides an exemption certificate to Joe's for the purchase of prewritten software. Joe's does not collect or remit retail sales tax, but does pay retailing B&O tax on the income from the sale. BE would generally charge and collect retail sales tax and pay retailing B&O tax on income received from the sale of the prewritten software remotely accessed by consumers.
(ii) Made available free to the general public. Retail sales and use taxes do not apply to the purchase or use by a business or other organization of remote access prewritten software in order to make that remote access prewritten software available free of charge for the use or enjoyment of the general public. Buyers claiming this exemption must provide the seller with a properly completed "Digital Products and Remote Access Software Exemption Certificate" or other exemption certificate acceptable to the department.
(A) Available for free. In order to qualify, the remote access prewritten software purchased must be made available for free. In this context, "free" means that the recipient of the remote access prewritten software does not need to provide anything of significant value. If the purchaser requires something of significant value from the recipient in exchange for the remote access prewritten software, it is not given away for free.
(B) "General public" means all persons and is not limited or restricted to a particular class of persons, except that the general public includes:
(I) Certain classes of persons defined by their residency or ownership: The general public includes a class of persons residing or owning property within the boundaries of any state (e.g., Washington), political subdivision of a state (e.g., King County), or a municipal corporation (e.g., Seattle).
(II) Library customers. With respect to libraries, the term general public includes authorized library patrons.
(C) Purchaser must have the legal rights to provide the remote access prewritten software to the general public: The exemption provided in subsection (3) of this section does not apply unless the purchaser has the legal right to broadcast, rebroadcast, transmit, retransmit, license, relicense, distribute, redistribute, or exhibit the remote access prewritten software, in whole or in part, to the general public.
(11) Multiple points of use (MPU) exemptions.
(a) The retail sales tax does not apply to the sale of prewritten computer software or remote access prewritten software if the buyer correctly provides the seller with an exemption certificate claiming multiple points of use.
(b) If the sale of the prewritten software or the remote access prewritten software (including retail sales of licenses to prewritten software and remote access prewritten software) is sourced to Washington and the purchaser does not provide an exemption certificate, then the entire charge is subject to retail sales tax. Buyers may use the department's "Digital Products and Remote Access Software Exemption Certificate" to claim this exemption.
(i) Requirements. A buyer is entitled to use an exemption certificate claiming MPU only if the buyer is a business or other organization and the prewritten software or remote access prewritten software purchased will be concurrently available for use within and outside Washington. A buyer is not entitled to use an exemption certificate claiming MPU for prewritten software purchased for personal use.
(ii) Concurrently available. "Concurrently for use within and outside this state" means that employees or other agents of the buyer may use the prewritten software or remote access prewritten software simultaneously from one or more locations within this state and one or more locations outside this state.
(iii) Apportionment (allocation) of use tax. For purposes of this subsection on MPU, "allocation" and "apportionment" will have the same meaning. A business or other organization subject to use tax on prewritten software or remote access prewritten software that is concurrently available for use within and outside this state is entitled to apportion the amount of tax due this state based on users in this state compared to users everywhere. Additionally, the department may authorize or require an alternative method of apportionment supported by the taxpayer's records that fairly reflects the proportion of in-state to out-of-state use by the taxpayer.
(c) Records requirement. No allocation under this section is allowed unless the allocation method is supported by the taxpayer's records kept in the ordinary course of business.
(i) "User" means an employee or agent of the taxpayer who is authorized by the taxpayer to use the prewritten software or remote access prewritten software purchased in the performance of his or her duties as an employee or other agent of the taxpayer.
(ii) Example 35. Neymar operates an accounting firm headquartered in Seattle. Neymar purchases from Lionel prewritten software which Neymar installs on a server in Seattle. The software is accessed and used concurrently by 5 employees at his Seattle office and 5 employees at his California office. Neymar provides Lionel with a sales tax exemption certificate claiming multiple points of use. Neymar is only required to pay use tax for the value attributed to his employee's use at the Seattle office (i.e., 50%). Neymar does not pay use tax to Washington for the value of the software used in his California offices even though the software resides on servers in Seattle.
[Statutory Authority: RCW 82.32.200 and 82.01.060. WSR 13-06-015, § 458-20-15502, filed 2/25/13, effective 3/28/13.]


PDF458-20-15503

Digital products.

This rule provides a structured approach for determining tax liability for digital products and digital codes. For purposes of this rule, a digital product includes digital goods or digital automated services, which are described in detail below. The sale or use of digital products and digital codes is generally subject to retail sales or use tax unless purchased for resale or some other exemption applies.
This rule is organized into six parts. Each part addresses a question or topic relevant to the determination of whether a person is selling or purchasing a digital product or digital code and, if so, what are the tax consequences that follow from such activity. In this respect this rule is intended to function similar to the decision tree provided in ETA 9003.2010.
1. Part 1: Are the products or services transferred electronically? If yes, go to Part 2.
2. Part 2: Does the product or service meet the general definitions of digital product or digital code? If yes, go to Part 3.
3. Part 3: Are there applicable exclusions from the general definitions of the digital product or digital code? If no, go to Part 4.
4. Part 4: Are the sales of the digital product or digital code sourced to Washington? If yes, go to Part 5.
5. Part 5: Are there applicable retail sales or use tax exemptions for the purchase or use of the digital product or digital code? If no, the transaction is likely taxable in Washington.
6. Part 6: Miscellaneous provisions.
Examples included in this rule identify a number of facts and then state a general conclusion; they should be used only as a general guide. The tax consequences of all situations must be determined after a review of all the facts and circumstances. Additionally, each fact pattern in each example is self contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. Examples concluding that sales tax applies to the transaction assume that no exclusions or exemptions apply, and the sale is sourced to Washington.
Part 1. Are the Products or Services Transferred Electronically?
(101) Introduction. Products or services must be transferred electronically in order to be digital products. If a product is transferred by means of a tangible storage media (e.g., compact disc, magnetic tape, hard drive, etc.), it is not a digital product. Digital codes need not be transferred electronically in order to be digital codes, but may be obtained by any means, including tangible storage media.
(102) Transferred electronically. Means the purchaser obtains the product by means other than tangible storage media. Generally, this means the product is transferred using the public internet, a private network, or some combination. However, it is not necessary that the product be delivered to the purchaser. As long as the purchaser may access the product, it will be considered to have been electronically transferred to the purchaser. For example, whether a digital movie is downloaded by the user or streamed by the user, it is considered to be "transferred electronically." Alternatively, the same movie purchased on tangible media (e.g., DVD, etc.) is the purchase of tangible personal property and is not considered to be either the sale of a digital product or transferred electronically.
Part 2. Does the Product or Service Meet the General Definition of Digital Product or Digital Code?
(201) Introduction. The term "digital product" means (1) digital goods and (2) digital automated services. Digital products transferred to an end user are generally subject to retail sales or use tax regardless of whether the purchaser's right of use is permanent, less than permanent (e.g., 24-hour period), or the purchaser is obligated to make continued payments as a condition of the sale (e.g., "subscriptions").
(202) Digital goods. Means sounds, images, data, facts, or information, or any combination thereof, transferred electronically, with certain exclusions discussed in Part 3 of this rule. The term "digital goods" includes within it the specific term "specified digital products" (as required by the Streamline Sales and Use Tax Agreement). The sale of a digital good is generally subject to retail sales tax and retailing business and occupation (B&O) tax.
(a) Specified digital products. Means electronically transferred digital audio-visual works, digital audio works, and digital books.
(i) Digital audio works. These are products that result from the fixation of a series of musical, spoken, or other sounds. Digital audio works include ringtones, recorded or live music, readings of books or other written materials, speeches, and other sound recordings. For example, a music file in MP3 format accessed or downloaded through the internet is a digital audio work.
(A) A "ringtone" is a digitized sound file that is downloaded onto a communication device (e.g., mobile phone) and may be used to alert the user to an incoming communication such as a call or text message.
(B) A ringtone does not include "ring-back tones" or other digital audio files that are not stored on the purchaser's communication device. In other words a ring-back tone is not a "specified digital product." A ring-back tone may be a digital automated service or a digital good depending on the facts. See analysis for digital automated services in subsection (203) of this rule.
(ii) Digital audio visual works. These products are a series of related images which, when shown in succession, impart an impression of motion, together with accompanying sounds, if any. Digital audio visual works include movies, music videos, videos of live events, and news and entertainment programs. For example, a movie downloaded or accessed via the internet is a digital audio visual work.
(iii) Digital books. These are books in a digital format that are generally recognized in the ordinary and usual sense as books. A digital book does not include periodicals, magazines, newspapers, chat rooms, or weblogs. For example, a cookbook in a PDF format downloaded or accessed through the internet is a digital book.
(b) Other digital goods. The following list illustrates the types of products that are also digital goods in addition to the subclass of "specified digital products" discussed above. This list is merely illustrative and not exhaustive:
(i) A digital schematic of a lawnmower engine transferred electronically.
(ii) A digital car history report transferred electronically.
(iii) A digital picture transferred electronically.
(iv) Digital periodicals or magazines transferred electronically.
(v) A digital presentation that includes still photos and accompanying audio content transferred electronically.
(c) Digital goods prior to July 26, 2009. The mere accessing or streaming of a digital good was not a retail sale before July 26, 2009. Instead, accessing or streaming a digital good was subject to the service and other activities B&O tax. The sale of a digital good to a customer who downloaded the digital good was a retail sale. See Part 6, subsection (604) of this rule for a discussion of tax amnesty for past periods.
(203) Digital automated services. Means services transferred electronically that use one or more software applications. The sale of a digital automated service is generally subject to retail sales tax and retailing B&O tax.
(a) Digital automated services may include. One or more software applications either prewritten or custom, as well as components that are similar to stand-alone digital goods. For example, an online information service may contain data, facts, or information the use of which is facilitated by one or more software applications that provide search capabilities and other functionality. Thus, digital automated services will include software and may include elements similar to stand alone digital goods, which operate together in an integrated fashion to provide an electronically transferred service.
Example 1. BFC provides an online service that facilitates apartment building management. The online service lists and advertises apartment vacancies, screens applicants, routes maintenance requests, and accepts and processes rental payments. In this example the software based service facilitates and automates various administrative functions and coordinates third-party services for apartment renting. The service is a digital automated service the sale of which is generally subject to retail sales tax and retailing B&O tax.
Example 2. QPR provides a service that uses one or more software applications to "crawl the internet" in order to identify, gather, and categorize digital information according to specified criteria. In this example software facilitates the gathering, identifying and categorizing of information acquired from the internet. The service is a digital automated service the sale of which is generally subject to retail sales tax and retailing B&O tax.
(i) Distinguishing a digital good from digital automated services. A digital good is not a service involving one or more software applications. A digital good consists solely of images, sounds, data, facts, information or any combination thereof. Clear examples of digital goods are digital books, digital music, digital video files, and raw data.
Example 3. XYZ provides an online service that uses one or more software applications to facilitate the use of news and information with features such as: Research history, natural and boolean searching, industry chat forums, chart creation, document and word flagging, and information organizing folders. In this example software features facilitate the search of the news or information. XYZ's service is a digital automated service the sale of which is subject to retail sales tax and retailing B&O tax.
Example 4. Company sells digital music files (i.e., digital goods) on its website. In order to locate specific digital music files customers may use a free software based search function that is integrated into Company's website. Customers may also find the digital music file they are seeking by clicking on a series of links to get to the desired music file. Company's software based search function associated with the sale of the digital music file does not transform the sale of the digital music file into a digital automated service. Company is selling a digital good (i.e., music file) subject to retail sales tax and retailing B&O tax.
(ii) Distinguishing remote access prewritten software from digital automated services. Remote access prewritten software (defined in RCW 82.04.050 (6)(b)) is solely prewritten software that is made remotely accessible from the vendor's server or other third-party server for a customer. To the extent that components similar to digital goods and/or additional services are supplied with the prewritten software the sale may be the sale of a digital automated service (see also Part 3, subsection (303)(h) of this rule).
Example 5. CFC provides an online gaming service that allows subscribers to play a game with other subscribers in a real time multiplayer environment using software accessed via the internet. In this example the gaming software is combined with additional capabilities that enable a real time multiplayer environment that is not otherwise available. The service is a digital automated service, the sale of which is generally subject to retail sales tax and retailing B&O tax.
Example 6. Company sells prewritten word processing software that is accessed by customers but hosted on Company's computers. The software includes access to clip-art image files that can be inserted into documents created with the remotely accessed prewritten word processing software. Company is selling remote access prewritten software and not a digital automated service or digital goods. The clip art made available with the software does not transform the remotely accessed prewritten software into a digital automated service or a digital good. Company is selling remote access prewritten software subject to retail sales tax and retailing B&O tax.
(b) Digital automated service prior to July 26, 2009. The sale of a digital automated service to consumers was not a retail sale before July 26, 2009. Generally, income earned from such sales was subject to B&O tax under the service and other activities classification.
(204) Digital codes. These are codes that provide a purchaser with the right to obtain one or more digital products, if all of the digital products to be obtained through the use of the code have the same retail sales and use tax treatment. A digital code may be obtained by any means, including email or by tangible media regardless of its designation as song code, video code, book code, or some other term. For example, a digital code includes the sale of an alphanumeric code that, when entered online at a website, provides the customer with a digital music file for download.
(a) Products with mixed tax treatment. Codes that provide the right to obtain one or more products that do not have the same retail sales and use tax treatment are not digital codes.
(b) Codes that represent a stored monetary value, redeemable cards, gift cards, or gift certificates. Codes that represent a stored monetary value that is deducted from a total as it is used by the purchaser or that represent a redeemable card, gift card, or gift certificate that entitles the holder to select digital products of an indicated cash value, are not digital codes.
Example 7. Calvin purchases a code at his local grocery store for use on Joe Seller's (JS) website. At check out, Calvin tells the grocery store clerk to put $25.00 in value on the plastic card containing the code. Calvin then goes to JS's website and inputs the code from the card. The $25.00 value of the card is stored in Calvin's "account" and can be used on any purchase by Calvin from JS's website. Calvin then purchases five digital songs for $5.00 from JS. At check-out from JS's website, $5.00 is deducted from Calvin's account to pay for the songs. When the transaction is complete, Calvin has a $20.00 balance remaining in his account on JS's website. Because the code represents a stored monetary value it is not a digital code and the sale of the code is not subject to retail sales tax or retailing B&O tax.
Part 3. Are There Applicable Exclusions from the General Definitions of Digital Product and Digital Code?
(301) Introduction. For certain products or services transferred electronically that otherwise meet the definition of digital good or digital automated service (as discussed in Part 2) there may be a specific exclusion from the applicable definition. If an exclusion applies, then the product or service will generally not be considered a digital good or digital automated service for retail sales and use tax purposes. For example, a service that is transferred electronically and that uses one or more software applications will generally be subject to retail sales tax as a digital automated service. However, if the service is an advertising service, then an exclusion applies, and the service will not be a digital automated service subject to retail sales tax; however, the service may still be subject to B&O tax. An excluded service may also still be subject to retail sales tax under certain circumstances. For example, telecommunications services are excluded from the definition of digital automated services, but remain subject to retail sales tax under their own separate definition of retail sale.
(302) Exclusions from the definition of digital good are:
(a) Telecommunications and ancillary services as defined in RCW 82.04.065. These services may be used to distribute digital goods, digital automated services, and digital codes, but are not themselves any of these products.
(b) Computer software as defined in RCW 82.04.215 and WAC 458-20-15502. These are coded instructions designed to cause a computer or automatic data processing equipment to perform a task.
(c) The internet and internet access as defined in RCW 82.04.297.
(d) Professional or personal services represented in electronic form are not a digital good. This exclusion applies where the service primarily involves the application of human effort by the service provider, and the human effort originated after the customer requested the service. For example, an electronic engineering report created at the customer's request that reflects an engineer's professional analysis, calculations, and judgment, which is sent to the customer electronically, is considered evidence of a professional service and not a digital good.
Photography. This exclusion for professional or personal services does not apply to photographers in respect to amounts received for the taking of digital photographs that are transferred electronically to the end user/customer as defined in RCW 82.04.190(11). See Example 39 for an example of a nonend user transaction involving photography that is subject to royalties B&O tax.
(e) Exclusions listed directly below for digital automated services are also exclusions from the definition of digital good.
(303) Exclusions from the definition of digital automated service are:
(a) Services that require primarily human effort by the seller and the human effort originated after the customer requested the service. In this context, "primarily" means greater than 50 percent of the effort to perform the service involved human labor. To determine whether the 50 percent or greater threshold is satisfied, the average of the time and cost factors is considered. The time factor is determined by dividing the time spent to perform the human effort portion for customers by the total time spent performing the service. The cost factor is determined by dividing the direct costs incurred to perform the human effort portion for customers by the total direct costs incurred to perform the service. Direct costs of the human effort component include salaries, employee benefits and similar direct costs. Direct costs of the automated component include the cost of software, computers, hosting services and other similar direct costs. If the average of the time and cost factors is greater than 50 percent then the service requires primarily human effort and is not a digital automated service in which case the service will generally be subject to service and other activities B&O tax.
Example 8. RepuCo.com performs a reputation monitoring service on the internet for its clients. The service utilizes software and other technology that searches the internet for websites that allow posting of information that may be harmful to RepuCo.com's client's reputation ("the automated component"). If the automated component finds a website that is posting erroneous or harmful information about one of RepuCo.com's clients, then a RepuCo.com employee will contact the owner of the website by phone or email and work with the owner and the client to resolve the matter to the satisfaction of the client ("the human effort component"). If the human effort time factor is 20% and the human effort direct cost factor is 60%, then the average of the two factors is 40% (80%/2 = 40%). Accordingly, the service is performed using 40% human effort which is less than 50% and therefore the service does not require primarily human effort and is subject to retail sales tax as a digital automated service.
Alternative methods. If the time and cost factors in this rule do not fairly represent the extent to which the service is performed using primarily human effort, the taxpayer may ask in writing for, or the department may require, the employment of another reasonable method to equitably determine whether the service is performed using primarily human effort.
(b) Loaning or transferring money or the purchase, sale, or transfer of financial instruments. For purposes of this rule, "financial instruments" include cash, accounts receivable and payable, loans and notes receivable and payable, debt securities, equity securities, as well as derivative contracts such as forward contracts, swap contracts, and options. For example, the electronic transfer of money from a savings account to a checking account, whether done for the customer by a bank teller or by an ATM machine, is excluded from the definition of digital automated service.
(c) Dispensing cash or other physical items from a machine. Includes an ATM that dispenses cash to users.
(d) Payment processing services, including services such as electronic credit card processing activities conducted online or in physical retail stores via electronic transmission.
(e) Parimutuel wagering and handicapping contests as authorized by chapter 67.16 RCW.
(f) Telecommunications services and ancillary services as those terms are defined in RCW 82.04.065. For additional information, refer to the discussion above concerning the comparable exclusion from the definition of digital goods (see Part 3, subsection (302)(a) of this rule).
(g) The internet and internet access as those terms are defined in RCW 82.04.297.
(h) Remote access prewritten software. Remote access prewritten software (defined in RCW 82.04.050 (6)(b)) provided on a standalone basis is excluded from the definition of digital automated service. However, software that is used in connection with a service that is transferred electronically would generally be included in the definition of a digital automated service.
Example 9. Company sells prewritten gaming software that is identical in all substantive respects to the same software available in stores for individual use and installation on home computers except that it is hosted on Company's servers and accessed by customers. Company's sales to consumers would be treated as a sale of remote access prewritten software and therefore is excluded from the definition of digital automated services and generally subject to retail sales tax and retailing B&O tax.
Example 10. Same facts as Example 9 except that Company uses the remote access prewritten software to provide a monthly subscription service that provides a real item multiplayer environment. Company is selling a digital automated service. In this case the customers are not merely receiving the individual use of software, but instead an online gaming service facilitated by the software. Thus, the monthly subscription service is not excluded from the definition of digital automated service and is subject to retail sales tax and retailing B&O tax.
(i) Online education programs provided by the following:
(i) Public or private elementary or secondary schools; or
(ii) An institution of higher education as defined in Sections 1001 or 1002 of the federal Higher Education Act of 1965 (Title 20 U.S.C. Sections 1001 and 1002), as existing on July 1, 2009. This would include most colleges and universities. For the purposes of this rule, an online educational program must be encompassed within the institution's accreditation.
Example 11. ABC University, a qualifying institution of higher education under the federal Higher Education Act of 1965, provides an accredited online Spanish course for which it charges a quarterly access and use fee to students. The course is remotely accessed by students logging into a website and accessing a fully interactive program that includes components of video, text, and audio, as well as extensive software code. This service would generally be considered a digital automated service. However, it is specifically excluded from the definition of digital automated service as an online educational program and may be subject to service and other activities B&O tax if another exclusion, deduction, or exemption does not apply.
(j) Live presentations such as lectures, seminars, workshops, or courses, where participants are connected to other participants and presenters via the internet or other networks, allowing the participants and the presenters to provide, receive, and discuss information together in real time.
Example 12. Company provides an online seminar service for Customer. Company provides a panel of live speakers that make a presentation to Customer's employees listening to and viewing the seminar through an internet connection supplied by a third-party service provider. The seminar allows Customer's employees and panelists to ask and answer questions on a real time basis. Company's online seminar service is transferred electronically and uses one or more software applications and therefore would generally be considered a digital automated service. However, this type of service allowing live interaction is specifically excluded from the definition of digital automated service and would generally be subject to service and other activities B&O tax.
Example 13. Same facts as Example 12 except that Company records the seminar and charges other individuals a fee for accessing the seminar from Company's website. The recorded presentation allows these customers to watch the presentation but it does not allow them to ask questions on a real time basis. Because the presentation was prerecorded there is no live interaction contemporaneous with the presentation and therefore Company is selling a digital good generally subject to retail sales tax and retailing B&O tax.
Example 14. Company provides online training courses to Steve for a fee. The training courses provide key interactive elements such as study guides, knowledge testing, and automated help, all facilitated by one or more software applications. Such courses are not live presentations and do not provide human interaction. Accordingly, Company is selling a digital automated service generally subject to retail sales tax and retailing B&O tax.
(k) Travel agent services, including online travel services, and automated systems used by travel agents to book reservations.
(l) Online marketplace related activities, which are services that allow the person receiving the services to make online sales of products or services, digital or otherwise, using either:
(i) The service provider's website; or
(ii) The service recipient's website, but only when the service provider's technology is used either to:
(A) Create or host the service recipient's website; or
(B) Process orders from customers using the service recipient's website.
Example 15. Company provides an "electronic marketplace" service to Holcomb that allows Holcomb to list and sell his coffee mugs on the internet using Company's website. This online marketplace service is excluded from the definition of digital automated services and charges for the service would generally be subject to service and other activities B&O tax.
Example 16. Same facts as Example 15, except that now Holcomb decides he no longer wants to be just another seller on Company's website. Instead, Holcomb wants his own "retailing presence" on the internet so Holcomb contracts with Company to create and host Holcomb's new coffee mug website, "HolcombsCoffeeWorld.com." This is still an online marketplace service that is excluded from the definition of digital automated services and charges for the service would generally be subject to service and other activities B&O tax.
(iii) Exclusion limitation. The services described in this subsection do not include the underlying sale of the products or services, digital or otherwise, by the person receiving the service. For instance, in Examples 15 and 16, the sale by Holcomb of coffee mugs would still generally be subject to retail sales tax and retailing B&O tax as the sale of tangible personal property.
(m) Advertising services means all services directly related to the creation, preparation, production, or the dissemination of advertisements. Advertising services include: Layout, art direction, graphic design, mechanical preparation, production supervision, placement, and rendering advice to a client concerning the best methods of advertising that client's products or services. Advertising services also include online referrals, search engine marketing and lead generation optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of website traffic for purposes of determining the effectiveness of an advertising campaign. Advertising services do not include web hosting services and domain name registration.
Example 17. Company provides marketing services to customers wishing to promote their products using the internet. Amy sells widgets on the internet and hires Company to market her products. Company consults with Amy on her marketing needs and then creates a marketing plan for her business. Company also creates and distributes online banners, links, and targeted "email blasts" that promote Amy's business. All of the services provided by Company are advertising services excluded from the definition of digital automated services and would generally be subject to service and other activities B&O tax.
Example 18. RVP, Inc. creates "sponsored links" on its website that drive customer traffic to Amy's website. RVP is paid by Amy for each click on a sponsored link on RVP's website. The services provided by RVP are advertising services excluded from the definition of digital automated services and charges for such would generally be subject to service and other activities B&O tax.
(n) Storage, hosting, and back-up. The mere storage of digital products, digital codes, computer software, or master copies of software is excluded from the definition of digital automated services. This exclusion includes providing space on a server for web hosting or backing-up data or other information.
Example 19. Company charges Rowe a fee for 25 terabytes of storage space under its "basic storage service" offering. Company also charges Rowe an additional and optional fee for its "premium service" package offering, which involves services beyond mere storage. The "basic storage" services are mere storage services and excluded from the definition of digital automated services. These services would generally be subject to service and other activities B&O tax. However, the charges for the optional premium services are more than mere storage or hosting services. As such, the premium services are not excluded from the definition of digital automated services and would generally be subject to retail sales tax and retailing B&O tax.
(o) Data processing services means a primarily automated service provided to a business or other organization where the primary object of the service is the systematic performance of operations by the service provider on data supplied in whole or in part by the customer to: (i) Extract the required information in an appropriate form, or (ii) to convert the data to usable information. Data processing services include check processing, image processing, form processing, survey processing, payroll processing, claim processing, and similar activities. Data processing does not include remote access prewritten software used by the customer to process their own data.
Example 20. Bango Corp., in preparation for litigation, hires Company to use its automated technology to search Bango's computers and gather documents relevant to the lawsuit. Company's service also provides software tools that allow Bango to categorize, copy, store, and notate the gathered documents. Company's service is not data processing. The services performed primarily involve gathering data, and providing software tools that allow the customer to categorize, copy, store and notate documents in preparation for litigation. Accordingly, Company is selling a digital automated service generally subject to retail sales tax and retailing B&O tax.
Example 21: Company provides check processing services to Wallo Corp., a bank operating in Washington. Company accepts scanned checks provided by Wallo and then uses its software and technology to extract the check dollar amount, account number, and verify the check has been signed. Company then provides this extracted and reformatted data back to Wallo allowing it to reconcile its customer's accounts. Company provides data processing services which are excluded from the definition of digital automated services. These services would generally be subject to service and other activities B&O tax.
Example 22. Same facts as Example 21, except that Company accepts checks provided directly by Wallo's customers. Thus, check images come from both Wallo and Wallo's customers. The services provided by Company are still data processing services excluded from the definition of digital automated services even though the data does not come exclusively from Wallo. These services would generally be subject to service and other activities B&O tax.
Part 4. Are the Sales of the Digital Product or Digital Code Sourced to Washington?
(401) Introduction. Once it is determined that a transaction involves the sale of a digital product or digital code, the sale must be sourced to Washington in order to be subject to Washington's retail sales tax and B&O tax. If the sale is sourced outside Washington it is not subject to Washington sales tax or B&O tax. Sales of digital products are sourced using the same statute that applies to other retail sales, RCW 82.32.730 as outlined below.
(402) Sourcing retail sales.
(a) Business location. When a digital product or digital code is received by the buyer at a business location of the seller, the sale is sourced to that business location.
Example 23. Frank goes to BigBox brick-and-mortar store in Washington and purchases a music file from an electronic kiosk in the store. Frank purchases and downloads the music file inside BigBox's store by connecting his digital music player to the kiosk in the store. The sale of the music file is sourced to BigBox's store location in Washington and is generally subject to retail sales tax and retailing B&O tax.
(b) Place of receipt. If the first sourcing rule explained above in (a) of this subsection does not apply, the sale is sourced to the location where receipt takes place.
(i) The digital product or digital code may be received by the buyer at the buyer's location or by the buyer's donee (e.g., a gift recipient) at the donee's location.
(ii) In the context of digital products and digital codes, "receive" and "receipt" means: (A) Making first use of digital automated services; or (B) taking possession or making first use of digital goods or digital codes, whichever comes first.
Example 24. Drogba Inc., located in Olympia, Washington, purchases a digital automated service generally subject to retail sales tax from Company. Drogba's employees access and make first use of the service at their computer workstations located in Olympia. Company knows that the digital automated service is received in Olympia and therefore will source the sale of the digital automated service to that location.
(c) Address in records. If the first two sourcing rules explained in (a) and (b) of this subsection do not apply, the sale is sourced to the location indicated by an address for the buyer that is available from the seller's business records maintained in the ordinary course of business, so long as use of this address does not constitute bad faith. For example, any address of the buyer held by the seller that reasonably estimates the receipt location will be sufficient, including an address contained in a relevant service contract or an address used for accounts receivable purpose.
Example 25. Nani Corp., located in California, purchases a digital automated service generally subject to retail sales tax and retailing B&O tax from Company located in Washington. The purchase contract between Nani and Company provides that Nani may have 5 users access the digital automated service. Company does not know where the digital automated service is actually received. However, Company has Nani's California address in its business records and will therefore source the sale to Nani's California address. Because the sale is sourced outside Washington, it is not subject to Washington's retail sales tax or retailing B&O tax. Note, to the extent that Nani Corp., receives the service at locations in Washington, it may have a use tax liability. See subsection (403) of this rule for more on use tax.
(d) Address obtained during sale. If the first three sourcing rules explained in (a), (b), and (c) of this subsection do not apply, the sale is sourced to the location indicated by an address for the buyer obtained during the consummation of the sale. For example, an address obtained during consummation of the sale would include the address of a buyer's payment instrument (e.g., billing address for a credit card), if no other address is available, so long as use of this address does not constitute bad faith.
Internet protocol (IP) address. The buyer's IP address is acceptable location information obtained at the time of sale if an address cannot otherwise be obtained during consummation of the sale.
(e) Origin. If the first four sourcing rules explained in (a), (b), (c), or (d) of this subsection do not apply, including the circumstance where the seller is without sufficient information to apply those provisions, then the sale must be sourced to the location determined by the address from which the digital good or digital code was first available for transmission by the seller, or from which the digital automated service was provided. Any location that merely provided the digital transfer of the product sold shall be disregarded.
(403) Sourcing for use tax purposes. The sales sourcing rules above in subsection (402) of this rule are for sourcing sales subject to retail sales tax under RCW 82.08.020 and RCW 82.32.730. What follows below is a discussion of use tax reporting obligations with respect to digital goods, digital automated services, and digital codes. Generally, use tax applies to the use of a digital product or digital code in Washington if retail sales tax has not already been paid and no exemption otherwise applies.
(a) Digital good or digital code. "Use" means the first act within this state by which the taxpayer, as a consumer, views, accesses, downloads, possesses, stores, opens, manipulates, or otherwise uses or enjoys the digital good or digital code.
(b) Digital automated service. "Use" means the first act within this state by which the taxpayer, as a consumer, uses, enjoys, or otherwise receives the benefit of the service.
Example 26. Company, located in New York, sells a digital automated service generally subject to retail sales tax and retailing B&O tax to Lampard Inc., located in Washington. Lampard's employees in Washington use the internet to access Company's services using an internet web browser. However, Company does not have nexus with Washington and is therefore not required to charge and collect retail sales tax on the sale of its service to Lampard. Lampard has a use tax reporting obligation because it uses, enjoys, or otherwise receives the benefit of Company's digital automated service at its location in Washington.
Part 5. Are there Applicable Retail Sales or Use Tax Exemptions for the Purchase or Use of the Digital Product or Digital Code?
(501) Introduction. After determining that a digital product or digital code has been sold or used and the sale or use is sourced to Washington, exemptions from retail sales or use tax should be examined. What follows is not an exhaustive list of exemptions but instead an explanation of the most common exemptions for digital products. Some exemptions may apply only with respect to certain digital products (e.g., some exemptions apply only to digital goods, not digital automated services). Exemptions may also require an exemption certificate or reseller permit.
(502) Resale. The purchase of a digital product or digital code for resale with no intervening use is not subject to retail sales or use tax. Sellers should obtain from buyers a copy of the buyer's reseller permit, a properly completed "Digital Products and Remote Access Software Exemption Certificate," or otherwise comply with RCW 82.04.470 to substantiate the wholesale nature of the sale. See RCW 82.32.780.
(503) Component of a new product. Generally, purchasing, acquiring, owning, holding, or using any digital product or digital code for purposes of incorporating it into a new product for sale will not be subject to retail sales tax. The digital product or digital code must become a component of the new product for sale. A digital code becomes a component of a new product if the digital good or digital automated service acquired through the use of the digital code becomes incorporated into a new product. RCW 82.04.190(11). This is also discussed in subsection (602) of this rule in the context of wholesale sales.
Product. For purposes of this subsection, "product" means a digital product, an article of tangible personal property, or remote access prewritten software as defined in RCW 82.04.050 (6)(b). For example, an industrial drill manufacturer and seller combines hardware, software, and data to create a new product, a "smart drill." Software embedded in the drill uses the variance data (also embedded in the drill) to control the hardware during drill operations. The data is a digital good purchased for use as a component of a new product for sale (i.e., the drill). Sellers should obtain from buyers a copy of the buyer's reseller permit, a properly completed "Digital Products and Remote Access Software Exemption Certificate," or otherwise comply with RCW 82.04.470 to substantiate the wholesale nature of the sale.
(504) Made available free to the general public. Retail sales and use tax does not apply to the purchase or use by a business or other organization of a digital product (including a digital product acquired through the use of a digital code) in order to make that digital product (1) available free of charge for the use or enjoyment of (2) the general public. Buyers claiming this exemption must provide the seller with a properly completed "Digital Products and Remote Access Software Exemption Certificate" or other exemption certificate acceptable to the department. See RCW 82.08.02082.
(a) Available for free. In order to qualify, the digital product purchased must be made available for free. In this context, "free" means that the recipient of the digital product does not need to provide anything of significant value. If the purchaser requires something of significant value from the recipient in exchange for the digital product, it is not given away for free.
Example 27. Mauro purchases 1,000 digital music files from Company to be used for a "give away" to the first 1,000 people to visit Mauro's website. When people visit Mauro's website they are required to fill out a marketing survey before they may receive a digital music file. The information gathered from the marketing survey is then sold to a marketing company by Mauro. Thus, Mauro has required that recipients provide something of significant value in exchange for the digital music file. This is not a "free" transaction and therefore, Mauro's purchase of the digital music from Company does not qualify for the exemption and would be subject to retail sales tax and retailing B&O tax. (See also Example 29.)
(b) "General public" means all persons and is not limited or restricted to a particular class of persons, except that the general public includes:
(i) Certain classes of persons defined by their residency or property ownership. The general public includes a class of persons residing or owning property within the boundaries of any state (e.g., Washington), political subdivision of a state (e.g., King County), or a municipal corporation (e.g., Seattle).
Example 28. The City of Evergreen (a municipal corporation) makes satellite images of land parcels available for free only to persons residing in Evergreen. Residents are required to enter their zip code prior to accessing the images and certify that they are a resident of the City. Accordingly, the City of Evergreen can purchase the satellite images exempt from retail sales tax.
(ii) Library customers. With respect to libraries, the term general public includes authorized library patrons.
(c) Buyer must have the legal rights to provide the digital product to the general public. The exemption provided in this subsection does not apply unless the purchaser has the legal right to broadcast, rebroadcast, transmit, retransmit, license, relicense, distribute, redistribute, or exhibit the digital product, in whole or in part, to the general public.
Example 29. Same facts as Example 27, except this time visitors to Mauro's website are provided free access to the digital music files and no survey information is required in exchange. Additionally, Mauro purchased the digital music files from Company with the right to distribute them to the general public. Mauro also provided the seller with an exemption certificate. Accordingly, Mauro's purchase from Company qualifies for the exemption because he has made the digital audio files available free of charge to the general public pursuant to a contract that gives him rights of distribution. Mauro only purchased 1,000 files and therefore must limit the distribution to the first 1,000 people. Most "give-aways" will have similar quantity limitations but this fact alone will not disqualify such transactions under the "general public" requirement.
(505) Purchased solely for business purpose.
(a) Introduction. Retail sales and use tax does not apply to the sale to or use by a business of digital goods and services rendered in respect to those digital goods, where the digital goods and services rendered in respect to digital goods are purchased solely for business purposes. This exemption only applies to purchases of digital goods and does not apply to the purchase of digital automated services, prewritten software, or remote access prewritten software. The exemption is only available when the buyer provides the seller with an exemption certificate. Buyers may use the department's "Digital Products and Remote Access Software Exemption Certificate" to claim this exemption. See RCW 82.08.02087.
(b) Digital codes. This exemption also applies to the sale to or use by a business of a digital code if all of the digital goods to be obtained through the use of the code will be used solely for business purposes. If the digital code purchased by a business for a business purpose provides access to both digital goods and digital automated services, the purchase of the digital code does not qualify for this exemption.
(c) "Business purposes" means the digital good is relevant to the buyer's business needs.
(d) Personal or household purpose. This exemption does not apply to the purchase for personal or household purposes.
(e) Government entities. This exemption does not apply to purchases by a governmental entity.
(f) Prior periods. For the period July 26, 2009, through June 30, 2010, the "business purpose" exemption applied only to "standard digital information." Standard digital information is a subset of digital goods.
Standard digital information is a digital good that consists primarily of data, facts, and/or information that is not generated or compiled for a specific client or customer. Standard digital information does not include a digital good that is comprised primarily of sounds or images.
(506) Purchases of standard financial information by qualifying international investment management companies. The purchase of standard financial information by a qualifying international investment management company, or persons affiliated with a qualifying international investment management company, is exempt from retail sales and use tax. RCW 82.08.207 and 82.12.207. The exemption applies regardless of whether the standard financial information is provided in a tangible format or on a tangible storage medium or as a digital product transferred electronically. This retail sales and use tax exemption expires July 1, 2031.
"Qualifying international investment management company" means a person engaging within this state in the business of providing qualifying international investment management services as defined in RCW 82.04.293(1).
(a) "Standard financial information" means financial data, facts, or information, or financial information services, not generated, compiled, or developed only for a single customer. Standard financial information includes, but is not limited to, financial market data, bond ratings, credit ratings, and deposit, loan, or mortgage reports. RCW 82.08.207 (4)(b)(i).
(b) "Financial market data" means market pricing information, such as for securities, commodities, and derivatives; corporate actions for publicly and privately traded companies, such as dividend schedules and reorganizations; corporate attributes, such as domicile, currencies used, and exchanges where shares are traded; and currency information. RCW 82.08.207 (4)(b)(ii).
(c) Filing and documentation. Sellers making tax-exempt sales should obtain a completed buyer's retail sales tax exemption certificate from the buyer. In lieu of an exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement. The seller must retain a copy of the exemption certificate or other relevant data elements for the seller's files and must meet the records requirement in subsection (607) of this rule for tax liabilities owed to this state. For sellers who electronically file their taxes, the department will provide a separate tax reporting line for exemption amounts claimed under this rule.
(d) Limitations on exemption. A buyer may not continue to claim the exemption once the buyer has purchased standard financial information during the current calendar year with an aggregate total selling price in excess of $15,000,000 and an exemption has been claimed for such standard financial information. The $15,000,000 limitation under this subsection does not apply to any other exemption that applies to standard financial information.
(e) Sellers' responsibilities. Sellers are not responsible for ensuring a buyer's compliance with the $15,000,000 limitation under this subsection. Sellers may not be assessed for uncollected sales tax on a sale to a buyer claiming an exemption under this rule after having exceeded the $15,000,000 limitation under this subsection, except as provided in RCW 82.08.050 (4) and (5).
(f) Reporting requirements for buyers. This retail sales and use tax exemption for standard financial information is subject to additional reporting requirements. Buyers must report the amount of tax preference received as directed by the department. Buyers are not required to report the amount of preference received if the tax benefit to a buyer is less than $1,000 per year; or the buyer files an annual tax return with the department.
(507) Multiple points of use (MPU). Retail sales tax does not apply to the sale of digital products or digital codes concurrently available for use within and outside this state. See RCW 82.08.0208 and 82.12.0208. Note that Washington use tax still applies to the use of the digital product or digital code used in Washington. See RCW 82.12.0208.
(a) Requirements. A buyer is entitled to claim the MPU exemption only if:
(i) The buyer is a business or other organization.
(ii) The digital product purchased (or obtained by using the digital code purchased) will be concurrently available for use within and outside this state (not for personal use).
(iii) The buyer provides the seller with a valid exemption certificate acceptable to the department claiming the MPU exemption. Buyers may use the department's "Digital Products and Remote Access Software Exemption Certificate" to claim this exemption.
(b) Concurrently available. "Concurrently available for use within and outside this state" means that employees or other agents of the buyer may use the digital product simultaneously from one or more locations within this state and one or more locations outside this state.
Example 30. Company sells an online patent searching service to Iniesta Corp., for simultaneous use at Iniesta's headquarters in Washington and its research and development facility in California. This service would generally be considered the sale of a digital automated service subject to retail sales tax and retailing B&O tax. In this case, the digital automated service is concurrently available for use by Iniesta's employees both within Washington and outside Washington, and therefore Iniesta may claim the MPU exemption from retail sales tax for its purchase of the digital automated service from Company. See (c) of this subsection for an explanation of how to apportion the use tax in this example.
(c) Apportionment (allocation) of use tax. For purposes of this subsection on multiple points of use, "allocation" and "apportionment" have the same meaning. A business or other organization subject to use tax on digital products or digital codes that are concurrently available for use within and outside this state is entitled to apportion the amount of tax due this state based on users in this state compared to users everywhere. For example, in the case of Iniesta in Example 30, if we assume Iniesta had five employees in California and five employees in Washington using the service concurrently, Iniesta would allocate one-half of the purchase price to Washington because five of its 10 users are in Washington (e.g., 5/10 = 50%). Thus Iniesta would pay use tax to Washington based on 50 percent of the value of the digital automated service. Additionally, the department may authorize or require an alternative method of allocation supported by the taxpayer's records that fairly reflects the proportion of in-state to out-of-state use by the taxpayer.
(i) Records requirement. No allocation under this rule is allowed unless the allocation method is supported by the taxpayer's records kept in the ordinary course of business in compliance with the records requirement in subsection (607) of this rule for tax liabilities owed to this state.
(ii) "User" means an employee or agent of the taxpayer who is authorized by the taxpayer to use the digital product purchased in the performance of his or her duties as an employee or other agent of the taxpayer.
(d) Application to digital codes. A digital code is concurrently available for use within and outside this state if users may use the digital goods or digital automated services to be obtained by the code simultaneously at one or more locations within this state and one or more locations outside this state.
(e) Reporting. A buyer claiming an exemption under this rule must report and pay state and local use tax directly to the department. As explained in (c) of this subsection, use tax may be reported and paid on an apportioned basis if supported by the buyer's records in compliance with the records requirement in subsection (607) of this rule for tax liabilities owed to this state.
(508) Machinery and equipment. Generally retail sales and use tax does not apply to sales to or use by a manufacturer or processor for hire of certain machinery and equipment used directly in a manufacturing or research and development operation. This exemption is commonly referred to as the M&E exemption. (See RCW 82.08.02565 and 82.12.02565 and WAC 458-20-13601 for information regarding the M&E exemption.) Included within the definition of "machinery and equipment" for purposes of the M&E exemption are digital goods. Accordingly, digital goods acquired by manufacturers and processors for hire and used directly in a manufacturing or research and development operation are exempt from retail sales and use tax, provided all of the requirements for the M&E exemption are met.
(509) Audio or video programming. Income received from the sale of regular audio or video programming by a radio or television broadcaster is generally subject to service and other B&O tax and therefore not subject to retail sales tax. However, the sale of audio or video programming sold on a pay per program or subscription on-demand basis is generally subject to retail sales and use tax except as provided in (d) and (e) of this subsection.
(a) "Radio and television broadcasters" include satellite radio providers, satellite television providers, cable television providers, and providers of subscription internet television.
(b) "Pay per program or subscription on-demand basis" means programming that the buyer pays for on a per program basis or a service that allows the buyer to access a library of programs at any time for a specific charge.
(c) "Regular programming" is scheduled programming. The person watching cannot stop, pause, rewind, or otherwise control the broadcast of the scheduled programming, including the time that the scheduled program is broadcast.
The fact that a customer uses a recording device, such as a VCR or DVR, does not result in the broadcaster's programming being characterized as a digital good.
(d) Cable television providers paying franchise fees. Cable television providers' sales of programming to consumers on a pay-per-program or subscription on-demand basis are not subject to retail sales and use tax if the cable television provider is subject to a franchise fee (under the authority of Title 47 U.S.C. Sec. 542(a)) on the gross revenue received from such sales. If the cable television provider is not subject to a franchise fee on the income from the sale of programming on a pay-per-program or subscription on-demand basis, then the exemption does not apply and the cable television provider must collect and remit retail sales tax on the retail sale of such programming.
Example 31. XYZ sells video programming to customers using cable technology. XYZ does not pay a franchise fee. Customers of XYZ are charged a monthly subscription fee to receive video programming. Customers are charged additional fees to view selected movies. XYZ must charge and collect retail sales tax on the additional fees charged to view the selected movies, but not on the monthly subscription fee which would generally be subject to service and other activities B&O tax.
(e) Satellite television providers do not generally pay franchise fees and therefore do not qualify for the retail sales and use tax exemption based on payment of franchise fees as described in (d) of this subsection.
(510) Newspapers. Generally, retail sales and use tax does not apply to sales of newspapers transferred electronically, provided that the electronic version has a printed counterpart, and the electronic version:
(a) Shares content with the printed newspaper; and
(b) Is prominently identified by the same name as the printed newspaper or otherwise conspicuously indicates that it is a complement to the printed newspaper.
(c) "Printed newspaper" means a publication issued regularly at stated intervals at least twice a month and printed on newsprint in tabloid or broadsheet format folded loosely together without stapling, glue, or any other binding of any kind, including any supplement of a printed newspaper.
(511) Received for free by end user. Digital products and digital codes obtained by the end user for free are not subject to use tax.
(a) For example, a person's use of a free search engine is not subject to use tax.
(b) For example, a person reading an online article or viewing an online picture for free is not subject to use tax.
(512) Other use tax exemptions. Use tax does not apply to the use of digital goods that are:
(a) Noncommercial in nature, such as personal email communications;
(b) Created solely for an internal audience; or
(c) Created solely for the business needs of the person who created the digital good and is not the type of digital good that is offered for sale, including business email communications.
Example 32. Gary, an employee of Kadabbera Corp., creates a digital audio-visual presentation using presentation authoring software and his innate creative capacity. Gary distributes the presentation internally to various divisions within Kadabbera in order to train employees on changes to company policies. Gary has created and distributed an item that meets the definition of "digital good." However, the distribution and use of this digital good is not subject to use tax as long as it is used solely internally or solely for the business needs of Kadabbera.
Part 6. Miscellaneous Provisions
(601) Retail services. Washington imposes retail sales and use tax on certain enumerated services under RCW 82.04.050 ("retail services"). For example, the sale of credit bureau services is subject to retail sales tax. However, when a retail service is transferred electronically and also meets the definition of digital automated service or digital good, such service will be treated as a digital product and is eligible for all applicable digital products retail sales and use tax exemptions as described above in Part 5 of this rule. Retail services that are not transferred electronically or those retail services that are excluded from the definitions of digital good or digital automated service (e.g., telecommunications services and ancillary services) continue to be taxed as retail services.
Example 33. ABC creates a "canned" digital report on Company X's creditworthiness prepared prior to a customer request for the report. The report may be a credit bureau service and/or a digital good (if transferred electronically). The "canned" report is listed for sale on ABC's website. An employee of InvestCo, Inc. purchases and downloads a digital copy of the "canned" credit report from ABC's website for InvestCo's business purpose. ABC is selling a digital good generally subject to retail sales tax. However, the "canned" report is purchased by InvestCo solely for a business purpose and therefore exempt from retail sales tax (see subsection (505) of this rule for more on this exemption).
Example 34. Company sells credit reports and credit research services. EPD Corp., requests that Company prepare a credit report for EPD's specialized business purposes. After receiving the request, Company's employee researches, analyzes and generates information from various digital sources to prepare the credit report for EPD. Company then sends the report electronically as a digital file to EPD. Company is not selling a digital good because the digital item supplied to EPD is merely a representation of a professional service performed by EPD's employee. Therefore, Company's services are not a "digital product." However, Company is still required to charge and collect retail sales tax because Company is still providing credit bureau services, a retail service, subject to retail sales tax.
Example 35. Company sells an online credit reporting service. The service includes access to searchable databases, digital data analysis, and digital data reporting tools. ManageCo investigates the credit worthiness of individuals and therefore purchases access to Company's online service. Company is selling a digital automated service to be used solely for a business purpose by ManageCo. However, the "used solely for a business purpose" exemption is limited to digital goods and is not applicable to digital automated services. As such, Company is required to charge and collect retail sales tax on its sale of the digital automated service to ManageCo.
(602) Royalties and wholesaling B&O tax on digital products. The sale of digital products to "nonend users" may be subject to royalties or wholesaling B&O tax depending on the type of transaction and the intangible rights provided to the purchaser. Transactions which provide the right to resell digital products (no copying rights) to consumers will generally be treated as wholesale sales. Additionally, transactions which allow the purchaser the right to incorporate a digital product into a new product for sale will also be treated as wholesale sales. See also subsection (503) of this rule. Other nonend user transactions involving digital products or digital codes will generally be treated as royalties transactions.
Example 36. Media Corp., licenses to Rerun Inc., the right to further broadcast a digital movie file on Rerun's website for a specified period of time. In this case Media Corp. provides Rerun with the right by contract to further commercially broadcast or exhibit a digital movie to its subscribers. This is a nonend user transaction subject to royalties B&O tax. Media Corp. would report its gross receipts from this transaction under the royalties B&O tax classification and not charge and collect retail sales tax on the transaction with Rerun. Rerun's charges for the subscription service provided to consumers are generally subject to retail sales tax and retailing B&O tax.
Example 37. Same facts as Example 36 except Rerun purchases individual digital movie files from Media Corp. with the right to resell those individual files to end users at retail instead of rebroadcasting or exhibiting to the public. In this case Media Corp. has provided Rerun with the right to resell individual digital movie files to end users. Media Corp. would report its gross receipts from this transaction under the wholesaling B&O tax classification and not charge and collect retail sales tax on the transaction with Rerun. Rerun's charges to consumers for the movie files are generally subject to retail sales tax and retailing B&O tax.
Example 38. Same facts as Example 37 except that Rerun purchases a single digital movie file with the right provided by contract to duplicate and sell that movie file. In this case Media Corp. has provided Rerun with the right to duplicate and sell individual digital movie files. Media Corp. would report its gross receipts from this transaction under the royalties B&O tax classification. Media Corp. would not need to charge and collect retail sales or use tax from Rerun. Rerun's charges to consumers for the movie files are generally subject to retail sales tax and retailing B&O tax.
Example 39. Jack is a photographer who creates a digital picture of Mt. Rainier. Jack licenses, by contract, to Cashman the right to duplicate and sell copies of the Mt. Rainier picture in retail stores. Cashman's payment to Jack is for the grant of an intangible right and subject to royalties B&O tax. Cashman's sale of the picture at retail to customers is subject to retail sales tax and retailing B&O tax.
(603) Substantial nexus is not established in Washington if a business's only contact with the state of Washington is ownership of, or rights in, computer software as defined in RCW 82.04.215, including computer software used in providing a digital automated service; master copies of software; a digital goods or digital codes residing on servers in Washington. For purposes of this rule, "substantial nexus" means the requisite connection that a person must have with a state to allow the state to subject the person to the state's taxing authority, consistent with the commerce clause of the United States Constitution.
(604) Amnesty. Before July 26, 2009, retail sales of downloaded digital goods on a permanent or nonpermanent basis were subject to retail sales tax. This did not include accessed or streamed digital goods. However, amnesty is available to those who did not collect or pay retail sales or use tax on digital goods and digital codes during that time. Sales of digital automated services and accessed or streamed digital goods were subject to service and other B&O tax before July 26, 2009, and amnesty does not extend to these transactions because they were not subject to retail sales tax during that time period.
(a) Refunds and credits of retail sales or use tax. No refund or credit will be given for state and local retail sales and use taxes properly paid on the sale or use, before July 26, 2009, of digital goods or of installing, repairing, altering, or improving digital goods.
(b) No B&O tax refund or credit unless sales tax was paid. If a taxpayer paid B&O tax under the service and other activities classification prior to July 26, 2009, on income received from retail sales of digital products or digital codes, the taxpayer may not receive a refund or credit for the difference between the B&O tax actually paid and the B&O tax that should have been paid under the retailing classification unless the taxpayer has remitted the retail sales tax for those sales.
(605) Bundled transactions. A "bundled transaction" is the retail sale of two or more products, which are distinct and identifiable for one nonitemized price. Because retail sales of digital products and digital codes are subject to retail sales tax, the general rules on the taxation of bundled transactions may apply to certain transactions involving digital products and digital codes. See RCW 82.08.190 and 82.08.195 for more information on the tax treatment of bundled transactions.
(606) Property tax. The excise tax laws relating to digital products and digital codes do not have any impact in the characterization of digital goods and digital codes as tangible or intangible personal property for purposes of property taxation and may not be used in any way in construing Title 84 RCW. See section 1201, chapter 535, Laws of 2009.
(607) Records requirement. Every taxpayer liable for any tax collected by the department must keep and preserve, for a period of five years, suitable records to determine the amount of tax owed. Such records must include copies of all federal income tax and state tax returns and reports. All of taxpayer's books, records, and invoices must be open to examination by the department. An out-of-state taxpayer that does not keep the necessary books and records within this state may produce within this state the books and records required by the department, or permit the examination by an agent authorized or designated by the department at the place the books and records are kept.
[Statutory Authority: RCW 82.02.060 and 82.12.0208. WSR 24-03-135, § 458-20-15503, filed 1/23/24, effective 2/23/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.32.070. WSR 16-04-099, § 458-20-15503, filed 2/2/16, effective 3/4/16. Statutory Authority: RCW 82.01.060 and 2013 2nd sp.s. c 13, Part VII. WSR 14-13-092, § 458-20-15503, filed 6/17/14, effective 7/18/14. Statutory Authority: RCW 82.32.200 and 82.01.060. WSR 13-06-015, § 458-20-15503, filed 2/25/13, effective 3/28/13.]


PDF458-20-156

Abstract, title insurance and escrow businesses.

The gross receipts of "abstract," "title insurance" and "escrow" businesses include all service charges representing an abstract fee, a charge for a title insurance fee or premium, or an escrow fee or service charge received by "escrow agents."
The term "escrow" means any transaction wherein any person or persons, for the purpose of effecting and closing the sale, purchase, exchange, transfer, encumbrance, or lease of real or personal property to another person or persons, delivers any written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by such third person until the happening of a specified event or the performance of a prescribed condition or conditions, when it is then to be delivered by such third person, in compliance with instructions under which he is to act, to a grantee, grantor, promisee, promisor, obligee, obligor, lessee, lessor, bailee, bailor, or any agent or employee thereof.
"Escrow agent" means any sole proprietorship, firm, association, partnership, or corporation engaged in the business of performing for compensation the duties of the third person referred to in the foregoing definition.
Business and Occupation Tax
Abstract, title insurance and escrow businesses are taxable under the classification retailing on gross receipts from fees or premiums charged to consumers for abstract, title insurance or escrow services.
The gross income from collection contracts which do not involve an escrow as above defined is subject to tax under the classification service and other activities.
Retail Sales Tax
The retail sales tax must be collected and reported by abstract, title insurance and escrow businesses on fees or premiums charged for such services. The retail sales tax is applicable to sales to such businesses of forms, office supplies and equipment for use in the conduct of such businesses.
[Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-156, filed 3/15/83; Order ET 70-3, § 458-20-156 (Rule 156), filed 5/29/70, effective 7/1/70.]


PDF458-20-158

Florists and nurserymen.

The word "florist" means a person engaged in the business of selling flowers and ornamental trees, shrubs or vines from an established business location, or one who peddles the same.
The word "nurseryman" means a person who grows, propagates or produces for sale upon his own lands or upon land in which he has a present right of possession, any flowers, trees, shrubs or vines.
Business and Occupation Tax
Retailing. Florists and nurserymen are taxable under the retailing classification upon gross sales made by them to consumers.
Wholesaling. Florists are taxable under the wholesaling classification upon gross sales for resale of articles which were not produced by them as nurserymen. Nurserymen are exempt from business tax with respect to sales at wholesale of articles produced by them in this state, but this exemption does not extend to the taking, cultivating, or raising of Christmas trees or timber.
Retail Sales Tax
Florists and nurserymen must collect the retail sales tax on sales of cut flowers, bulbs, corsages, bouquets, wreaths, floral designs, displays, potted plants, young trees, shrubs, bushes and other such items of tangible personal property to purchasers for use or consumption. However, sales by nurserymen of fruit and nut trees and berry slips or vines to farmers who use the same for producing fruit, nuts or berries for sale are wholesale sales and are not subject to the retail sales tax.
Telegraphic delivery. Where, through the Florist's Telegraphic Delivery Association, one florist takes an order pursuant to which he gives telegraphic instructions to a second florist for delivery of flowers, the sending florist is a retailer of flowers and must collect the retail sales tax from the customer who placed the order on the basis of the total charge. The receiving florist is selling the flowers which he delivers, to the sending florist for resale and is not required to collect the retail sales tax. Thus:
(1) On all orders taken by a Washington florist and telegraphed to a second florist, either in Washington or at a point outside the state of Washington, the florist taking the order will be responsible for the collection of the retail sales tax from the customer placing the order.
(2) In cases where a Washington florist receives telegraphic instructions from a second florist located either within or without Washington for the delivery of flowers, the Washington florist receiving the telegraphic instructions is making a sale for resale to the sending florist on which no tax is to be collected.
Telephone and telegraph charges. The income derived by a florist from telephone and telegraph charges is construed to be an advance for the customer when such charges are paid by the florist and the amount thereof is billed to the customer as a separate item.
Purchase or supplies, materials, equipment, etc. Sales by supply houses to florists and nurserymen of the following articles are sales for resale upon which the retail sales tax should not be collected:
(1) Sales of paper boxes, wrapping paper, bags, twine, gummed tape or other containers sold to customers along with the flowers, shrubs, etc., sold and contained therein;
(2) Sales of labels, stickers, cards which are permanently affixed to the containers referred to above;
(3) Sales of wire, tin foil, ribbon and other items which are attached to or become a component part of, wreaths, floral displays, bouquets or corsages.
Furthermore, sales to nurserymen of seeds, fertilizers and spray materials for use by them in producing for sale flowers, trees, shrubs or vines, are not subject to the retail sales tax. (See WAC 458-20-122.)
However, sales by supply houses to florists and nurserymen of fuel for heating green houses or for other purposes, and sales of equipment and supplies for use or consumption by them are taxable under the retail sales tax.
Revised June 1, 1965.
[Order ET 70-3, § 458-20-158 (Rule 158), filed 5/29/70, effective 7/1/70.]


PDF458-20-159

Consignees, bailees, factors, agents and auctioneers.

A consignee, bailee, factor, agent or auctioneer, as used in this ruling, refers to one who has either actual or constructive possession of tangible personal property, the actual ownership of such property being in another, or one calling for bids on such property. The term "constructive possession" means possession of the power to pass title to tangible personal property of others.
Business and Occupation Tax
Retailing and wholesaling. Every consignee, bailee, factor, agent or auctioneer having either actual or constructive possession of tangible personal property, or having possession of the documents of title thereto, with power to sell such tangible personal property in his or its own name and, actually so selling, shall be deemed the seller of such tangible personal property and taxable under the retailing or wholesaling classification of the business and occupation tax, depending upon the nature of the transactions. In such case the consignor, bailor, principal or owner shall be deemed a seller of such property to the consignee, bailee, factor or auctioneer and taxable as a wholesaler with respect to such sales.
The mere fact that consignee, bailee or factor makes a sale raises a presumption that such consignee, bailee or factor actually sold in his or its own name. This presumption is controlling unless rebutted by proof satisfactory to the department of revenue.
Agents and brokers. Any person who claims to be acting merely as agent or broker in promoting sales for a principal or in making purchases for a buyer, will have such claim recognized only when the contract or agreement between such persons clearly establishes the relationship of principal and agent and when the following conditions are complied with:
(1) The books and records of the broker or agent show the transactions were made in the name and for the account of the principal, and show the name of the actual owner of the property for whom the sale was made, or the actual buyer for whom the purchase was made.
(2) The books and records show the amount of gross sales, the amount of commissions and any other incidental income derived by the broker or agent from such sales.
Service and other business activities. Every consignee, bailee, factor, agent or auctioneer who makes a sale in the name of the actual owner, as agent of the actual owner, or who purchases as agent of the actual buyer, is taxable under the service and other business activities classification upon the gross income derived from such business.
Retail Sales Tax
Consignees, bailees, factors, agents or auctioneers. Every consignee, bailee, factor, agent or auctioneer authorized, engaged or employed to sell or call for bids on tangible personal property belonging to another, and, so selling or calling, is deemed a seller, and shall collect the retail sales tax upon all retail sales made by him, except sales of certain farm property as hereinafter provided. The tax applies to all such sales even though the sales would have been exempt if made directly by the owner of the property sold.
It shall be the duty of every consignee, bailee, factor, agent or auctioneer to collect and remit the retail sales tax directly to the department with respect to all retail sales made or called by them: Provided, however, That if the owner of the property sold is engaged in the business of selling tangible property and the sale by the consignee, bailee, factor, agent or auctioneer has been made in the owner's name and the owner continues to engage in business, the owner may report and pay the tax collected directly to the department.
If the owner of the property sold discontinues business either before or at the time of the sale, the owner and the consignee, bailee, factor, agent or auctioneer will be held jointly responsible for payment of the tax.
The foregoing does not apply to auction sales made by or through auctioneers of tangible personal property (including household goods) which have been used in conducting a farm activity when the seller thereof is a farmer and the sale is held or conducted upon a farm, since such sales are specifically exempted from the retail sales tax.
Bailees will be relieved from liability for the collection of the sales tax from buyers in those cases where they merely receive a commission on the sale and the entire transaction is closed directly between the owner and the buyer, if such sales are reported to the department by such bailees, within ten days after receipt of the sales commission and such report shows the following:
(1) Name and address of seller;
(2) Name and address of buyer;
(3) Amount for which sold;
(4) Approximate date of sale;
(5) Description of property sold.
Those failing to submit such report to the department within the time stated will be held responsible for payment of the sales tax to the state.
Note:
For tax liability of certain independent selling agents for the collection of the use tax, see WAC 458-20-221.
[Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-159, filed 3/15/83; Order ET 70-3, § 458-20-159 (Rule 159), filed 5/29/70, effective 7/1/70.]


PDF458-20-160

Agricultural commission agents.

Any person whose business consists in selling agricultural products both as a dealer and upon a commission-consignment basis is presumed to be conducting business as a seller of tangible personal property either at wholesale or at retail, unless such person segregates upon his books and records between sales of products purchased and sold as a dealer and those handled strictly upon a commission basis.
Business and Occupation Tax
Retailing. Dealers are taxable under the retailing classification upon gross proceeds derived from retail sales. Persons selling upon a commission-consignment basis who do not segregate upon their books and records between sales made as a dealer and those handled upon a commission basis are taxable as sellers upon gross proceeds of all sales.
Wholesaling. Dealers are taxable under the wholesaling classification upon gross proceeds derived from wholesale sales. Persons selling upon a commission-consignment basis who do not segregate upon their books and records between wholesale sales made as a dealer and those handled on a commission basis are taxable as sellers upon gross proceeds of all sales.
Service and other business activities. A person may be classified as engaging in service and other business activities with respect to bona fide commission-consignment sales, even though such consigned sales are credited to the "sales" account, providing he has complied with the Commission Merchants' Law of the state of Washington and has prepared and kept the following records supplementary to the regular books of account:
(1) Lot sheets, cards or similar subsidiary records upon which consigned sales are regularly recorded;
(2) An analysis sheet showing the date, lot number, gross proceeds of sales of consigned goods, remittances to consignor, advances, commissions, other charges and taxable amount with respect to consigned accounts. This sheet shall contain a complete analysis of all consigned sales showing the distribution made from lot sheets, cards or similar subsidiary records. Entries in the consigned sales analysis record shall be made as of the date that final distribution is made on lot sheet, card or similar record;
(3) A detailed record of deductions claimed with respect to sales of products purchased. Such records shall show the date of sale, the lot number and the nature of the deductions claimed.
The subsidiary analysis of consigned accounts and record of deductions shall be kept substantially in the following form:
Principal accounts
Date
Lot
Number
Interstate
Sales
 
Other
Deductions
 
Total
Deductions
 
 
 
 
 
 
 
Commission accounts
Date
Lot
No.
Gross
Proceeds
of Sales
Remit-
tances
Advances
Commis-sion
Charged
Other
Charges
Taxable
Amount
 
 
 
 
 
 
 
 
 
 
 
Retail Sales Tax
Persons engaged in the business of selling agricultural products at retail either as dealers or upon a commission-consignment basis are required to collect the retail sales tax upon all retail sales made by them.
Revised May 1, 1939.
[Order ET 70-3, § 458-20-160 (Rule 160), filed 5/29/70, effective 7/1/70.]


PDF458-20-162

Stockbrokers and security houses.

(1) Introduction. With respect to stockbrokers and security houses, "gross income of the business" means the total of gross income from earnings accounts, specifically gross income from interest, gross income from commissions, gross income from trading, and gross income from all other sources. Provided that:
(a) Gross income from each account is to be computed separately and on a monthly basis;
(b) Loss sustained upon any earnings account may not be deducted from or offset against gross income upon any other account, nor may a loss sustained upon any earnings account during any month be deducted from the gross income upon any account for any other month;
(c) No deductions are allowed on account of salaries or commissions paid to employees or salesmen, rent, or any other overhead or operating expenses paid or incurred, or on account of losses other than under (b) of this subsection;
(d) No deductions are allowed from commissions received from sales of securities which are delivered to buyers outside the state of Washington.
(2) Gross income from interest. Gross income from interest includes all interest received upon bonds or other securities held for sale or otherwise, except direct obligations of the federal government and of the state of Washington. No deduction is allowed for interest paid out even though such interest may have been paid to banks, clearing houses or others upon amounts borrowed to carry debit balances of customers' margin accounts.
Interest accrued upon bonds or other securities sold must be included in gross income where such interest is carried in an interest account and not as part of the selling price. Conversely, interest accrued upon bonds or other securities at the time of purchase may be deducted from gross income where such interest is carried in an interest account and not as a part of the purchase price.
(3) Gross income from commissions. Gross income from commissions is the amount received as commissions upon transactions for the accounts of customers over and above the amount paid to other established security houses associated in such transactions: Provided, however, That no deduction or offset is allowed on account of salaries or commissions paid to salesmen or other employees.
(4) Gross income from trading. Gross income from trading is the amount received from the sale of stocks, bonds and other securities over and above the cost or purchase price of such stocks, bonds and other securities. In the case of short sales gross earnings must be reported in the month during which the transaction is closed, that is, when the purchase is made to cover such sales or the short sale contract is forfeited.
(5) Gross income from all other sources. Gross income from all other sources includes all income received by the taxpayer, other than from interest, commissions and trading, such as dividends upon stocks, fees for examinations, fees for reorganizations, etc.
(6) Services inside and outside the state-apportionment. Stockbrokers and security houses engaging in business in multiple states are required to apportion income for B&O tax purposes.
(a) For periods on and after June 1, 2010. Effective June 1, 2010, RCW 82.04.460 requires that any person, including stockbrokers and security houses, earning apportionable income subject to B&O tax, and who is also taxable in another state, must apportion to this state that portion of the person's apportionable income from business activities pursuant to WAC 458-20-19402.
(b) For periods prior to June 1, 2010. RCW 82.04.460 authorized apportionment of income by either a separate accounting method or cost apportionment. (See WAC 458-20-194.)
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 13-04-085, § 458-20-162, filed 2/5/13, effective 3/8/13. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-162, filed 3/15/83; Order ET 70-3, § 458-20-162 (Rule 162), filed 5/29/70, effective 7/1/70.]


PDF458-20-163

Insurance companies, including surety companies, fraternal benefit societies, fraternal fire insurance associations, beneficiary corporations or societies and Washington state health insurance pool.

(1) Introduction. Income earned by insurance companies, including surety companies, fraternal benefit societies, fraternal fire insurance associations, beneficiary corporations or societies, and the Washington state health insurance pool is generally subject to the service and other activities business and occupation (B&O) tax, unless the law provides an exemption or deduction. This section identifies exemptions and deductions available to these businesses. It also explains the reporting responsibilities for retail sales and use taxes for retail purchases and retail services.
(2) Exemptions. The law provides the following B&O tax exemptions. These amounts do not need to be reported on the excise tax returns filed with the department of revenue.
(a) RCW 82.04.320 provides an exemption to any person with respect to insurance business upon which a tax based on gross premiums is paid to the state of Washington. It should be noted, however, that the law provides expressly that this exemption does not extend to "any person engaging in the business of representing any insurance company, whether as general or local agent, or acting as broker for such companies" or to "any bonding company … with respect to gross income derived from the completion of any contract as to which it is a surety, or as to any liability as successor to the liability of the defaulting contractor." The exemption also does not apply to any business engaged in by an insurance company other than its insurance business. Thus an insurance company is subject to the retailing or wholesaling B&O tax on sales of salvaged property unless the sales are casual or isolated sales as described in WAC 458-20-106 (Casual or isolated sales—Business reorganizations). Also see WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits) for documentation requirements for wholesale sales.
(b) RCW 82.04.322 provides an exemption to any health maintenance organization, health care service contractor, or certified health plan in respect to premiums or prepayments that are taxable under RCW 48.14.0201.
(c) RCW 82.04.370 provides an exemption to fraternal benefit societies or fraternal fire insurance associations organized or licensed pursuant to Title 48 RCW and as defined in RCW 48.36A.010.
The statute also exempts beneficiary corporations or societies organized under and existing by virtue of Title 24 RCW, if such beneficiary corporations or societies provide in their bylaws for the payment of death benefits.
The exemption provided by RCW 82.04.370, however, is limited to gross income from premiums, fees, assessments, dues, or other charges directly attributable to the insurance or death benefits provided by such persons. It is not intended that all the varied, regular business activities (e.g., sales of food, liquor, admissions, and amusement devices receipts) of these societies or organizations be exempt from B&O tax. Only that portion of income which can be demonstrated as directly attributable to charges made for insurance or providing death benefits is exempt.
(3) Deductions. For periods prior to July 1, 2006, a B&O tax deduction was provided by RCW 82.04.4329 to a member of the Washington state health insurance pool for assessments paid by that member to the pool. This deduction did not apply to a member who had deducted such assessments from the insurance premiums tax, RCW 48.14.020.
(4) Retail sales and use tax responsibilities. Insurance companies are subject to the retail sales tax or use tax upon retail purchases, certain retail services, or articles acquired for their own use.
When insurance companies make sales to consumers of salvaged property (e.g., from automobile collisions, fire loss, burglary, or theft recoveries) or any other tangible personal property, they must collect and report retail sales tax on those sales.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-163, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 07-17-109, § 458-20-163, filed 8/17/07, effective 9/17/07. Statutory Authority: RCW 82.32.300. WSR 91-05-040, § 458-20-163, filed 2/13/91, effective 3/16/91; WSR 87-19-007 (Order ET 87-5), § 458-20-163, filed 9/8/87; WSR 83-07-033 (Order ET 83-16), § 458-20-163, filed 3/15/83; Order ET 70-3, § 458-20-163 (Rule 163), filed 5/29/70, effective 7/1/70.]


PDF458-20-164

Insurance producers, adjusters—Title insurance agents—Surplus line brokers.

(1) Introduction. This section explains the taxability of amounts earned by insurance producers, title insurance agents, and surplus line brokers, which include persons commonly referred to as insurance agents, solicitors, representatives, brokers, or dealers.
(a) Economic nexus. Nonresident individuals or business entities organized or commercially domiciled outside the state of Washington and Washington businesses conducting business for customers receiving benefits outside Washington should refer to WAC 458-20-19401, Minimum nexus thresholds for apportionable activities, which include engaging in business as an insurance producer, title insurance agent, or a surplus line broker, to determine if they meet the minimum thresholds for apportionable activities.
(b) Examples. This section contains examples which identify a number of facts and then state a conclusion. The examples should be used only as a general guide. Tax results must be determined after a review of all the facts and circumstances.
(2) Definitions.
• Insurance producer. An insurance producer is a person required to be licensed under the laws of this state to sell, solicit, or negotiate insurance. An insurance producer may receive a license to sell insurance products including, but not limited to, life, disability, property, and/or casualty. "Insurance producer" does not include title insurance agents or surplus line brokers. RCW 48.17.010 and 48.17.170.
• Title insurance agent. A title insurance agent is a business entity licensed under the laws of this state and appointed by an authorized title insurance company to sell, solicit, or negotiate insurance on behalf of the title insurance company.
• Surplus line broker. A surplus line broker is a person specially licensed under chapter 48.15 RCW to procure policies from an insurer not licensed in Washington.
(3) Business and occupation (B&O) tax. Persons engaging in business in this state as an insurance producer or a title insurance agent licensed under chapter 48.17 RCW, or a surplus line broker licensed under chapter 48.15 RCW are taxable on gross income earned from such licensed activities, including commissions, fees, and renewals, under the insurance producers/title insurance agents/surplus line broker commissions B&O tax classification. (See WAC 458-20-156, Abstract, title insurance and escrow businesses for taxability of fees/premiums charged to consumers for title insurance.)
Persons engaging in this state as an agent, broker, representative, or solicitor licensed under chapter 48.18A RCW are taxable on gross income earned from such licensed activities under the service and other activities B&O tax classification.
(a) How is gross income determined? The gross income of the business is determined by the amount of gross commissions received, not by the gross premiums paid by the insured. The term "gross income of the business" includes gross receipts from commissions, fees, renewals, or other amounts which the insurance producer, title insurance agent, or surplus line broker receives or becomes entitled to receive. RCW 82.04.080. The gross income of the business does not include amounts held in trust for the insurer or the client. (See WAC 458-20-111, Advances and reimbursements.)
(b) Are commissions and expenses deductible? No deduction is allowed for commissions, fees, or salaries paid to other insurance producers, title insurance agents, or surplus line brokers or for other expenses of doing business.
(c) Examples.
(i) ABC Financial Services (ABC) is a full-service broker-dealer firm with independent contractors, referred to as "representatives," licensed to sell insurance products (chapter 48.17 RCW) and securities (chapter 48.18A RCW). ABC's top selling representative is John. When John sells an insurance policy to a client, ABC receives a commission from the insurer and pays a portion of that commission to John, which John reports under the insurance producers/title insurance agents/surplus line broker commissions B&O tax classification. When John sells securities, ABC charges the purchaser a fee and pays a portion of that fee to John as a commission, which John reports under the service and other activities B&O tax classification. ABC is taxable on the total commissions received from the sale of insurance products (under the insurance producers/title insurance agents/surplus line broker commissions classification) and fees charged for security transactions, (under the service and other activities classification), including the amount in commissions paid to John.
(ii) Tom is an independent contractor with agency agreements with several insurance companies that authorize him to accept applications for insurance. Tom also has an agreement with William, who will market insurance policies for Tom. When William sells a policy for Tom, William collects the entire gross premium from the customer. William deposits the entire amount, and sends Tom a check for the balance remaining after William deducts his commission. Tom deposits the check and writes a check to the insurance company for the net premium. As Tom, not William, has the contractual relationship with the insurance company, Tom owes B&O tax on the gross commission income including the amount retained by William. Tom cannot deduct the amount William kept as it is a cost of doing business for Tom. He will report under the insurance producers/title insurance agent/surplus line broker commissions B&O tax classification. William will also report his commission income on his excise tax return under the insurance producers/title insurance agent/surplus line broker commissions B&O tax classification.
(iii) Lisa sells life insurance and variable annuities. Lisa is not an employee of the insurance company and is taxable under the insurance producers/title insurance agent/surplus line broker commissions B&O tax classification on the commissions she earns from selling insurance. Commissions earned from selling variable annuities are taxable under the service and other business activities B&O tax classification. See RCW 48.18A.030.
(d) Engaging in business. Every person acting in the capacity of an insurance producer, title insurance agent, or surplus line broker is presumed to be engaging in business and subject to the B&O tax unless the person can demonstrate he or she is a bona fide employee. The burden is on the person to establish the fact of his or her status as an employee. (See WAC 458-20-105, Employees distinguished from persons engaging in business.)
(e) How do I apportion my income? Income earned from engaging in business as insurance producers, title insurance agents, and surplus line brokers is apportionable income. The portion that is taxable income for B&O tax purposes must be determined by using the apportionment method provided in WAC 458-20-19402, Single factor receipts apportionment—Generally.
(4) Full-time life insurance salespersons. Persons who sell life insurance on a full-time basis, as provided in section 3121 (d)(3)(B) of the Internal Revenue Code (statutory employee), will be considered employees. These persons will not be subject to the B&O tax on amounts received in their capacity as statutory employees.
(a) What are the criteria for full-time life insurance salespersons? For purposes of this subsection (4), a full-time life insurance salesperson is an individual who meets all of the following criteria:
(i) The person's principal business activity is devoted to the solicitation of life insurance or annuity contracts, or both, primarily for one insurance company;
(ii) The contract between the individual and the primary life insurance company contemplates that substantially all of such services are to be performed personally by such individual;
(iii) The individual does not have a substantial investment in facilities used in connection with the sale of life insurance or annuity contracts (other than in facilities for transportation); and
(iv) The sale of life insurance by such individual occurs in the course of a continuing relationship with the primary life insurance company.
(b) What is a principal business activity? A person's principal business activity is the activity from which he or she generally receives the greatest remuneration. All business activities, including acting as an employee, will be considered in determining a person's principal business activity.
(c) What is considered a facility? The facilities referred to in (a)(iii) of this subsection include such things as office space, office equipment, and secretarial services. The term facilities does not include tools, instruments, or clothing as are commonly furnished by employees. An investment is substantial if a deduction for the item is taken in calculating the person's federal income tax liability.
(d) What will disqualify a person? Failure to satisfy any one of the criteria listed in (a) of this subsection will disqualify a person from treatment as an employee under this subsection.
(e) You can be an employee for only one life insurance company. A person will be considered an employee under this subsection (4):
(i) With only one company, even if selling on behalf of more than one insurance company; and
(ii) Only as to amounts received as compensation for the sale of life insurance or annuity contracts, or both from one life insurance company.
(f) Receiving a Form W-2 as a statutory employee. A person will be presumed to be a full-time life insurance salesperson within the meaning of section 3121 (d)(3)(B) of the Internal Revenue Code if they receive a Form W-2 (federal income tax wage and tax statement) indicating that they are a statutory employee. A person receiving a W-2 as a statutory employee will be presumed to be an employee under this subsection only as to amounts reported on the W-2 as compensation for the sale of life insurance.
A person who does not receive a properly marked W-2 has the burden of establishing that they are a full-time life insurance salesperson as provided in (a) of this subsection.
(g) Examples.
(i) A person sells life insurance on a full-time basis on behalf of one company. The company issues a Form W-2 which indicates that the person is a statutory employee. Under these circumstances, the person will be presumed an employee as to amounts reported on the Form W-2 as compensation for the sale of life insurance and will not be taxable under the B&O tax on these amounts.
(ii) A person sells insurance on behalf of several insurance companies two of which are life insurance companies and the others are casualty insurance companies. The person sells both life insurance and casualty insurance. One of the life insurance companies issues a Form W-2 indicating that the person is a statutory employee. The person will be presumed an employee as to amounts reported on the Form W-2 as compensation for the sale of life insurance and will not be taxable under the B&O tax on these amounts.
(iii) A person sells life insurance on behalf of several life insurance companies and does not engage in any other business activity. Most of the policies sold by the person are written with one company. The person does not receive a Form W-2 from any of the companies for which life insurance is sold. The person's sales activities are conducted from an office which he or she leases. The office lease payments are deducted by the salesperson in computing his or her federal income tax liability. In addition, the salesperson has an employee whose salary is also deducted for federal income tax purposes. Because the person does not receive a Form W-2, he or she will not be presumed to be an employee. Instead, the person has the burden of proving the existence of each of the criteria listed in subsection (4)(a) of this section. In this example, the salesperson will not be considered an employee under this subsection (4) of this section because they have a substantial investment in facilities.
(5) Licensed producer appointed as a managing general agent. A person representing and performing services for fire or casualty insurance companies as an independent resident managing general agent is subject to tax on the gross income of such business activities and will report under the insurance producers/title insurance agents/surplus line broker commissions B&O tax classification.
Any person claiming to fall within this tax classification must demonstrate:
(a) That the person is licensed as a resident producer by the insurance commissioner; and
(b) That the person performs the following independent manager functions:
(i) Pays all sales and/or production expense; including salaries of special field representatives, underwriters, and inspectors as well as all office expenses of rent, supplies, secretarial help, etc.
(ii) Bills all premiums for the company so represented.
(iii) Directly contracts for or hires all selling agents.
(iv) Exercises final responsibility with respect to selecting risks and underwriting matters.
(v) Makes all arrangements for reinsurance.
(vi) Handles all claims adjustments directly with the insured (by his own staff or through hiring an independent adjuster).
(6) Insurance adjusters. For the purpose of this section, adjuster means a person licensed as such under the provisions of chapter 48.17 RCW. Persons engaged in business as insurance adjusters are taxable under the service and other business activities classification upon the gross income of the business.
Gross income includes all fees received for services rendered, and all charges recovered for expenses incurred in performing services, such as transportation costs, hotel, restaurant, and telephone charges, etc.
In computing tax liability, there may be deducted from the gross income (if included therein) money or credits received as reimbursement of advances made for:
• Towing;
• Storage of damaged automobiles;
• Repairs to damaged automobiles;
• Advances for doctor, hospital, and ambulance fees and charges; and
• Other such expenditures made with respect to damaged property or injured persons.
The words "advance" and "reimbursement" apply only when the insurer or the insured alone is liable for the payment of the fees or costs and when the adjuster making the payment has no personal liability therefore, either primarily or secondarily, other than as agent for the insurer or the insured. Refer to WAC 458-20-111, Advances and reimbursements.
(7) Purchases subject to retail sales tax. Retail sales tax is owed on purchases of:
• Tangible personal property such as office equipment, supplies, furnishings, computers, prewritten software;
• Digital products, unless specifically exempt; and
• Retail services, such as telephone service, construction services, landscape services, repair services.
If retail sales tax is not paid at the time of purchase, deferred sales tax or use tax is owed by the purchaser. See WAC 458-20-178, Use tax.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 12-11-006, § 458-20-164, filed 5/3/12, effective 6/3/12. Statutory Authority: RCW 82.32.300. WSR 92-19-004, § 458-20-164, filed 9/3/92, effective 10/4/92; WSR 83-17-099 (Order ET 83-6), § 458-20-164, filed 8/23/83; Order 70-5, § 458-20-164 (Rule 164), filed 6/22/70.]


PDF458-20-165

Laundry, dry cleaning, linen and uniform supply, and self-service and coin-operated laundry services.

Introduction. This section discusses the application of the business and occupation (B&O), retail sales, and use taxes to laundries, dry cleaners, laundry pickup and delivery services, self-service laundries and dry cleaners, and linen and uniform supply services. It also discusses the tax treatment of laundry services provided to nonprofit health care facilities and income received from coin-operated laundry facilities.
PART I - LAUNDRY OR DRY CLEANING SERVICES; LINEN OR UNIFORM SUPPLY SERVICES.
(101) Definitions.
(a) Laundry or dry cleaning service. A "laundry or dry cleaning service" is the activity of laundering, cleaning, dying, and pressing of articles such as clothing, linens, bedding, towels, curtains, drapes, and rugs. It also includes incidental mending or repairing. The term applies to services operating their own cleaning establishments as well as those contracting with other laundry or dry cleaning services. It also includes pickup and delivery laundry services performed by persons operating in their independent capacity and not as agent for another laundry or dry cleaning service.
(b) Linen and uniform supply services. "Linen and uniform supply services" is the activity of providing customers with a supply of clean linen, towels, uniforms, gowns, protective apparel, clean room apparel, mats, rugs, and/or similar items whether ownership of the item is in the person operating the linen and uniform supply service or in the customer. RCW 82.08.0202. It also includes the supply of diapers and bedding. "Linen and uniform supply services" includes supply services operating their own cleaning establishments as well as those contracting with other laundry or dry cleaning businesses.
A person providing linen and uniform supply services performs a number of different activities, often at multiple locations. Many of these activities are the same types of activities performed by a person providing laundry or dry cleaning services, such as: Laundering, dry cleaning, pressing, incidental mending, and/or pickup and delivery. Additional activities not generally performed by a person providing laundry or dry cleaning services may include: Providing linen and uniform items customized by application of the customer's business name, company logo, employee names, etc.; measuring and/or issuing uniforms to the customer's employees; repairing or replacing worn or damaged linen and uniform items; and/or performing various administrative functions for the customer, such as inventory control.
(102) Sales.
(a) Services provided to consumers. The sale of these services is subject to the retailing B&O tax and retail sales tax when the services are provided to consumers. No deduction is available for commissions allowed or amounts paid. RCW 82.04.070 and 82.08.010. The retailing B&O and retail sales taxes also apply to sales of soap, bleach, fabric softener, laundry bags, hangers, and other tangible personal property to consumers.
(b) Services provided to nonprofit health care facilities. Persons providing laundry services to nonprofit health care facilities should refer to Part III of this section for reporting instructions.
(c) Services provided for resale. The wholesaling B&O tax applies when these services are performed for persons reselling the services. The seller must obtain a resale certificate for sales made before January 1, 2010, or a reseller permit for sales made on or after January 1, 2010, from the buyer to document the wholesale nature of any sale as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(d) Laundry agents collecting and distributing laundry. Persons who collect and/or distribute laundered or dry cleaned items as an agent for a provider of laundry or dry cleaning services, or linen and uniform supply services are liable for the service and other activities B&O tax on their gross commissions. See WAC 458-20-159 for the recordkeeping requirements for showing agency status. The person providing the laundry or dry cleaning services, or linen and uniform supply services must collect and remit to the department retail sales tax on the total charge made to the customer (see (a) of this subsection).
(103) Collecting retail sales tax. For the purposes of determining a seller's responsibility to collect and remit retail sales tax, the retail sales tax is based on where the buyer receives the cleaned items. RCW 82.32.730. It does not matter whether the actual services occur at this location.
(a) Delivery at service's location. If the laundered or dry-cleaned items are picked up by the customer at the service's location, the retail sales tax that applies at that location is to be collected. For example, a dry cleaning service located in Vancouver, Washington, must collect sales tax from an Oregon resident who brings clothing items to the business for dry cleaning, if the Oregon resident picks up the clothing items at the Washington location. The Vancouver, Washington, local sales tax applies to this sale.
(b) Seller hiring third-party to perform services. A customer may purchase laundry or dry cleaning services, or linen and uniform supply services from a seller who hires another person to perform the actual service. When the customer drops off and picks up the clothing or other articles at the seller's business location, the place of sale is the seller's location.
(c) Seller using agent for pickup and delivery. If a person providing laundry or dry cleaning services uses an agent such as a hotel or a driver for pickup and delivery of the articles to be cleaned, the retail sales tax collected is the tax applicable to the location where the articles are delivered.
(d) Geographic information system (GIS) for identifying appropriate retail sales tax rate. For assistance with determining appropriate local sales and use tax rates, the department's GIS provides a mapping and address lookup system. The system, along with other taxpayer resources, is available on the department's internet site at: http://dor.wa.gov.
(104) Purchases. Laundry, dry cleaning, and linen and uniform supply service businesses make retail and wholesale purchases of products and services.
(a) Wholesale purchases. The purchase of tangible personal property for resale or as a component or ingredient of the cleaned article is a wholesale purchase. Such purchases are not subject to retail sales tax when the buyer provides a resale certificate for purchases made before January 1, 2010, or a reseller permit for purchases made on or after January 1, 2010, to the seller as discussed in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
The following are examples of items that may be generally purchased at wholesale. Persons providing laundry services for nonprofit health care facilities, however, should refer to Part III of this section.
(i) Soap, bleach, fabric softener, laundry bags, hangers, and other tangible personal property that is not used in performing laundry or dry cleaning services but is resold as tangible personal property.
(ii) Dyes, fabric softeners, starches, sizing, and similar articles or substances that become ingredients of the articles being cleaned.
(iii) Linen, uniforms, towels, cabinets, hand soap, and similar property rented or supplied to customers as a part of the laundry and linen supply service.
(b) Purchases for own use. A laundry or dry cleaning service, or linen and uniform supply service that purchases, or otherwise obtains, services or tangible personal property for use as a consumer must pay retail sales tax. If the seller does not collect the tax, the purchaser must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department. For further information about the use tax, refer to RCW 82.12.020 and WAC 458-20-178 (Use tax).
The following are examples of purchases by a laundry or dry cleaning service, or linen and uniform supply service that are subject to retail sales tax or use tax:
(i) Soaps, cleaning solvents, and other articles or substances that do not become ingredients of the articles cleaned;
(ii) Equipment such as washing machines, dryers, presses, irons, fixtures, and furniture;
(iii) Supplies such as hand tools, sewing notions, scissors, spotting brushes, and stationery; and
(iv) Items given to customers without charge.
PART II - SELF-SERVICE AND COIN-OPERATED LAUNDRY FACILITIES.
(201) Self-service and coin-operated laundry facilities. The definition of "retail sale" excludes charges made for the use of self-service or coin-operated laundry facilities. RCW 82.04.050. Thus, gross income received from charges for the use of such facilities is subject to the service and other activities B&O tax. Retail sales tax does not apply to these charges.
(202) Sales of tangible personal property. Sales of soap, bleach, fabric softener and other supplies to consumers are subject to the retailing B&O tax and retail sales tax. For most sales, the law requires a seller to separately state the retail sales tax from the selling price. However, the law allows a seller making sales of tangible personal property to a consumer from a vending machine to deduct the tax from the total amount received to arrive at the net amount that becomes the measure of the tax. RCW 82.08.050 and 82.08.080.
For the purposes of determining a seller's responsibility to collect and remit retail sales tax, the tax to be collected is determined by the location of the facility.
(203) Purchases.
(a) Wholesale purchases. The purchase of tangible personal property for resale as tangible personal property is a purchase at wholesale. Such purchases are not subject to retail sales tax when the buyer provides a resale certificate for purchases made before January 1, 2010, or a reseller permit for purchases made on or after January 1, 2010, to the seller as discussed in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Thus, purchases of soap, bleach, fabric softener, and other supplies for resale to customers separate from charges for the use of the laundry facilities are wholesale purchases. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(b) Retail purchases. A self-service or coin-operated laundry facility that acquires tangible personal property for use as a consumer must pay retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department when the seller fails to collect the appropriate retail sales tax. For further information about use tax, refer to RCW 82.12.020 and WAC 458-20-178 (Use tax).
The following are examples of purchases by a self-service or coin-operated laundry facility that are subject to retail sales tax or use tax:
(i) Washing machines, dryers, fixtures, and furniture; and
(ii) Items given to customers without charge.
PART III - LAUNDRY SERVICES PERFORMED FOR NONPROFIT HEALTH CARE FACILITIES.
(301) Definition - nonprofit health care facilities. For the purpose of this section, "nonprofit health care facilities" means facilities operated by nonprofit organizations providing diagnostic, therapeutic, convalescent, or preventive inpatient or outpatient health care services. The term includes, but is not limited to, nonprofit hospitals, nursing homes, and hospices.
(302) Sales of laundry services to nonprofit health care facilities. The definition of a retail sale specifically excludes sales of laundry services to nonprofit health care facilities. As a result, charges for laundry services provided to these facilities are not subject to retail sales tax or the retailing B&O tax. However, the gross proceeds of sale received for providing laundry services to nonprofit health care facilities is subject to the service and other activities B&O tax.
(303) Purchases subject to retail sales or use tax. Persons providing laundry services to nonprofit health care facilities are considered consumers of all items used in providing such services. RCW 82.04.190. As a result, purchases of items such as dyes, fabric softeners, linens, and uniforms are subject to the retail sales tax. The same is true for purchases of washing machines, dryers, fixtures, furniture, and other items of tangible personal property. The buyer must remit retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department when the seller fails to collect the appropriate retail sales tax. For further information about the use tax, refer to RCW 82.12.020 and WAC 458-20-178 (Use tax).
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-12-052, § 458-20-165, filed 5/26/10, effective 6/26/10; WSR 05-20-018, § 458-20-165, filed 9/26/05, effective 10/27/05; WSR 02-23-034, § 458-20-165, filed 11/13/02, effective 12/14/02. Statutory Authority: RCW 82.32.300. WSR 99-13-052, § 458-20-165, filed 6/9/99, effective 7/10/99. Statutory Authority: RCW 82.32.300 and 82.04.050. WSR 94-09-016, § 458-20-165, filed 4/13/94, effective 5/14/94. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-165, filed 3/15/83; Order ET 73-1, § 458-20-165, filed 11/2/73; Order ET 70-3, § 458-20-165 (Rule 165), filed 5/29/70, effective 7/1/70.]


PDF458-20-166

Hotels, motels, boarding houses, rooming houses, resorts, hostels, trailer camps, short-term rentals and similar lodging businesses.

(1) Introduction. This rule explains the taxation of persons operating hotels, motels, bed and breakfast facilities, and similar businesses that provide lodging and related services to transient tenants.
(a) References to related rules. The department of revenue (department) has adopted other rules that may contain additional relevant information:
(i) WAC 458-20-111 (Advances and reimbursements);
(ii) WAC 458-20-118 (Sale or rental of real estate, license to use real estate);
(iii) WAC 458-20-159 (Consignees, bailees, factors, agents and auctioneers);
(iv) WAC 458-20-165 (Laundry, dry cleaning, linen and uniform supply, and self-service and coin-operated laundry services);
(v) WAC 458-20-167 (Educational institutions, school districts, student organizations, and private schools);
(vi) WAC 458-20-168 (Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities);
(vii) WAC 458-20-187 (Coin operated vending machines, amusement devices and service machines); and
(viii) WAC 458-20-245 (Taxation of competitive telephone service, telecommunications service, and ancillary service).
(b) Examples. This rule includes examples that identify a set of facts and then state a conclusion. The examples are only a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority.
(2) This rule explains the business and occupation (B&O) tax, retail sales tax, special hotel/motel tax, the convention and trade center tax, the tourism promotion area charge, and the taxation of emergency housing furnished to homeless people.
(a) This rule applies to persons operating hotels, motels, short-term rentals, and the following businesses:
(i) Trailer camps and recreational vehicle parks that rent space to transient tenants for house trailers, campers, recreational vehicles, mobile homes, tents, and similar accommodations.
(ii) Educational institutions that sell overnight lodging to persons other than students. Information regarding educational institutions is provided in WAC 458-20-167 (Educational institutions, school districts, student organizations, and private schools).
(iii) Private lodging houses, dormitories, bunkhouses, and similar accommodations operated by or on behalf of a business or school solely for the accommodation of employees of the business or students of the school, which are not held out to the public as a place where sleeping accommodations may be obtained.
(b) This rule does not apply to persons operating the following businesses:
(i) Hospitals, sanitariums, nursing homes, rest homes, and similar institutions. Information regarding operating these establishments is provided in WAC 458-20-168 (Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities).
(ii) Apartments or condominiums where the rental is for one month or more. Information regarding rentals for one month or more and the distinction between a rental of real estate and the license to use real estate is provided in WAC 458-20-118 (Sale or rental of real estate, license to use real estate).
(3) Transient tenant defined. The term "transient tenant" as used in this rule means any guest, resident, or other occupant to whom lodging and other services are furnished under a license to use real property for less than one month, or less than thirty continuous days if the rental period does not begin on the first day of the month. Providing lodging for a continuous period of one month or more to a guest, resident, or other occupant is a rental or lease of real property. It is presumed that when lodging is provided for a continuous period of one month or more, or thirty continuous days or more if the rental period does not begin on the first day of the month, the guest, resident, or other occupant purchasing the lodging is a nontransient upon the thirtieth day without regard to a specific lodging unit occupied throughout the continuous thirty-day period. An occupant who contracts in advance and remains in continuous occupancy for the initial thirty days will be considered a nontransient from the first day of occupancy provided in the contract.
(4) Business and occupation tax (B&O). Where lodging is sold to a nontransient tenant, the transaction is a rental of real estate and not subject to B&O tax. See WAC 458-20-118 (Sale or rental of real estate, license to use real estate). Sales of lodging and related services to transient tenants are subject to B&O tax, including transactions that may have been identified or characterized as membership fees or dues.
(a) Retailing classification. Gross income derived from the following activities provided to transient tenants is subject to the retailing B&O tax:
• Rental of rooms for lodging;
• Rental of radio and television sets;
• Rental of rooms, space, and facilities not for lodging, such as ballrooms, display rooms, meeting rooms, and similar accommodations;
• Automobile parking or storage; and
• Sale or rental of tangible personal property at retail. More information regarding retail sales is provided in subsection (5) of this rule discussing retail sales tax.
(b) Service and other activities classification. Commissions, amounts derived from accommodations not available to the public, and certain lump sum fees charged for multiple services are taxable under the service and other activities classification of the B&O tax. Gross income derived from the following business activities also is subject to service and other B&O tax.
(i) Commission income received by hotels, motels, and similar businesses from other businesses providing a service to their tenants. The following are examples of commission income that is subject to the service and other activities B&O tax.
(A) Commission income received from acting as a laundry agent for tenants when someone other than the hotel provides the laundry service. Information regarding these commissions is provided in WAC 458-20-165 (Laundry, dry cleaning, linen and uniform supply, and self-service and coin-operated laundry services).
(B) Commission income received from telephone companies for long distance telephone calls when the hotel or motel merely acts as an agent and commission income received from coin-operated telephones. Information regarding these commissions is provided in WAC 458-20-159 (Consignees, bailees, factors, agents and auctioneers) and WAC 458-20-245 (Taxation of competitive telephone service, telecommunications service, and ancillary service). Refer to subsection (5) of this rule for a discussion of telephone service fees subject to retail sales tax.
(C) Commission income or license fees for permitting a satellite antenna to be installed on the premises or for permitting a broadcaster or cable operator to make sales to the transient tenants staying at the hotel or motel are subject to service and other activities B&O tax.
(D) Commission income from the rental of videos for use by tenants staying at the hotel or motel when the hotel or motel operator is making the sales as an agent for a seller.
(E) Commission income received from the operation of amusement devices. Information regarding amusement devices is provided in WAC 458-20-187 (Coin operated vending machines, amusement devices and service machines).
(ii) Gross income derived from the following business activities is subject to the service and other activities B&O tax.
(A) The rental of sleeping accommodations by private lodging houses (including dormitories, bunkhouses, and similar accommodations) operated by or on behalf of a business for its employees, which are not held out to the public as a place where sleeping accommodations may be obtained.
(B) Deposits retained by the lodging business as a penalty charged to a transient tenant for failure to timely cancel a reservation.
(5) Retail sales tax. Persons providing lodging and other services generally must collect and remit retail sales tax on the gross selling price of the lodging and other services. They must pay retail sales or use tax on all items they purchase for use in providing their services.
(a) Lodging. All fees charged for lodging and related services to transient tenants are retail sales. Included are fees charged for vehicle parking and storage and for space and other facilities, including fees charged by a trailer camp for utility services.
(i) A tenant who does not contract in advance to stay at least thirty days is not entitled to a refund of retail sales tax if the rental period later extends beyond thirty days.
Example: Assume a tenant rents the same motel room on a weekly basis. Further assume the tenant continues to extend occupancy on a weekly basis until the tenant finally exceeds thirty days. Under these assumed facts, the tenant is considered a transient for the first twenty-nine days of occupancy and must pay retail sales tax on the rental fees. The rental fees are exempt from retail sales tax beginning on the thirtieth day. The tenant is not entitled to a refund of retail sales taxes paid on the rental fees for the first twenty-nine days.
(ii) A business providing transient-tenant lodging must complete the "transient rental income" information section of the combined excise tax return. The four digit location code must be listed along with the gross income received from transient-tenant lodging subject to retail sales tax for each facility located within a participating city or county.
(b) Meals and entertainment. All fees charged for food, beverages, and entertainment activities are retail sales subject to retail sales tax.
(i) Fees charged for related services including, but not limited to, room service, banquet room services, and service charges and gratuities that are agreed to in advance by customers or added to their bills by the service provider are subject to retail sales tax.
(ii) If meals sold under a promotion such as a "two meals for the price of one," the taxable selling price is the actual amount received as payment for the meals.
(iii) Meals sold to employees are subject to retail sales tax. Information regarding meals furnished to employees is provided in WAC 458-20-119 (Sales by caterers and food service contractors).
(iv) Sale of food and other items sold through vending machines are retail sales. Information regarding income from vending machines and the distinction between taxable and nontaxable sales of food products is provided in WAC 458-20-187 (Coin operated vending machines, amusement devices and service machines) and WAC 458-20-244 (Food and food ingredients).
(v) When a lump sum fee is charged to nontransient tenants for providing both lodging and meals, retail sales tax must be collected upon the fair selling price of such meals. Unless accounts are kept showing the fair selling price, the tax will be computed upon double the cost of the meals served. The cost includes the price paid for food and drinks served, the cost of preparing and serving meals, and all other costs incidental thereto, including an appropriate portion of overhead expenses.
(vi) Cover fees charged for dancing and other entertainment activities are retail sales.
(vii) Fees charged for providing extended television reception to transient tenants are retail sales.
(c) Laundry services. Fees charged for laundry services provided by a hotel/motel in the hotel's name are retail sales. Fees charged to tenants for self-service laundry facilities are not retail sales, but the gross income derived from these fees is subject to service and other activities B&O tax.
(d) Telephone charges. Telephone and "message service" fees charged to transient tenants are retail sales, but commission income received from telephone companies for long distance telephone calls when the hotel or motel merely acts as an agent is not subject to retail sales tax.
If the hotel or motel is acting as an agent for a telephone service provider that provides long distance telephone service to the transient tenant, the actual telephone fees charged are not taxable income to the hotel or motel. These amounts are advances and reimbursements. Information on advances and reimbursements is provided in WAC 458-20-111 (Advances and reimbursements). Any additional fee added by the hotel or motel to the actual long distance telephone fee, however, is a retail sale.
(e) Telephone lines. If the hotel or motel leases telephone lines and then provides telephone services for a fee to either its transient or nontransient tenants, these fees are retail sales. In this case the hotel or motel is in the telephone business. Information regarding the telephone business is provided in WAC 458-20-245 (Taxation of competitive telephone service, telecommunications service, and ancillary service). The hotel or motel may give a reseller permit for purchases made to the provider of the leased lines and is not subject to the payment of retail sales tax to the provider of the leased lines.
(f) Rentals. Renting tangible personal property such as movies and sports equipment is a retail sale.
(g) Purchases of tangible personal property for use in providing lodging and related services. All purchases of tangible personal property for use in providing lodging and related services are retail sales. The fee charged for lodging and related services is for services rendered and not for the resale of any tangible property.
(i) Purchases subject to retail sale tax include, but are not limited to, beds, room furnishings, linens, towels, soap, shampoo, restaurant equipment, and laundry supply services. Purchases, such as small toiletry items, are included even though they may be provided for guests to take home if not used.
(ii) Sales of prepared meals or other prepared items are subject to retail sales tax. Information regarding the sales of food products is provided in WAC 458-20-244 (Food and food ingredients).
(h) Sales to the United States government. Sales made directly to the United States government are not subject to retail sales tax. Sales to employees of the federal government are taxable even if the employee ultimately will be reimbursed for the lodging fee.
(i) Payment by government voucher or check. If the lodging fee is paid by United States government voucher or United States government check payable directly to the hotel or motel, the sale is presumed to be a tax-exempt sale made directly to the federal government.
(ii) Charges to government credit card. Various United States government contracted credit cards are used to make payment for purchases of goods and services by or for the United States government. Specific information about determining when a purchase by government credit card is a tax-exempt purchase by the United States government is available via the department's internet website at http://dor.wa.gov. (See the department's lodging industry guide.) For specific information about determining when payment is the direct responsibility of the United States government or the employee, you may contact the department's taxpayer services division at http://dor.wa.gov/content/ContactUs/ or:
Department of Revenue
Taxpayer Services
P.O. Box 47478
Olympia, WA 98504-7478
(6) Special hotel/motel tax. Some locations in the state impose special hotel/motel taxes. (These taxes are imposed under chapters 67.28 and 36.100 RCW.) If a business is in one of those locations, an additional tax is charged and reported under the special hotel/motel portion of the tax return. The four digit location code, the gross-selling price for providing the lodging, and the tax rate must be completed for each location where the lodging is provided. The tax applies without regard to the number of lodging units except that the tax imposed under RCW 36.100.040(1) applies only if there are forty or more lodging units. The tax only applies to the fee charged for the rooms used for lodging by transient tenants. Additional fees charged for telephone services, laundry, or other incidental charges are not subject to the special hotel/motel tax. Nor is the fee charged for use of meeting rooms, banquet rooms, or other special use rooms subject to this tax. The tax applies, however, to fees charged for use of camping and recreational vehicle sites.
(7) Convention and trade center tax. Subject to the exemptions in (b) of this subsection, businesses located in King County selling lodging to transient tenants including, but not limited to, any short-term rental, must charge their customers the convention and trade center tax and report the tax under the "convention and trade center" portion of the combined excise tax return.
(a) The convention and trade center tax applies only to the fees charged for the rooms, or camping or recreational vehicle sites, used to provide lodging for transient tenants. Each campsite is considered a single unit.
Additional fees charged for telephone services, laundry, or other incidental charges are not subject to the convention and trade center tax. Fees charged for the use of meeting rooms, banquet rooms, or other special use rooms are also not subject to the convention and trade center tax.
(b) Exemptions. The following are exempt from the convention and trade center tax:
(i) A business in a town with a population of less than three hundred people that has fewer than sixty rooms that are available or being used to provide lodging to transient tenants, regardless of whether the business also rents units to nontransient tenants and the combined number of transient and nontransient lodging units is sixty rooms or more;
(ii) Businesses classified as hostels;
(iii) Any lodging that is concurrently subject to a tax on engaging in the business of being a short-term rental operator imposed by a city in which a convention and trade center is located;
(iv) Any lodging that is operated by a university health care system exclusively for family members of patients; and
(v) Any lodging that is operated as a charity described in (c)(iii)(B) of this subsection, is otherwise exempted in this subsection, or is emergency lodging to homeless people as described in subsection (9) of this rule.
(c) Definitions. The definitions in this subsection apply to the convention and trade center tax:
(i) "Hostel" means a structure or facility where a majority of the rooms for sleeping accommodations are hostel dormitories containing a minimum of four standard beds designed for single-person occupancy within the facility. Hostel accommodations are supervised and must include at least one common area and at least one common kitchen for guest use.
(ii) "Hostel dormitory" means a single room, containing four or more standard beds designed for single-person occupancy, used exclusively as nonprivate communal sleeping quarters, generally for unrelated persons, where such persons independently acquire the right to occupy individual beds, with the operator supervising and determining which bed each person will occupy.
(iii) "Short-term rental" means a lodging use, that is not a hotel or motel, in which a short-term rental operator offers or provides a dwelling unit, or portion thereof, to a guest or guests for a fee for fewer than thirty consecutive nights. The term "short-term rental" does not include:
(A) A dwelling unit, or portion thereof, that the same person uses for thirty or more consecutive nights; and
(B) A dwelling unit, or portion thereof, that is operated by an organization or government entity that is registered as a charitable organization with the secretary of state, state of Washington, and/or is classified by the federal Internal Revenue Service as a public charity or a private foundation, and provides temporary housing to individuals who are being treated for trauma, injury, or disease and/or their family members.
(d) The four digit location code, gross-selling price for the lodging, and the tax rate must be completed for each location where the lodging is provided.
(8) Tourism promotion area charge. A legislative authority as defined in RCW 35.101.010 may impose a charge on the activity of providing lodging by a business located in the tourism promotion area, except for temporary medical housing that is exempt under RCW 82.08.997 (Exemptions—Temporary medical housing). The charge is administered by the department and must be collected by the business providing the lodging from the transient tenant. The charge is not subject to the sales tax rate limitations of RCW 82.14.410. To determine whether your lodging business must collect and remit the charge, refer to the special notices for tourism promotion areas at http://dor.wa.gov/content/GetAFormOrPublication/PublicationBySubject/tax_sn_main.aspx or the lodging industry guide at http://dor.wa.gov/content/doingbusiness/BusinessTypes/Industry/lodging/.
(9) Providingemergency lodging to homeless people. The fee charged for providing emergency lodging to homeless people purchased via a shelter voucher program administered by cities, towns, counties, or private organizations that provide emergency food and shelter services is exempt from the retail sales tax, the convention and trade center tax, and the special hotel/motel tax. This form of payment does not influence the required minimum of transient rooms available for use as transient-lodging units under the "convention and trade center tax" or under the "special hotel/motel tax."
[Statutory Authority: RCW 82.32.300, 82.01.060(2) and 36.100.040. WSR 19-04-002, § 458-20-166, filed 1/23/19, effective 2/23/19; WSR 15-22-085, § 458-20-166, filed 11/3/15, effective 12/4/15. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 10-22-067, § 458-20-166, filed 10/29/10, effective 11/29/10. Statutory Authority: RCW 82.32.300. WSR 94-05-001, § 458-20-166, filed 2/2/94, effective 3/5/94; WSR 92-05-064, § 458-20-166, filed 2/18/92, effective 3/20/92; WSR 88-20-014 (Order 88-6), § 458-20-166, filed 9/27/88; WSR 83-07-033 (Order ET 83-16), § 458-20-166, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-166, filed 6/27/78; Order ET 70-3, § 458-20-166 (Rule 166), filed 5/29/70, effective 7/1/70.]


PDF458-20-167

Educational institutions, school districts, student organizations, and private schools.

(1) Introduction. This rule explains the application of Washington's business and occupation (B&O), retail sales, and use taxes to educational institutions, school districts, student organizations, and private schools. It also gives tax reporting information to persons operating nursery schools, preschools, or providing child care.
(a) Other rules that may apply. Readers may also want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-169 Nonprofit organizations.
(ii) WAC 458-20-189 Sales to and by the state of Washington, counties, cities, towns, school districts, and fire districts.
(iii) WAC 458-20-244 Food and food ingredients.
(b) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) Tuition fees. The term "tuition fees" includes fees for instruction, library, laboratory, and health services. The term also includes special fees and amounts charged for room and board when the property or service for which such charges are made is furnished exclusively to the students, teachers, or other staff of the institution. RCW 82.04.170.
(b) Educational institutions. "Educational institutions" means the following:
(i) Institutions which are established, operated, and governed by this state or its political subdivisions under Title 28A (Common school provisions), 28B (Higher education), or 28C (Vocational education) RCW.
(ii) Nonpublic schools, including parochial or independent schools or school districts, carrying out a program for any or all of grades one through twelve, which have been approved by the Washington state board of education. (See also chapter 180-90 WAC, Private schools.)
(iii) Degree-granting institutions offering educational credentials, instruction, or services prerequisite to or indicative of an academic or professional degree or certificate beyond the secondary level, provided the institution is accredited by an accrediting association recognized by the United States Secretary of Education and offers to students an educational program of a general academic nature. Degree-granting institutions should refer to chapter 28B.85 RCW for information about the requirement for authorization by the Washington higher education coordinating board.
(iv) Institutions which are not operated for profit, and which are privately endowed under a deed of trust to offer instruction in trade, industry, and agriculture.
(v) Programs that an educational institution cosponsors with a nonprofit organization, as defined by the Internal Revenue Code Sec. 501 (c)(3), provided that educational institution grants college credit for course work successfully completed through the educational program.
(vi) Certain branch campuses of foreign degree-granting institutions, provided the following requirements, among others, are satisfied:
(A) The branch campus must be owned and operated directly by a foreign degree-granting institution or indirectly through a Washington profit or nonprofit corporation in which the foreign degree-granting institution is the sole or controlling shareholder or member;
(B) Courses must be provided solely and exclusively to students enrolled in a degree-granting program offered by the institution;
(C) The branch campus must be approved by the Washington higher education coordinating board to operate in this state; and
(D) The branch campus must be recognized to be exempt from income taxes pursuant to 26 U.S.C. Sec. 501(c).
(vii) "Educational institutions" does not include any entity defined as a "private vocational school" under RCW 28C.10.020 and/or any entity defined as a "degree-granting private vocational school" under chapters 28C.10 and 28B.85 RCW (other than those described in (b)(iv) of this subsection).
(c) Private schools. "Private schools" means all schools and institutions which are excluded from the above definition of "educational institutions." For example, an elementary school operated by a church organization is a "private school" if the school is not approved. It will be given the tax treatment of an "educational institution" for purposes of this rule only if it has obtained approval from the Washington state board of education.
(3) Business and occupation tax. Departments and institutions of the state of Washington are not subject to the B&O tax. School districts are also not subject to the B&O tax, except as to income derived from a public utility or enterprise activity. RCW 82.04.419. Private schools, student organizations, and school districts engaging in utility or enterprise activities, and educational institutions which are not departments or institutions of the state of Washington are subject to the B&O tax as follows:
(a) Service and other business activities. The service and other business activities B&O tax applies to the following nonexclusive list of activities or sources of income:
(i) Tuition fees received by private schools. However, educational institutions, as defined above, may deduct amounts derived from tuition fees. RCW 82.04.4282.
(ii) Rental of conference facilities to various organizations or groups.
(iii) Rental by private schools of dormitories or other student lodging facilities which are not generally available to the public and where the student does not have an absolute right of control and occupancy. However, educational institutions may deduct the income from charges for lodging made to students. These amounts are defined by law as being tuition. For additional information on the rental of real estate and the license to use real estate, see WAC 458-20-118.
(iv) Amounts received by private schools for providing meals to students where the meals are provided exclusively for students, teachers, staff, and their guests. However, refer to the comments under retailing for the taxability of meals sold to guests of students. Income from providing meals to students by educational institutions is deductible.
(v) Amounts received from owners of vending machines that operate after accepting payment, for allowing the placement of those machines on the premises of the school. For additional information on sales through vending machines, see WAC 458-20-187.
(b) Retailing. Activities and sources of income subject to the retailing B&O tax include, but are not limited to, the following:
(i) Sales of tangible personal property or services classified as retail sales. This includes sales of books and supplies to students where these materials are not supplied as part of the tuition charge. Sales of academic transcripts are exempt from B&O tax. RCW 82.04.399.
(ii) Sales of meals to guests of students.
(iii) Sales of meals or prepared foods in facilities which are generally open to the public, including those sold to students. For additional information on sales by caterers and food service contractors, see WAC 458-20-119.
(iv) Amounts derived from charges made by an educational institution to its alumni or other members of the public for the use of any of the educational institution's athletic or fitness facilities, or charges for the recreational activities defined as retail sales under RCW 82.04.050.
(4) Retail sales tax. The retail sales tax applies to all retail sales including, but not limited to, those identified in subsection (3)(b) of this rule, unless a specific statutory exemption applies.
(a) Tangible personal property and retail services. Educational institutions, school districts, student organizations, and private schools, including departments or institutions of the state of Washington, are required to collect the retail sales tax on sales of tangible personal property and retail services to consumers, even though such sales may be exempt from the retailing B&O tax. Retail sales tax exemptions are provided for sales of academic transcripts (RCW 82.08.02537) and certain food products (RCW 82.08.0293 and 82.08.0297).
(b) Interdepartmental charges. Amounts derived from charges between departments or institutions of the state of Washington, or between departments of the same entity, constitute interdepartmental charges and are not subject to the retailing B&O tax or retail sales tax. For additional information on interdepartmental charges, see WAC 458-20-201.
(c) Sales through vending machines. Persons selling through vending machines should refer to WAC 458-20-187.
(d) Charges to alumni and members of the public. Amounts derived from charges made by an educational institution to its alumni or other members of the public for the use of any of the educational institution's athletic or fitness facilities, or charges for the recreational activities defined as retail sales under RCW 82.04.050.
(5) Deferred sales or use tax. Educational institutions, school districts, student organizations, and private schools are required to report the deferred sales or use tax upon the use of all tangible personal property purchased or acquired under conditions whereby the Washington retail sales tax has not been paid, unless a specific statutory exemption applies. If items are purchased for dual purposes (i.e., for both consumption and resale), a tax paid at source deduction may be claimed for the cost of the articles resold upon which retail sales tax was previously paid. For additional information on reseller permits, see WAC 458-20-102. For additional information on use tax and the use of tangible personal property, see WAC 458-20-178.
(a) Meals for students and faculty. These organizations are the consumers of food or beverage products which are ingredients of meals that are furnished to students and faculty. However, certain food products are exempt from the retail sales and/or use tax. RCW 82.12.0293 and 82.12.0297.
(b) Exemptions. Use tax exemptions are also provided for the following:
(i) Academic transcripts. RCW 82.12.0347.
(ii) Computers, computer components, computer accessories, computer software, digital goods, or digital codes, irrevocably donated to any public or private nonprofit school or college in this state, as defined by chapter 84.36 RCW. For the purposes of this exemption, RCW 82.04.215 defines "computer" as an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions. RCW 82.12.0284. This exemption is available to both the donor and the public or private nonprofit school or college receiving the donation.
(iii) Tangible personal property donated to a nonprofit charitable organization or state or local governmental entity including the subsequent use of the property by a person to whom the property is donated or bailed by the nonprofit charitable organization, or state or local governmental entity, if used to further the purpose of that organization. RCW 82.12.02595.
(iv) The donation of tangible personal property without intervening use to a nonprofit charitable organization, or the incorporation of tangible personal property without intervening use into real or personal property of or for a nonprofit charitable organization in the course of installing, repairing, cleaning, altering, imprinting, improving, constructing, or decorating the real or personal property for no charge. RCW 82.12.02595.
(v) Motor vehicles equipped with dual controls loaned to and exclusively used by a school in connection with the school's driver training program. This exemption is available to both the donor and the school receiving the donation. For the purposes of this exemption, RCW 82.12.0264 limits the term "school" to:
(A) The University of Washington, Washington State University, the regional universities, The Evergreen State College, and the state community colleges;
(B) Any public, private, or parochial school accredited by either the state board of education or by the University of Washington (the state accrediting station); or
(C) Any public vocational school meeting the standards, courses, and requirements established and prescribed or approved in accordance with the Community College Act of 1967.
(6) Nursery schools, preschools, child care providers, privately operated kindergartens, and persons monitoring home child care facilities. Income received by nursery schools, preschools, child care providers, and privately operated kindergartens for the care or education of children who are under eight years of age and not enrolled in or above the first grade is exempt from the B&O tax. RCW 82.04.4282. Such persons are, however, subject to B&O tax upon the gross proceeds derived from providing child care to children who are eight years of age or older or enrolled in or above the first grade.
Persons providing child care for periods of less than twenty-four hours are subject to tax under the child care B&O tax classification. RCW 82.04.2905. The service and other business activities B&O tax classification applies to child care services provided for periods in excess of twenty-four hours. Nursery schools, preschools, and child care providers receiving both taxable and exempt income must properly segregate such income in their books of account.
(a) The B&O tax does not apply to income derived by a church for the care of children of any age for periods of less than twenty-four hours, provided the church is exempt from property tax under RCW 84.36.020. RCW 82.04.339.
(b) Persons who monitor home child care facilities under one or more federal nutrition programs are required to register with the department and are taxable on their gross income under the service and other business activities classification of the B&O tax. These monitors contract with, and are accountable to the office of superintendent of public instruction which receives funds from the United States Department of Agriculture and disburses funds to each monitor. Commonly, a portion of the funds received by the monitor is required by law to be passed directly to the home child care facilities for the provision of qualifying meals. That portion of the funds received by the monitor may be taken as a "reimbursement" deduction on the monitor's excise tax return, so that the monitor is subject to B&O tax only on the portion of funds retained for the rendering of services.
(7) Examples.
(a) Example 1. MN University is an educational institution created by the state of Washington. MN University operates a book store at which it sells text books, school supplies, and apparel to students and nonstudents. As an institution of the state of Washington, MN University is exempt from the B&O tax with respect to all sales, irrespective that sales are made to nonstudents. However, MN is required to collect and remit retail sales tax on its gross proceeds of sales made through its book store.
(b) Example 2. DMG College is a degree-granting institution accredited by an accrediting association recognized by the United States Secretary of Education. DMG College is an educational institution operated by a church. DMG makes charges to its students for tuition, meals, and lodging. It also receives income for occasionally providing lodging and meals to guests of its students during the year. DMG also rents its conference and dormitory facilities to various groups during the summer, providing cafeteria services when needed. The income from tuition, meals, and lodging received from the students is exempt from B&O tax and retail sales tax because this entity meets the definition of an educational institution. However, DMG must report the retailing B&O tax and collect and remit retail sales tax upon the gross proceeds derived from the sales of meals and prepared foods to the conference attendees and guests. The income derived from the rental of the conference and dormitory facilities to various groups and student guests is subject to the service and other business activities B&O tax. The college is not considered as holding itself out for the sale of lodging to the general public.
(c) Example 3. JB College is an educational institution which is not a department or institution of the state of Washington. JB College has converted five housing units from student use to use by nonstudents. Guests of the administration use these units for stays of two or three days, and are charged a specific amount per night. The college provides linen, towels, etc., to the users. These units are always rented for periods under thirty days. JB College must report this rental income under the retailing B&O tax and collect and remit retail sales tax. This income is not derived from the occasional rental of student lodging facilities, but is derived from the rental of accommodations specifically maintained for public use.
(d) Example 4. Jane Doe operates a private preschool and kindergarten, providing care and elementary education for children. She also provides after hours child care. Jane Doe may claim a deduction for the income received for the care and education of children under eight years old and not enrolled in or above the first grade, provided this income is properly segregated in her books of account. The income attributable to the care of children at or above the first grade level (i.e., eight years old or enrolled in or above the first grade), is subject to the child care B&O tax classification. Jane Doe may be able to reduce or eliminate any child care B&O tax liability if she qualifies for the small business B&O tax credit. RCW 82.04.4451 and WAC 458-20-104.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-049, § 458-20-167, filed 2/24/16, effective 3/26/16; WSR 07-10-056, § 458-20-167, filed 4/27/07, effective 5/28/07. Statutory Authority: RCW 82.32.300. WSR 99-03-005, § 458-20-167, filed 1/7/99, effective 2/7/99; WSR 94-07-047, § 458-20-167, filed 3/10/94, effective 4/10/94; WSR 83-07-032 (Order ET 83-15), § 458-20-167, filed 3/15/83; Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-167, filed 6/27/78; Order ET 70-3, § 458-20-167 (Rule 167), filed 5/29/70, effective 7/1/70.]


PDF458-20-168

Hospitals, nursing homes, assisted living facilities, adult family homes, and similar health care facilities.

(1) Introduction. This rule explains the application of business and occupation (B&O), retail sales, and use taxes to persons operating:
• Hospitals as defined in RCW 70.41.020;
• Nursing homes as defined in RCW 18.51.010;
• Assisted living facilities as defined in RCW 18.20.020;
• Adult family homes as defined in RCW 70.128.010;
• Senior living communities as defined in RCW 82.04.040; and
• Similar health care facilities.
(a) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(b) Other rules that may apply. Readers may want to refer to the rules in the following list for additional information:
(i) WAC 458-20-102 Reseller permits.
(ii) WAC 458-20-111 Advances and reimbursements.
(iii) WAC 458-20-150 Optometrists, ophthalmologists, and opticians.
(iv) WAC 458-20-151 Dentists, audiologists, and other health care providers—Dental laboratories and dental technicians.
(v) WAC 458-20-169 Nonprofit organizations.
(vi) WAC 458-20-178 Use tax and the use of tangible personal property.
(vii) WAC 458-20-18801 Medical substances, devices, and supplies for humans—Drugs prescribed for human use—Medically prescribed oxygen—Prosthetic devices—Mobility enhancing equipment—Durable medical equipment.
(viii) WAC 458-20-233 Tax liability of medical and hospital service bureaus and associations and similar health care organizations.
(2) Personal and professional services of hospitals. For purposes of this rule, the following definitions apply:
• "Hospital" - The term hospital is as defined in RCW 70.41.020. It includes hospitals that come within the scope of chapter 71.12 RCW, but only if they are also licensed under chapter 70.41 RCW.
• "Public hospital" or "nonprofit hospital" - Public or nonprofit hospitals are hospitals operated by the state or any of its political subdivisions or operated as nonprofit corporations.
(a) Hospital services to patients. Gross income earned by hospitals for providing personal or professional services to patients is subject to B&O tax as shown in the table below. RCW 82.04.260.
Report Income From Providing Personal or Professional Services
Reporting Classification
For profit hospitals
For profit hospitals B&O tax classification
Public and nonprofit hospitals
Public or nonprofit hospitals B&O tax classification
Gross income earned for providing nonmedical services, interest received on patient accounts receivable, and amounts earned for providing transcribing services to physicians are subject to service and other activities B&O tax.
(b) Clinics and departments operated by hospitals. Gross income earned by medical clinics and departments providing services to patients and operated by a hospital is subject to B&O tax as shown in subsection (2)(a) of this rule, where the operation of a medical clinic or department is covered by the hospital's license. If the clinic or department is not covered by the hospital's license, the gross income earned by a medical clinic or department providing services to patients is subject to B&O tax under the service and other activities B&O tax classification.
(i) Example 1. Acme Hospital is a nonprofit hospital that has a medical clinic that is physically located within the hospital. The clinic is open only during the hours of 8:00 a.m. to 5:00 p.m., and provides no domiciliary care or overnight facilities to its patients. The medical clinic is covered under Acme Hospital's hospital license. Gross income earned by the medical clinic for providing patient care is subject to the Public and Nonprofit Hospital B&O Tax Classification because the clinic is covered under the hospital license.
(ii) Example 2. Mountain Hospital is a for profit hospital with a cancer treatment facility that is located one mile from the hospital campus. The cancer treatment facility provides the type of services normally provided by hospitals to cancer patients but only during regular business hours. The cancer treatment facility is covered under the hospital's license. Gross income earned by the cancer treatment facility is subject to the For Profit Hospitals B&O tax classification because the facility is covered under the hospital's license.
(c) Educational programs and services. Amounts earned by public or nonprofit hospitals for providing educational programs and services to the general public are subject to B&O tax under the public or nonprofit hospitals classification if the educational programs and services are an integral, interrelated, and essential part of the hospital. Otherwise, such amounts are subject to B&O tax under the service and other activities classification. Educational services are considered an integral, interrelated, and essential part of the hospital only if they are unique and incidental to the provision of hospitalization services. Only those educational programs and services offered by a hospital that would be very difficult or impossible to duplicate by a person other than a hospital because of the specialized body of knowledge, facilities, and equipment required are unique and incidental to the provision of hospitalization services. Amounts received from educational programs and services are subject to the service and other activities B&O tax when the educational programs or services could be provided by any physician, clinic, or trained lay person.
(3) Personal and professional services from other medical clinics, nursing homes, and similar health care facilities. Gross income earned by medical clinics, nursing homes, and similar health care facilities for providing personal and professional services is subject to service and other activities B&O tax. Physicians performing these services are also subject to service and other activities B&O tax on gross income earned. Services provided are ones not integral, interrelated, and an essential part of a hospital operation.
(4) Assisted living facilities and domiciliary care. For the purpose of this rule, "assisted living facilities" and "domiciliary care" have the same meaning as found in RCW 18.20.020. A preferential B&O tax rate is provided by RCW 82.04.2908 to persons operating assisted living facilities licensed under chapter 18.20 RCW. Persons operating licensed assisted living facilities should report their gross income derived from providing room and domiciliary care to residents under the licensed assisted living facilities B&O tax classification. Refer to subsection (9)(h) of this rule for B&O tax deductions and exemptions available to persons operating assisted living facilities.
(5) Hospitals or other health care facilities operated by the state of Washington. Gross income earned by the state of Washington for operating a hospital or other health care facilities, whether or not owned by the state, is not subject to B&O tax.
(6) Nonprofit corporations and associations performing research and development. A separate B&O tax rate applies to nonprofit corporations and nonprofit associations for gross income earned in performing research and development within this state, including medical research. See RCW 82.04.260.
(7) Sales of tangible personal property. Retailing B&O tax applies to sales of tangible personal property sold and billed separately from the performance of personal or professional services by hospitals, nursing homes, assisted living facilities, adult family homes, and similar health care facilities. This includes charges for making copies of medical records. The seller must collect retail sales tax from the buyer and remit the tax to the department unless the sale is specifically exempt by law.
(a) Tangible personal property used in providing medical services to patients. Retailing B&O and retail sales taxes do not apply to charges to a patient for tangible personal property used in providing medical services to the patient, even if separately billed. Tangible personal property used in providing medical services is not considered to have been sold separately from the medical services simply because those items are separately invoiced. These charges, even if separately itemized, are for providing medical services.
For example, when a hospital charges a patient for drugs physically administered by the hospital staff, the charges to the patient are subject to B&O tax under the appropriate tax classification as shown in subsection (2)(a) of this rule based on the hospital making the charge. However, charges for drugs sold to persons or their caregivers, either for self-administration or administration by a caregiver other than the seller, are subject to retailing B&O tax and retail sales tax unless specifically exempt by law. Readers should refer to WAC 458-20-18801 for detailed information regarding retail sales tax exemptions that apply to sales of prescription drugs and other medical items.
(b) Sales of food, drinks, and meals. Although the sale of food, drinks, or meals is generally considered to be a retail sale:
(i) Hospitals, nursing homes, assisted living facilities, and similar health care facilities that furnish meals to patients or residents as a part of the services provided to those patients or residents are not considered to be making retail sales of meals. Thus, such amounts are not subject to retail sales tax. However, amounts earned by hospitals, nursing homes, assisted living facilities, and similar health care facilities for furnishing meals to patients or residents are subject to B&O tax as part of the services provided to those patients or residents;
(ii) Senior living communities that furnish food, drinks, or meals to tenants as a part of a rental or residency agreement for which no separate charge is made, regardless of whether the tenant is a resident for purposes of chapter 18.20 or 18.390 RCW, are not considered to be making retail sales of food, drinks, or meals. Thus, such sales are not subject to retail sales tax. However, amounts earned by senior living communities for furnishing food, drinks, or meals to tenants, as described in this subsection (7)(b)(ii), are subject to B&O tax as part of the services provided to those tenants. RCW 82.04.040;
(iii) RCW 82.08.0293 and 82.12.0293 provide, respectively, retail sales tax and use tax exemptions for prepared meals sold to senior citizens, disabled persons, or low-income persons by a nonprofit organization organized under chapter 24.03A or 24.12 RCW. The exemptions apply to sales of prepared meals to nonprofit organizations organized under chapter 24.03A or 24.12 RCW, that provide the meals to senior citizens, disabled persons, or low-income persons as a part of the patient services they render; and
(iv) Hospitals, nursing homes, assisted living facilities, and similar health care facilities may have restaurants, cafeterias, or other dining facilities where meals are sold to doctors, employees, and visitors. These sales of meals are subject to retailing B&O and retail sales taxes. For additional information regarding the sale of meals, including meals furnished to employees, refer to WAC 458-20-124.
(8) Industry reporting. This subsection discusses common reporting issues affecting persons operating medical or other health care facilities.
(a) Adjustments to revenues. Many hospitals provide medical care without charge or where some portion of the charge will be canceled. In other cases, medical care is billed to patients at "standard" rates but is later adjusted to reduce the charges to the rates established by contract with medicare, medicaid, or private insurers. In these situations, the hospital must initially include the total charges as billed to the patient as gross income unless the hospital's records clearly indicate the amount of income to which it will be entitled under its contracts with insurance carriers. Where tax returns are initially filed based on gross charges, an adjustment may be taken on future tax returns after the hospital has adjusted its records to reflect the actual amounts collected. In no event may the hospital reduce the amount of its current gross income by amounts that were not previously reported on its excise tax return. If the tax rate changes from the time the B&O tax was first paid on the gross charges and the time of the adjustment, the hospital must file amended tax returns to report the B&O tax on the transaction as finally completed at the rate in effect when the service was performed.
(b) Tax consequences if a hospital contracts with an independent contractor to provide medical services at the hospital. When a hospital contracts with an independent contractor (service provider) to provide medical services, such as managing and staffing the hospital's emergency department, the hospital may not deduct the amount paid to the service provider from its gross income. If, however, the patients are alone liable for paying the service provider, and the hospital has no personal liability, either primarily or secondarily, for paying the service provider, other than as agent for the patients, then the hospital may deduct from its gross income the amount it receives and pays to the service provider.
In addition, the service provider is subject to service and other activities B&O tax on the amount earned from the hospital for providing these services for the hospital. If the service provider subcontracts with a third party, such as a physician or nurse, to help provide medical services as an independent contractor, the service provider may not deduct from its gross income amounts paid to the subcontractor where the service provider is personally liable, either primarily or secondarily, for paying the subcontractor. If, however, the hospital is alone liable for paying the subcontractor, and the service provider has no personal liability, either primarily or secondarily, other than as agent for the hospital, then the service provider may deduct from its gross income the amount it receives from the hospital and pays to the subcontractor. For additional information regarding deductible advances and reimbursements, refer to WAC 458-20-111.
(c) Nursing homes and assisted living facilities may not claim a B&O tax exemption for the rental of real estate. The purpose of nursing homes is to provide medical care to their residents. The purpose of assisted living facilities is to assume general responsibility for the safety and well-being of their residents and to provide other services to residents such as housekeeping, meals, laundry, and activities. Assisted living facilities may also provide residents with assistance with activities of daily living, health support services, and intermittent nursing services. Because the purpose of nursing homes and assisted living facilities is to provide services and not to lease or rent real property, no part of the gross income of nursing homes or assisted living facilities is exempted from B&O tax as the rental of real estate.
(9) B&O tax deductions, credits, and exemptions. This subsection provides information about B&O tax deductions, credits, and exemptions available to persons operating medical or other health care facilities.
Deductible amounts should be included in the gross income reported on the combined excise tax return and then identified on the appropriate deduction detail line of the return to determine the amount of taxable income.
(a) Organ procurement organizations. RCW 82.04.326 provides a B&O tax exemption for amounts earned by a qualified organ procurement organization under 42 U.S.C. Sec. 273(b) in effect as of January 1, 2001, to the extent that the amounts are exempt from federal income tax.
(b) Contributions, donations, and endowment funds. RCW 82.04.4282 provides a B&O tax deduction for amounts received as contributions, donations, and endowment funds, including grants, which are not in exchange for goods, services, or business benefits. For example, a B&O tax deduction is allowed for donations received by a public hospital, as long as the donors do not receive any goods, services, or any business benefits in return. On the other hand, a public hospital may not take a B&O tax deduction on amounts earned from a state university for work-study programs or training seminars, because the university receives business benefits in return, as students receive education and training while enrolled in the university's degree programs.
(c) Adult family homes. RCW 82.04.327 provides a B&O tax exemption for gross income derived from personal and professional services of adult family homes licensed by the department of social and health services (DSHS), or which are specifically exempt from licensing under the rules of DSHS. This exemption does not apply to persons who provide home care services to clients in the clients' own residences.
For the purpose of this rule, "adult family home" has the same meaning as in RCW 70.128.010.
(d) Nonprofit kidney dialysis facilities, hospice agencies, and nonprofit nursing homes and homes for unwed mothers. RCW 82.04.4289 provides a B&O tax exemption for amounts earned as compensation for services rendered to patients or from sales of drugs for human use pursuant to a prescription furnished as an integral part of services rendered to patients by kidney dialysis facilities operated as a nonprofit corporation, nonprofit hospice agencies licensed under chapter 70.127 RCW, nonprofit nursing homes and homes for unwed mothers operated as religious or charitable organizations. This exemption applies only if no part of the net earnings earned by such an institution inures, directly or indirectly, to any person other than the institution entitled to this exemption. This exemption is available to nonprofit hospitals for income from the operation of kidney dialysis facilities if the hospital accurately identifies and accounts for the income from this activity.
Examples of nonprofit nursing homes include nursing homes operated by church organizations or by nonprofit corporations designed to assist alcoholics in recovery and rehabilitation. Nursing homes and homes for unwed mothers operated by governmental entities, including public hospital districts, do not qualify for the B&O tax exemption provided in RCW 82.04.4289.
(e) Government payments made to health or social welfare organizations. RCW 82.04.4297 provides a B&O tax deduction to health or social welfare organizations, as defined in RCW 82.04.431, for amounts earned directly from the United States, any instrumentality of the United States, the state of Washington, or any municipal corporation or political subdivision of the state of Washington as compensation for health or social welfare services.
RCW 82.04.4275 provides a B&O tax deduction for amounts health or social welfare organizations receive as compensation for providing child welfare services under a government-funded program.
A deduction is not allowed, however, for amounts that are received under an employee benefit plan. For purposes of the deduction provided by RCW 82.04.4297, "employee benefit plan" includes any plan, trust, commingled employee benefit trust, or custodial arrangement that is subject to the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. Sec. 1001 et seq., or that is described in sections 125, 401, 403, 408, 457, and 501 (c)(9) and (17) through (23) of the Internal Revenue Code of 1986, as amended, or a similar plan maintained by a state or local government, or a plan, trust, or custodial arrangement established to self-insure benefits required by federal, state, or local law.
(f) Amounts earned under a health service program subsidized by federal or state government. RCW 82.04.4311 provides a B&O tax deduction to:
• A public hospital that is owned by a municipal corporation or political subdivision; or
• A nonprofit hospital; or
• A nonprofit community health center; or
• A network of nonprofit community health centers, that qualifies as a health and social welfare organization as defined in RCW 82.04.431, for amounts earned as compensation for health care services covered under the federal medicare program authorized under Title XVIII of the federal Social Security Act; medical assistance, children's health, or other program under chapter 74.09 RCW; or for the state of Washington basic health plan under chapter 70.47 RCW. This deduction applies to amounts received directly or through a third party from the qualified programs or plans. However, it does not apply to amounts received from patient copayments or patient deductibles. For purposes of the deduction provided by RCW 82.04.4311, "community health center" means a federally qualified health center as defined in 42 U.S.C. Sec. 1396d as existed on August 1, 2005.
Example 3. Acme Hospital is a nonprofit hospital that qualifies as a health and social welfare organization as defined in RCW 82.04.431. Acme receives $1,000 for providing health care services to Jane, who qualifies for the federal medicare program authorized under Title XVIII of the federal Social Security Act. Jane is covered in a health care plan that is a combination of medicare, which is B&O tax deductible by Acme, and a medicare plus plan, which is paid for by Jane and is not B&O tax deductible by Acme. Jane pays $20 to Acme as patient copayments. Medicare pays $600 to Acme for the health care services, and the medicare plus plan pays $380. Acme may deduct only the $600 received from medicare.
(g) Blood and tissue banks. Except as otherwise provided, RCW 82.04.324 provides a B&O tax exemption for amounts earned by a qualifying blood bank, a qualifying tissue bank, or a qualifying blood and tissue bank to the extent such amounts are exempt from federal income tax.
For the purposes of this exemption, the following definitions apply:
(i) Qualifying blood bank. "Qualifying blood bank" means a blood bank that qualifies as an exempt organization under 26 U.S.C. 501 (c)(3) as existing on June 10, 2004, that is registered under 21 C.F.R., Part 607 as existing on June 10, 2004, and whose primary business purpose is the collection, preparation, and processing of blood.
"Qualifying blood bank" does not include a comprehensive cancer center that is recognized as such by the National Cancer Institute.
(ii) Qualifying tissue bank. "Qualifying tissue bank" means a tissue bank that qualifies as an exempt organization under 26 U.S.C. 501 (c)(3) as existing on June 10, 2004, is registered under 21 C.F.R., Part 1271 as existing on June 10, 2004, and whose primary business purpose is the recovery, processing, storage, labeling, packaging, or distribution of human bone tissue, ligament tissue and similar musculoskeletal tissues, skin tissue, heart valve tissue, or human eye tissue. "Qualifying tissue bank" does not include a comprehensive cancer center that is recognized as such by the National Cancer Institute.
(iii) Qualifying blood and tissue bank. "Qualifying blood and tissue bank" means a bank that qualifies as an exempt organization under 26 U.S.C. 501 (c)(3) as existing on June 10, 2004, is registered under 21 C.F.R., Parts 607 and 1271 as existing on June 10, 2004, and whose primary business purpose is the collection, preparation, and processing of blood, and the recovery, processing, storage, labeling, packaging, or distribution of human bone tissue, ligament tissue and similar musculoskeletal tissues, skin tissue, and heart valve tissue.
"Qualifying blood and tissue bank" does not include a comprehensive cancer center that is recognized as such by the National Cancer Institute.
(h) Assisted living facilities. RCW 82.04.4337 provides a B&O tax deduction to licensed assisted living facility operators for amounts earned as compensation for providing adult residential care, enhanced adult residential care, or assisted living services under contract with the department of social and health services authorized by chapter 74.39A RCW to residents who are medicaid recipients. For the purpose of this rule, "adult residential care," "enhanced adult residential care," and "assisted living services" have the same meaning as in RCW 74.39A.009.
In addition, RCW 82.04.4264 provides a B&O tax exemption for amounts earned by a nonprofit assisted living facility licensed under chapter 18.20 RCW for providing room and domiciliary care to residents of the assisted living facility. For purposes of this rule, "nonprofit assisted living facility" means an assisted living facility that is operated as a religious or charitable organization, is exempt from federal income tax under 26 U.S.C. Sec. 501 (c)(3), is incorporated under chapter 24.03A RCW, is operated as part of a nonprofit hospital, or is operated as part of a public hospital district.
(i) Comprehensive cancer centers. RCW 82.04.4265 provides a B&O tax exemption for amounts earned by a comprehensive cancer center to the extent such amounts are exempt from federal income tax. For purposes of this rule, "comprehensive cancer center" means a cancer center that has written confirmation that it is recognized by the National Cancer Institute as a comprehensive cancer center and that qualifies as an exempt organization under 26 U.S.C. Sec. 501 (c)(3) as existing on July 1, 2006.
(j) Prescription drugs administered by the medical service provider. RCW 82.04.620 allows a deduction from the measure of tax for reporting under the service and other activities classification of the B&O tax (RCW 82.04.290) for amounts earned by physicians or clinics for drugs for infusion or injection by licensed physicians or their agents for human use pursuant to a prescription. This deduction only applies to amounts that:
(i) Are separately stated on invoices or other billing statements;
(ii) Do not exceed the then current federal rate; and
(iii) Are covered or required under a health care service program subsidized by the federal or state government.
For the purpose of this deduction only, amounts that "are covered or required under a health care service program subsidized by the federal or state government" include any required drug copayments made directly from the patient to the physician or clinic.
(A) "Federal rate" means the rate at or below which the federal government or its agents reimburse providers for prescription drugs administered to patients as provided for in the medicare, Part B, drugs average sales price information resource as published by the United States Department of Health and Human Services, or any index that succeeds it.
(B) The deduction is available on an "all or nothing" basis against the total amount earned for a specific drug charge. If the total amount earned by the physician or clinic for a specific drug exceeds the federal reimbursement rate, none of the total amount earned qualifies for the deduction (including any required copayment received directly from the patient). In other words, a physician or clinic may not simply take an "automatic" deduction equal to the federal reimbursement rate for each drug.
(C) For physicians or clinics reporting taxes on the accrual basis, the total amount charged for a drug must be included in the gross income at the time of billing if it is in excess of the federal rate. However, in some cases the gross income from charges may be adjusted, as indicated in subsection (8)(a) of this rule. If such an adjustment to gross income is appropriate, the exemption discussed in this subsection may also be taken at the time of billing if the adjustment leaves the physician or clinic contractually liable to receive a total amount, including any copayment received from the patient that does not exceed the federal rate.
(10) Sales, use, and other specified taxes deductions and exemptions. Unless otherwise exempt by law, hospitals, nursing homes, adult family homes, assisted living facilities, and similar health care providers are required to pay retail sales tax on purchases of equipment and supplies. The deductions and exemptions listed in this subsection are available to qualified persons.
(a) For the purpose of this subsection, the following definitions apply:
(i) "Chemical" means any catalyst, solvent, water, acid, oil, or other additive that physically or chemically interacts with blood, bone, or tissue.
(ii) "Materials" for the purposes of RCW 82.08.02807 means any item of tangible personal property including, but not limited to, bags, packs, collecting sets, filtering materials, testing reagents, antisera, and refrigerants, used or consumed in performing research on, procuring, testing, processing, storing, packaging, distributing, or using blood, bone, or tissue.
(iii) "Medical supplies" means any item of tangible personal property, including any repair and replacement parts for such tangible personal property, used by a comprehensive cancer center for the purpose of performing research on, procuring, testing, processing, storing, packaging, distributing, or using blood, bone, or tissue. The term includes tangible personal property used to:
(A) Provide preparatory treatment of blood, bone, or tissue;
(B) Control, guide, measure, tune, verify, align, regulate, test, or physically support blood, bone, or tissue; and
(C) Protect the health and safety of employees or others present during research on, procuring, testing, processing, storing, packaging, distributing, or using blood, bone, or tissue.
(iv) "Research" means basic and applied research that has as its objective the design, development, refinement, testing, marketing, or commercialization of a product, service, or process.
(b) Temporary medical housing provided by a health or social welfare organization. RCW 82.08.997 provides an exemption from state and local retail sales taxes and lodging taxes for temporary medical housing provided by a health or social welfare organization. The term "health or social welfare organization" is defined in RCW 82.04.431. "Temporary medical housing" means transient lodging and related services provided to a patient or the patient's immediate family, legal guardian, or other persons necessary to the patient's mental or physical well-being.
(i) The exemption applies to the following taxes:
(A) Retail sales tax levied under RCW 82.08.020;
(B) Lodging taxes levied under chapter 67.28 RCW;
(C) Convention and trade center tax levied under chapter 36.100 RCW;
(D) Public facilities tax levied under RCW 36.100.040; and
(E) Tourism promotion areas tax levied under RCW 35.101.050.
(ii) The exemptions in this subsection apply to charges made for "temporary medical housing" only:
(A) While the patient is receiving medical treatment at a hospital required to be licensed under RCW 70.41.090 or at an outpatient clinic associated with such hospital, including any period of recuperation or observation immediately following such medical treatment; and
(B) By a person that does not furnish lodging or related services to the general public.
(c) Purchases for resale. Purchases of tangible personal property for resale without intervening use are not subject to retail sales tax. Persons purchasing tangible personal property for resale must furnish a copy of their reseller permit to the seller to document the wholesale nature of the sale.
(d) Sales of medical supplies, chemicals, or materials to a comprehensive cancer center. RCW 82.08.808 and 82.12.808 provide, respectively, retail sales tax and use tax exemptions for sales of medical supplies, chemicals, or materials to a comprehensive cancer center. These exemptions do not apply to sales of construction materials, office equipment, building equipment, administrative supplies, or vehicles.
(e) Sales of medical supplies, chemicals, or materials to organ procurement organizations. RCW 82.08.02807 and 82.12.02749 provide, respectively, retail sales tax and use tax exemptions for sales of medical supplies, chemicals, or materials to organ procurement organizations exempt under RCW 82.04.326. These exemptions do not apply to the sale of construction materials, office equipment, building equipment, administrative supplies, or vehicles.
(11) Buyer's responsibility to remit deferred sales or use tax. If the seller does not collect retail sales tax on a retail sale, the buyer must remit the retail sales tax, commonly referred to as "deferred sales tax", or use tax directly to the department unless the purchases are specifically exempt by law. For detailed information regarding the use tax, refer to WAC 458-20-178.
(a) Reporting deferred sales or use tax. Persons registered with the department and required to file tax returns should report deferred sales or use tax on their combined excise tax return. As the combined excise tax return does not have a separate line for reporting deferred sales tax, the buyer should report the tax liability on the use tax line. If a deferred sales tax or use tax liability is incurred by a person who is not required to be registered with the department, the person must report the tax on a "Consumer Use Tax Return" and remit the appropriate tax to the department.
(b) Consumer Use Tax Return. The Consumer Use Tax Return may be obtained from the department's website at dor.wa.gov, or by calling the department's telephone information center at 1- 360-705-6705.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 24-03-081, § 458-20-168, filed 1/16/24, effective 2/16/24; WSR 22-14-014, § 458-20-168, filed 6/23/22, effective 7/24/22. Statutory Authority: RCW 82.24.550, 82.01.060, 82.08.808, 82.12.808, 82.08.02807 and 82.12.02749. WSR 21-01-062, § 458-20-168, filed 12/9/20, effective 1/9/21. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 2015 c 86. WSR 15-21-092, § 458-20-168, filed 10/21/15, effective 11/21/15. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 14-18-019, § 458-20-168, filed 8/25/14, effective 9/25/14. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-069, § 458-20-168, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 08-16-057, § 458-20-168, filed 7/30/08, effective 8/30/08; WSR 05-14-090, § 458-20-168, filed 6/30/05, effective 7/31/05. Statutory Authority: RCW 82.32.300 and 82.04.260(15). WSR 94-11-097, § 458-20-168, filed 5/17/94, effective 6/17/94. Statutory Authority: RCW 82.32.300. WSR 88-01-050 (Order 87-9), § 458-20-168, filed 12/15/87; WSR 87-05-042 (Order 87-1), § 458-20-168, filed 2/18/87; WSR 83-07-033 (Order ET 83-16), § 458-20-168, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-168, filed 6/27/78; Order ET 74-2, § 458-20-168, filed 6/24/74; Order ET 70-3, § 458-20-168 (Rule 168), filed 5/29/70, effective 7/1/70.]


PDF458-20-169

Nonprofit organizations.

(1) Introduction. Unlike the tax systems of most states and the federal government, Washington's tax system, including its primary business tax, applies to the activities of nonprofit organizations. Washington's business and occupation (B&O) tax is imposed on all entities that generate gross receipts or proceeds, unless there is a specific statutory exemption or deduction. This rule explains how the B&O, retail sales, and use taxes apply to activities often performed by nonprofit organizations. Although some nonprofit organizations may be subject to other taxes such as the public utility tax or insurance premium taxes on income from utility or insurance activities, these taxes are not discussed in this rule. The rule describes the most common B&O, retail sales, and use tax exemptions and deductions that are specifically provided to nonprofit organizations by state law. Other exemptions or deductions not specific to nonprofit organizations may also apply.
(a) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(b) Other rules that may apply. Rules in the following list may contain additional information for nonprofit organizations:
(i) WAC 458-20-101 Tax registration and tax reporting.
(ii) WAC 458-20-167 Educational institutions, school districts, student organizations, and private schools.
(iii) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.
(iv) WAC 458-20-183 Recreational services and activities.
(v) WAC 458-20-249 Artistic or cultural organizations.
(vi) WAC 458-20-256 Trade shows, conventions and seminars.
(2) Registration and reporting requirements. Nonprofit organizations are subject to the registration and reporting requirements as described in WAC 458-20-101. Whether registering and reporting are required depends upon the level and type of taxes the nonprofit organization is required to collect or pay to the department of revenue (department).
(3) Filing combined excise tax returns. Nonprofit organizations making retail sales that require the collection of retail sales tax must file an excise tax return, regardless of the annual level of gross receipts or gross income and whether or not any B&O tax is due. For information on when a taxpayer may qualify for a small business B&O tax credit, see WAC 458-20-104 Small business tax relief based on income of business. The excise tax return with payment is generally filed on a monthly basis. Under certain conditions the department may authorize taxpayers to file and remit payment on either a quarterly or an annual basis or be placed on an "active nonreporting" status by the department. For information on how reporting frequencies are assigned to taxpayers, see WAC 458-20-22801 Tax reporting frequency, and WAC 458-20-101.
(4) General tax reporting responsibilities. While Washington state law provides some tax exemptions and deductions specifically for nonprofit organizations, these organizations otherwise have the same tax-reporting responsibilities as for-profit organizations.
(a) Business and occupation tax. Chapter 82.04 RCW imposes a B&O tax on every person with substantial nexus in Washington engaged in business activities within this state, unless the income is specifically exempt or deductible under state law. RCW 82.04.067. The B&O tax applies to the value of products, gross proceeds of sales, or gross income of the business, as the case may be. RCW 82.04.220.
(i) Common B&O tax classifications. Chapter 82.04 RCW provides a number of classifications that apply to specific activities. The most common B&O tax classifications applying to income received by nonprofit organizations are the retailing, wholesaling, and service and other activities classifications. RCW 82.04.250, 82.04.270, and 82.04.290. If an organization engages in more than one kind of business activity, it must report the gross income from each activity under the appropriate tax classification. RCW 82.04.440(1).
(ii) Measure of tax. The most common measures of the B&O tax are "gross proceeds of sales" and "gross income of the business." RCW 82.04.070 and 82.04.080, respectively. These measures include the value proceeding or accruing from the sale of tangible personal property or services rendered without any deduction for the cost of property sold, cost of materials used, labor costs, discounts paid, delivery costs, taxes, losses, or any other expenses.
(b) Retail sales tax. A nonprofit organization must collect and remit retail sales tax on all retail sales, unless the sale is specifically exempt by statute. Examples of retail sales tax exemptions that may apply to nonprofit organizations are those for:
(i) Sales of certain food products, WAC 458-20-244 Food and food ingredients;
(ii) Construction materials purchased by a health or social welfare organization for new construction of alternative housing to be licensed as a family foster home for youth in crisis. RCW 82.08.02915. New construction includes renovating an existing structure to provide new housing for youth in crisis; and
(iii) Fund-raising activities in subsection (5)(g) of this rule.
A nonprofit organization must pay retail sales tax when it purchases goods or retail services for its own use as a consumer, unless the purchase is specifically exempt by statute. Items purchased for resale without intervening use are purchases at wholesale and are not subject to the retail sales tax if the seller takes from the buyer a copy of the buyer's reseller permit. The reseller permit documents the wholesale nature of any sale. For additional information on reseller permits see WAC 458-20-102 Reseller permits.
(c) Use tax. The use tax is imposed on every person, including nonprofit organizations, using tangible personal property within this state as a consumer, unless such use is specifically exempt by statute. The use tax applies only if retail sales tax has not previously been paid on the item. The rate of tax is the same as the retail sales tax rate that applies at the location where the property is first used.
A common application of the use tax occurs when items are purchased from an out-of-state seller who has no presence in Washington. When the out-of-state seller does not collect Washington's retail sales or use tax, the buyer is statutorily required to remit use tax directly to the department. For more information on use tax and the use of tangible personal property, see WAC 458-20-178 Use tax and the use of tangible personal property.
Except for fund-raising, use tax exemptions generally correspond to retail sales tax exemptions. For example, the use tax exemption for construction materials acquired by a health or social welfare organization for new construction of alternative housing for youth in crisis, to be licensed as a family foster home in RCW 82.12.02915, corresponds with the retail sales tax exemption described in subsection (4)(b) of this rule for purchasing these construction materials.
(i) Use tax exemption for donated items. RCW 82.12.02595 provides a use tax exemption for personal property donated to a nonprofit charitable organization. This exemption:
(A) Is available for the nonprofit charitable organization and the donor, if the donor did not previously use the personal property as a consumer; or
(B) Applies to the use of property by a donor who is incorporating the property into a nonprofit organization's real or personal property for no charge; or
(C) Applies to another person using property originally donated to a charitable nonprofit organization that is subsequently donated or bailed to that person by the charitable nonprofit organization, provided that person uses the property in furtherance of the charitable purpose for which the property was originally donated to the charitable nonprofit organization.
(I) Example 1. A hardware store donates an industrial pressure washer to a nonprofit community center for neighborhood cleanup, the community center bails this washer to people enrolled in its neighborhood improvement group for neighborhood clean-up projects. No use tax is due from any of the participants in these transactions.
(II) Example 2. A car is donated to a church for its staff and the church gives that car to its pastor. The pastor must pay use tax on the car because it serves multiple purposes. It serves the church's charitable purpose, but it also acts as compensation to the pastor and is available for the pastor's personal use, so the gift of the car would not qualify for the exemption as a gift of donated items. The subsequent donation of property from the charity to another person must be solely for a charitable purpose. If the property is donated or bailed to the third party for a charitable purpose in line with the nonprofit organization's charitable activities, generally no additional proof is required that this was the charitable purpose for which the property was originally donated.
(ii) Use tax implications with respect to fund-raising activities. Subsection (5)(g) of this rule explains that a retail sales tax exemption is available for certain fund-raising sales. However, there is usually no comparable use tax exemption provided to the buyer or user of property purchased at these fund-raising sales. While the nonprofit organization is not obligated to collect use tax from the buyer, the organization is encouraged to inform the buyer of the buyer's possible use tax obligation.
(iii) Contests of chance. RCW 82.12.225 provides a use tax exemption for the use of any article of personal property, purchased or received as a prize in a contest of chance, as defined in RCW 82.04.285, from a nonprofit organization or a library, if the value is less than the current value limit. This exemption only applies if the gross income from the sale by the nonprofit organization or library is exempt under RCW 82.04.3651.
(A) The current value limit is $12,000. Beginning in 2020, the value limit must be adjusted annually each December for inflation. The department will calculate an adjusted value limit for use in the next calendar year, using the consumer price index for the Seattle area. Adjusted value limits may not decrease from one year to the next. If an adjusted value limit calculation based on the consumer price index results in less than the current year's value limit, the current year's value limit will apply in the following calendar year. Adjusted value limits are published on the department's website and take effect January 1st for the following year.
(B) The following definitions apply to (c)(iii) of this subsection unless the context clearly requires otherwise:
(I) "Consumer price index" means the consumer price index for all urban consumers, all items, (CPI-U) as calculated by the United States Bureau of Labor Statistics or successor agency.
(II) "Seattle area" means the geographic area sample that includes Seattle and surrounding areas.
(5) Exemptions. The following sources of income are specifically exempt from tax. As such, they should not be included or reported as gross income if the organization is required to file an excise tax return.
(a) Adult family homes. RCW 82.04.327 exempts from B&O tax amounts received by licensed adult family homes or adult family homes that are exempt from licensing under rules of the department of social and health services.
(b) Nonprofit assisted living facilities. RCW 82.04.4264 exempts from B&O tax amounts received by a nonprofit assisted living facility licensed under chapter 18.20 RCW for providing room and domiciliary care to residents of the assisted living facility. For the purposes of this exemption, the terms:
(i) "Domiciliary care" has the meaning provided in RCW 18.20.020; and
(ii) "Nonprofit assisted living facility" means an assisted living facility that is operated as a religious or charitable organization, is exempt from federal income tax under 26 U.S.C. Sec. 501(c)(3), is incorporated under chapter 24.03A RCW, is operated as part of a nonprofit hospital, or is operated as part of a public hospital district.
(c) Camp or conference centers. RCW 82.04.363 and 82.08.830, respectively, exempt from B&O tax and retail sales tax amounts received by a nonprofit organization from the sale or furnishing of certain items or services at a camp or conference center conducted on property exempt from the property tax under RCW 84.36.030 (1), (2), or (3). For information about property tax exemptions that may apply see: WAC 458-16-210 Nonprofit organizations or associations organized and conducted for nonsectarian purposes; WAC 458-16-220 Church camps; and WAC 458-16-230 Character building organizations.
Amounts received from the sale of the following items and services are exempt:
(i) Lodging, conference and meeting rooms, camping facilities, parking, and similar licenses to use real property;
(ii) Food and meals;
(iii) Books, tapes, and other products, including electronically transferred items, available exclusively to the participants at the camp, conference, or meeting and not available to the public at large.
(d) Child care resource and referral services. RCW 82.04.3395 exempts from B&O tax amounts received by nonprofit organizations for providing child care resource and referral services. Child care resource and referral services do not include child care services provided directly to children.
(e) Credit and debt services. RCW 82.04.368 exempts from B&O tax amounts received by nonprofit organizations for providing specialized credit and debt services. These services include:
(i) Presenting individual and community credit education programs including credit and debt counseling;
(ii) Obtaining creditor cooperation allowing a debtor to repay debt in an orderly manner;
(iii) Establishing and administering negotiated repayment programs for debtors; and
(iv) Providing advice or assistance to a debtor with regard to (i), (ii), or (iii) of this subsection.
(f) Day care provided by churches. RCW 82.04.339 exempts from B&O tax amounts received by a church for the care of children of any age for periods of less than 24 hours, provided the church is exempt from property tax under RCW 84.36.020.
(g) Fund-raising. RCW 82.04.3651 and 82.08.02573, respectively, exempt from B&O tax and retail sales tax amounts received from certain fund-raising activities.
These exemptions apply only to the fund-raising income received by the nonprofit organization. For example, commission income received by a nonprofit organization selling books owned by a for-profit entity on a consignment basis is exempt from tax only if the statutory requirements are satisfied. The nonprofit organization is generally responsible for collecting and remitting retail sales tax on the gross proceeds of sales when selling items for another person. For additional information on the taxability of sales by agents, auctioneers and other similar types of sellers see WAC 458-20-159.
(i) Qualifying nonprofit organizations. Nonprofit organizations that qualify for this exemption are those that are:
(A) A tax-exempt nonprofit organization described by section 501(c)(3) (educational and charitable), 501(c)(4) (social welfare), or 501(c)(10) (fraternal societies operating as lodges) of the Internal Revenue Code; or
(B) A nonprofit organization that would qualify for tax exemption under section 501(c)(3), (4), or (10) except that it is not organized as a nonprofit corporation; or
(C) A nonprofit organization that does not pay its members, stockholders, officers, directors, or trustees any amounts from its gross income, except as payment for services rendered, does not pay more than reasonable compensation to any person for services rendered, and does not engage in a substantial amount of political activity. Political activity includes, but is not limited to, influencing legislation and participating in any campaign on behalf of any candidate for political office.
(ii) Qualifying fund-raising activities. For the purpose of this exemption, "fund-raising activity" means soliciting or accepting contributions of money or other property, or activities involving the anticipated exchange of goods or services for money between the soliciting organization and the organization or person solicited, for furthering the goals of the nonprofit organization. The following are examples of qualifying fund-raising activities:
(A) Example 3. Money raised by a nonprofit charitable group from its annual telephone fund drive to fund its homeless shelters where nothing is promised in return for a donor's pledge is exempt as fund-raising contributions of money to further the goals of the nonprofit organization.
(B) Example 4. A nonprofit group organized as a community playhouse has an annual telephone fund drive. The group gives the caller a mug, jacket, dinner, or vacation trip depending on the amount of pledge made over the phone. The community playhouse does not sell or exchange the mugs, jackets, dinners, or trips for cash or property, except during this pledge drive. The money is used to produce the next season's plays. The money earned from the pledges is exempt from both B&O tax and retail sales tax to the extent these amounts represent an exchange of goods and services for money to further the goals of the nonprofit group. The money earned from the pledges above the value of the goods and services exchanged is exempt as a fund-raising contribution of money to further the goals of the nonprofit organization.
(C) Example 5. A nonprofit group sells ice cream bars at booths leased during the two-week runs of three county fairs, for a total of six weeks during the year, to fund youth camps maintained by the nonprofit group. The money earned from the booths is exempt from both B&O tax and retail sales tax as a fund-raising exchange of goods for money to further the goals of the nonprofit group.
(iii) Contributions of money or other property. The term contributions includes grants, donations, endowments, scholarships, gifts, awards, and any other transfer of money or other property by a donor, provided the donor receives no significant goods, services, or benefits in return for making the gift. For example, an amount received by a nonprofit educational broadcaster from a group that conditions receipt on the nonprofit broadcaster airing its seminars is not a contribution regardless of how the amount paid is titled by the two organizations.
It is not unusual for the person making a gift to require some accountability for how the gift is used as a condition for receiving the gift or future gifts. Such gifts remain exempt, provided the "accountability" required does not result in a direct benefit to the donor. Examples of direct benefits to a donor may include money given for a report on the soil contamination levels of land owned by the donor, medical services provided to the donor or the donor's family, or market research benefiting the donor directly. This "accountability" can take the form of conditions or restrictions on the use of the gift for specific charitable purposes or can take the form of written reports accounting for the use of the gift. Public acknowledgment of a donor for the gift is not a significant service or benefit.
(iv) Nonqualifying fund-raising activities. Fund-raising activity does not include the operation of a regular place of business in which services are provided or sales are made during regular hours such as a bookstore, thrift shop, restaurant, legal or health clinic, or similar business. It also does not include the operation of a regular place of business from which services are provided or performed during regular hours such as the provision of retail, personal, or professional services. A regular place of business and the regular hours of that business depend on the type of business being conducted. The following are examples of nonqualifying fund-raising activities:
(A) Example 6. In the example in (g)(iii) of this subsection demonstrating that an amount received by a nonprofit broadcaster was not a contribution because services were given in return for the funds, this activity must also be examined to see whether the exchange was for services as part of a fund-raising activity. The broadcaster is in the business of broadcasting programs. It has a regular site for broadcasting programs and broadcasts 24 hours every day. Broadcasting is a part of its business activity performed from a regular place of business during regular hours. The money received from the group with the requirement that its seminars be broadcast would not qualify as money received from a fund-raising activity even though the parties viewed the money as a "donation."
(B) Example 7. A nonprofit organization that makes catalog sales throughout the year with a 24-hour telephone line for taking orders has a regular place of business at the location where the sales orders are processed and regular hours of 24 hours a day. Catalog sales are not exempt as fund-raising amounts even though the funds are raised for a nonprofit purpose.
(C) Example 8. A nonprofit group organized as a community playhouse performs three plays during the year at a leased theater. The plays run for a total of six weeks and the group provides concessions at each of the performances. The playhouse has a regular place of business with regular hours for that type of business. The concessions operate at that regular place of business during regular hours. The concessions are not exempt as fund-raising activities even though amounts raised from the concessions may be used to further the nonprofit purpose of that group.
(D) Example 9. A nonprofit student group that raises money for scholarships and other educational needs sets up an espresso stand that is open for two hours every morning during the school year. The espresso stand is a regular place of business with regular hours for that type of business. The money earned from the espresso stand is not exempt, even though the amounts are raised to further the student group's nonprofit purpose.
(v) Fund-raising sales by libraries. RCW 82.04.3651 provides that selling used books, used videos, used sound recordings, or similar used information products in a library is not operating a regular place of business, if the proceeds are used solely to support the library. The library must be a free public library supported in whole or in part with money derived from taxes. RCW 27.12.010. In addition to the B&O tax exemption under RCW 82.04.3651, RCW 82.08.02573 provides a comparable retail sales tax exemption for the same sales made by a library.
(h) Group training homes. RCW 82.04.385 exempts from B&O tax amounts received from the department of social and health services for operating a nonprofit group training home. The amounts excluded from gross income must be used for the cost of care, maintenance, support, and training of developmentally disabled individuals. As defined in RCW 71A.22.020, a nonprofit group training home is an approved facility equipped, supervised, managed, and operated on a full-time nonprofit basis for the full-time care, treatment, training, and maintenance of individuals with developmental disabilities.
(i) Sheltered workshops. RCW 82.04.385 also exempts from B&O tax amounts received by a nonprofit organization for operating a sheltered workshop.
(i) Definition of a sheltered workshop. A sheltered workshop is that part of the nonprofit organization engaged in business activities that are performed primarily to provide evaluation and work adjustment services for persons with disabilities or to provide gainful employment or rehabilitation services to persons with disabilities. The sheltered workshop may be maintained on or off the premises of the nonprofit organization.
(ii) Gainful employment or rehabilitation services to persons with disabilities. Gainful employment or rehabilitation services must be an interim step in the rehabilitation process that is provided because the person cannot be readily absorbed into the competitive labor market or because employment opportunities for the person do not exist during that time in the competitive labor market.
"Persons with disabilities," for the purposes of this exemption, means persons with a physical or mental disability that restricts normal achievement, including medically recognized addictions and learning disabilities. However, this term does not include social or economic disadvantages that restrict normal achievement, such as having a prior criminal history or low-income status.
(j) Student loan services. RCW 82.04.367 exempts from B&O tax amounts received by nonprofit organizations that are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code that:
(i) Are guarantee agencies under the federal guaranteed student loan program or that issue debt to provide or acquire student loans; or
(ii) Provide guarantees for student loans made through programs other than the federal guaranteed student loan program.
(k) Grants received to fund education programs pertaining to litter control, waste reduction, recycling, and composting. RCW 82.04.755 provides a B&O tax exemption for grants received by a nonprofit organization from the matching fund competitive grant program established in RCW 70A.200.140 (1)(b)(ii). This program provides funding for local or statewide education programs designed to help the public with litter control, waste reduction, recycling, and composting of primarily products upon which litter tax is imposed. For information on the state litter tax program, see chapter 82.19 RCW. The requirements for the grants are listed in RCW 70A.200.140 (1)(b)(ii).
(6) B&O tax deduction of payments made to health or social welfare organizations.
(a) Compensation from public entities. RCW 82.04.4297 provides a B&O tax deduction to health or social welfare organizations for amounts received from the United States, any instrumentality of the United States, the state of Washington, or any municipal corporation or political subdivision of the state of Washington as compensation for or to support health or social welfare services, rendered by a health or social welfare organization, as defined in RCW 82.04.431, or by a municipal corporation or political subdivision. These deductible amounts should be included in the gross income reported on the excise tax return, entered on the deduction page, and then deducted on the return when determining the amount of the organization's taxable income. A deduction is not allowed, however, for amounts that are received under an employee benefit plan.
(b) Mental health services or substance use disorder treatment services under a government-funded program. Effective April 26, 2021, RCW 82.04.4290 provides a B&O tax deduction for health or social welfare organizations for amounts received as compensation for providing mental health services or substance use disorder treatment services under a government-funded program. During the period August 24, 2011, to December 31, 2019, RCW 82.04.4277 provided a similar B&O tax deduction for mental health services and chemical dependency services under a government-funded program. This rule explains the B&O tax deduction in RCW 82.04.4290.
A behavioral health administrative services organization may deduct from the measure of tax amounts received from the state of Washington for distribution to a health or social welfare organization that is eligible to deduct the distribution for providing mental health services of substance use disorder treatment services under a government-funded program.
(i) The following definitions apply to (b) of this subsection unless the context clearly requires otherwise:
(A) "Behavioral health administrative services organization" has the same meaning as provided in RCW 71.24.025;
(B) "Health and social welfare organization" has the meaning provided in RCW 82.04.431;
(C) "Mental health services" has the same meaning provided in chapter 71.24 RCW; and
(D) "Substance use disorder treatment services" means substance use disorder treatment services as described in chapter 71.24 RCW.
(ii) Persons claiming a deduction under RCW 82.04.4290 must file an annual tax performance report with the department. Refer to RCW 82.32.534 and WAC 458-20-267 Annual tax performance reports for certain tax preferences, for information regarding filing an annual tax performance report.
(iii) This deduction is scheduled to expire January 1, 2032.
(c) Child welfare services. RCW 82.04.4275 provides a B&O tax deduction for health or social welfare organizations for amounts received as compensation for providing child welfare services under a government-funded program. Persons may also deduct from the measure of tax amounts received from the state of Washington for distribution to health or social welfare organizations eligible to deduct the distribution under RCW 82.04.4275(1).
(d) Definition of health or social welfare organization. A health or social welfare organization is an organization, including any community action council, providing health or social welfare services as defined in (e) of this subsection. To be exempt under RCW 82.04.4297, a corporation must satisfy all of the following conditions:
(i) Be a corporation sole under chapter 24.12 RCW or a domestic or foreign nonprofit corporation under chapter 24.03A RCW. A corporation providing professional services as authorized under chapter 18.100 RCW does not qualify as a health or social welfare organization;
(ii) Be governed by a board of not less than eight individuals who are not paid corporate employees when the organization is a nonprofit corporation;
(iii) Not pay any part of its corporate income directly or indirectly to its members, stockholders, officers, directors, or trustees except as executive or officer compensation or as services rendered by the corporation in accordance with its purposes and bylaws to a member, stockholder, officer, or director or as an individual;
(iv) Only pay compensation to corporate officers and executives for actual services rendered. This compensation must be at a level comparable to like public service positions within Washington;
(v) Have irrevocably dedicated its corporate assets to health or social welfare activities. Upon corporate liquidation, dissolution, or abandonment, any distribution or transfer of corporate assets may not inure directly or indirectly to the benefit of any member or individual, except for another health or social welfare organization;
(vi) Be duly licensed or certified as required by law or regulation;
(vii) Use government payments to provide health or social welfare services;
(viii) Make its services available regardless of race, color, national origin, or ancestry; and
(ix) Provide access to the corporation's books and records to the department's authorized agents upon request.
(e) Qualifying health or welfare services. The term "health or social welfare services" includes, and is limited to:
(i) Mental health, drug, or alcoholism counseling or treatment;
(ii) Family counseling;
(iii) Health care services;
(iv) Therapeutic, diagnostic, rehabilitative, or restorative services for the care of the sick, aged, physically disabled, developmentally disabled, or emotionally disabled individuals;
(v) Activities, including recreational activities, intended to prevent or ameliorate juvenile delinquency or child abuse;
(vi) Care of orphans or foster children;
(vii) Day care of children;
(viii) Employment development, training, and placement;
(ix) Legal services to the indigent;
(x) Weatherization assistance or minor home repairs for low-income homeowners or renters;
(xi) Assistance to low-income homeowners and renters to offset the cost of home heating energy, through direct benefits to eligible households or to fuel vendors on behalf of eligible households;
(xii) Community services to low-income individuals, families and groups that are designed to have a measurable and potentially major impact on causes of poverty in communities of the state of Washington; and
(xiii) Temporary medical housing, as defined in RCW 82.08.997, if the housing is provided only:
(A) While the patient is receiving medical treatment at a hospital required to be licensed under RCW 70.41.090 or at an outpatient clinic associated with such hospital, including any period of recuperation or observation immediately following such medical treatment; and
(B) By a person that does not furnish lodging or related services to the general public.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-14-014, § 458-20-169, filed 6/23/22, effective 7/24/22; WSR 20-21-104, § 458-20-169, filed 10/21/20, effective 11/21/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-169, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.04[.]4277. WSR 16-20-011, § 458-20-169, filed 9/23/16, effective 10/24/16. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-07-047, § 458-20-169, filed 3/14/16, effective 4/14/16; WSR 14-13-105, § 458-20-169, filed 6/17/14, effective 7/18/14. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-169, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 01-09-066, § 458-20-169, filed 4/16/01, effective 5/17/01; WSR 91-21-001, § 458-20-169, filed 10/3/91, effective 11/3/91; WSR 88-21-014 (Order 88-7), § 458-20-169, filed 10/7/88; WSR 86-02-039 (Order ET 85-8), § 458-20-169, filed 12/31/85; WSR 83-07-033 (Order ET 83-16), § 458-20-169, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-169, filed 6/27/78; Order ET 70-3, § 458-20-169 (Rule 169), filed 5/29/70, effective 7/1/70.]


PDF458-20-170

Constructing and repairing of new or existing buildings or other structures upon real property.

(1) Definitions. As used herein:
(a) The term "prime contractor" means a person engaged in the business of performing for consumers, the constructing, repairing, decorating or improving of new or existing buildings or other structures under, upon or above real property, either for the entire work or for a specific portion thereof. The term includes persons who rent or lease equipment to property owners for use in respect to constructing, repairing, etc., buildings or structures upon such property, when the equipment is operated by the lessor.
(b) The word "subcontractor" means a person engaged in the business of performing a similar service for persons other than consumers, either for the entire work or for a specific portion thereof. The term includes persons who rent or lease equipment to prime contractors or subcontractors for use in respect to constructing, repairing, etc., when such equipment is operated by the lessor. When equipment or other tangible personal property is rented without an operator to contractors, subcontractors or others, the transaction is a sale at retail (see RCW 82.04.040 and 82.04.050).
(c) The terms "prime contractor" and "subcontractor" include persons performing labor and services in respect to the moving of earth or clearing of land, cleaning, fumigating, razing, or moving of existing buildings or structures even though such services may not be done in connection with a contract involving the constructing, repairing, or altering of a new or existing building or structure. The terms also include persons constructing streets, roads, highways, etc., owned by the state of Washington.
(d) The term "buildings or other structures" means everything artificially built up or composed of parts joined together in some definite manner and attached to real property. It includes not only buildings in the general and ordinary sense, but also tanks, fences, conduits, culverts, railroad tracks, tunnels, overhead and underground transmission systems, monuments, retaining walls, piling and privately owned bridges, trestles, parking lots, and pavements for foot or vehicular traffic, etc.
(e) The term "constructing, repairing, decorating or improving of new or existing buildings or other structures," in addition to its ordinary meaning, includes: The installing or attaching of any article of tangible personal property in or to real property, whether or not such personal property becomes a part of the realty by virtue of installation; the clearing of land and the moving of earth; and the construction of streets, roads, highways, etc., owned by the state of Washington. The term includes the sale of or charge made for all service activities rendered in respect to such constructing, repairing, etc., regardless of whether or not such services are otherwise defined as "sale" by RCW 82.04.040 or "sales at retail" by RCW 82.04.050. Hence, for example, such service charges as engineering fees, architectural fees or supervisory fees are within the term when the services are included within a contract for the construction of a building or structure. The fact that the charge for such services may be shown separately in bid, contract or specifications does not establish the charge as a separate item in computing tax liability.
(2) Speculative builders.
(a) As used herein the term "speculative builder" means one who constructs buildings for sale or rental upon real estate owned by him. The attributes of ownership of real estate for purposes of this rule include but are not limited to the following: (i) The intentions of the parties in the transaction under which the land was acquired; (ii) the person who paid for the land; (iii) the person who paid for improvements to the land; (iv) the manner in which all parties, including financiers, dealt with the land. The terms "sells" or "contracts to sell" include any agreement whereby an immediate right to possession or title to the property vests in the purchaser.
(b) Where an owner of real estate sells it to a builder who constructs, repairs, decorates, or improves new or existing buildings or other structures thereon, and the builder thereafter resells the improved property back to the owner, the builder will not be considered a speculative builder. In such a case that portion of the resale attributable to the construction, repairs, decorations, or improvements by the builder, shall not be considered a sale of real estate and shall be fully subject to retailing business and occupation tax and retail sales tax. It is intended by this provision to prevent the avoidance of tax liability on construction labor and services by utilizing the mechanism of real property transfers. (RCW 82.04.050 (2)(c).)
(c) Amounts derived from the sale of real estate are exempt from the business and occupation tax. (RCW 82.04.390.) Consequently, the proceeds of sales by legitimate speculative builders of completed buildings are not subject to such tax. Neither does the sales tax apply to such sales, since such a sale involves no charge made for construction for a consumer, but the price paid is for the sale of real estate.
(d) However, when a speculative builder sells or contracts to sell property upon which he is presently constructing a building, all construction done subsequent to the date of such sale or contract constitutes a retail sale and that portion of the sales price allocable to construction done after the agreement shall be taxed accordingly. Consequently, the builder must pay business and occupation tax under the retailing classification on that part of the sales price attributable to construction done subsequent to the agreement, and shall also collect sales tax from the buyer on such allocable part of the sales price.
(e) Speculative builders must pay sales tax upon all materials purchased by them and on all charges made by their subcontractors. Deductions for such tax paid with respect to materials used or charges made for that part of the construction done after the contract to sell the building should be claimed by the speculative builder on his tax returns in accordance with WAC 458-20-102, under the subheading purchases for dual purposes.
(f) Persons, including corporations, partnerships, sole proprietorships, and joint ventures, among others, who perform construction upon land owned by their corporate officers, shareholders, partners, owners, co-venturers, etc., are constructing upon land owned by others and are taxable as sellers under this rule, not as "speculative builders."
(3) Business and occupation tax.
(a) Prime contractors are taxable under the retailing classification, and subcontractors under the wholesaling classification upon the gross contract price.
(b) Where no gross contract price is stated in any contract or agreement between the builder and the property owner, then the measure of business and occupation tax is the total amount of construction costs, including any charges for licenses, fees, permits, etc., required for the construction and paid by the builder.
(4) Retail sales tax.
(a) Prime contractors are required to collect from consumers the retail sales tax measured by the full contract price. Where no gross contract price is stated, the measure of sales tax is the total amount of construction costs including any charges for licenses, fees, permits, etc., required for construction and paid by the builder.
(b) The retail sales tax does not apply to charges made for janitorial services nor for the mere leveling of land used in commercial farming or agriculture. The tax does apply, however, in respect to contracts for cleaning septic tanks or the exterior walls of buildings, as well as to earth moving, land clearing and the razing or moving of structures, whether or not such services are performed as incidents of a contract to construct, repair, decorate, or improve buildings or structures.
(c) Sales to prime contractors and subcontractors of materials such as concrete, tie rods, lumber, finish hardware, etc., which become part of the structure being built or improved are sales for resale and are not subject to the retail sales tax. Sales of form lumber to such contractors are sales for resale provided that such lumber is used or to be used first by such persons for the molding of concrete in a single contract, project or job and the form lumber is thereafter incorporated into the product of that same contract project or job as an ingredient or component thereof. Sales of form lumber not so incorporated as an ingredient or component are sales at retail.
(d) The retail sales tax applies upon sales and rentals to prime contractors and subcontractors of tools, machinery and equipment, and consumable supplies, such as hand and machine tools, cranes, air compressors, bulldozers, lubricating oil, sandpaper and form lumber which are primarily for use by the contractor rather than for resale as a component part of the finished structure.
(e) The retail sales tax applies upon sales to speculative builders of all tangible personal property, including building materials, tools, equipment and consumable supplies and upon sales of labor, services and materials to speculative builders by independent contractors.
(5) Use tax.
The use tax applies generally to the use by prime contractors and subcontractors of tools, machinery, equipment and consumable supplies acquired by them primarily for their own use and upon which the retail sales tax has not been paid. This includes equipment and supplies purchased in a foreign state for use or consumption in performing contracts in this state. The use tax applies generally to the use by speculative builders of all tangible personal property, including building materials, purchased or acquired by them without payment of the retail sales tax (see also WAC 458-20-178).
[Statutory Authority: RCW 82.32.300. WSR 87-19-007 (Order ET 87-5), § 458-20-170, filed 9/8/87; WSR 83-07-033 (Order ET 83-16), § 458-20-170, filed 3/15/83; Order ET 71-1, § 458-20-170, filed 7/22/71; Order ET 70-3, § 458-20-170 (Rule 170), filed 5/29/70, effective 7/1/70.]


PDF458-20-17001

Government contracting—Construction, installations, or improvements to government real property.

(1) Introduction. This rule explains the taxation of businesses engaged in "government contracting"; i.e., constructing, repairing, decorating, or improving new or existing buildings or other structures under, upon, or above real property of or for the United States, its instrumentalities, or a county or city housing authority created pursuant to chapter 35.82 RCW. It also explains the reporting requirements for persons engaged in these activities.
(a) Examples. Examples included in this rule identify a number of facts and then state a general conclusion; they should be used only as a general guide. The tax consequences of all situations must be determined after a review of all the facts and circumstances.
(b) Other rules that may apply. The following rules may contain additional relevant information for persons engaged in government contracting or persons working with or for government contractors:
(i) WAC 458-20-134 Commercial or industrial use;
(ii) WAC 458-20-170 Constructing and repairing of new or existing buildings or other structures upon real property;
(iii) WAC 458-20-171 Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic;
(iv) WAC 458-20-178 Use tax and the use of tangible personal property;
(v) WAC 458-20-190 Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments;
(vi) WAC 458-20-211 Leases or rentals of tangible personal property, bailments.
(c) Definitions. The definitions in WAC 458-20-170 apply equally for this rule, as appropriate. In addition, the terms "clearing land" and "moving earth" include any grading or clearing of land, including razing buildings or other structures, as well as well drilling, core drilling, and digging holes, regardless of whether or not casing materials are installed.
(2) Business and occupation tax.
(a) Manufacturing. Government contractors that manufacture or produce any tangible personal property for their own commercial or industrial use in performing government contracting activities must report the value of the property manufactured under the manufacturing B&O tax classification. See RCW 82.04.240. In these circumstances, the government contractor is considered the consumer of the manufactured product and should not report the value of the manufactured product on either the retailing or wholesaling B&O tax classifications. The multiple activities tax credit is not allowed on this transaction.
(b) Government contracting. Persons, including subcontractors, engaged in constructing, repairing, decorating, or improving new or existing buildings or other structures under, upon, or above real property, including installing or attaching tangible personal property therein or thereto, and clearing land or moving earth, of or for the United States, its instrumentalities, or county or city housing authorities of chapter 35.82 RCW are taxable under the government contracting B&O tax classification, on the gross income from those activities. See RCW 82.04.280 (1)(g). The measure of the tax is the gross contract price.
(3) Retail sales tax.
(a) Government contracting activities excluded. The retail sales tax does not apply to any portion of the contract price for any business activities taxable under the government contracting B&O tax classification described in subsection (2)(b) of this section.
(b) Materials. Prime and subcontractors engaged in government contracting are "consumers" under RCW 82.04.190 and must pay retail sales tax or use tax on all purchases of materials. Examples of common materials on which sales or use tax would apply include prefabricated and precast items, equipment, and other tangible personal property installed, applied, attached, or otherwise incorporated in their government contracting work. Sales tax applies to the contractor's purchases notwithstanding that the full purchase price of the property will be reimbursed by the government or housing authority in the gross contract price, and notwithstanding that the contract provides that the title to the property vests in the government or housing authority immediately upon its acquisition by the contractor.
(c) Tools and consumables. Government contractors must pay retail sales tax on purchases and leases or rentals of tools, consumables, and other tangible personal property they use as consumers in performing government contracting as described in subsection (2)(b) of this section.
(4) Use tax.
(a) Use tax applies to the value of all materials, equipment, and other tangible personal property a government contractor purchases at retail, acquires as a bailee or donee, or manufactures or produces for commercial use or industrial use and upon which the contractor, its bailor, or its donor paid no retail sales tax.
(b) Government contractors are required to remit use tax on the value of government-provided tooling as well as property provided by the federal government to the contractor for installation or inclusion in the contract work.
(c) Either the prime contractor or a subcontractor may be held responsible for payment of the applicable use tax unless there is proof that one of these persons has paid the tax to the department because both persons are "consumers" of the tooling/property under RCW 82.04.190(6).
Example 1. Prime Contracting LLC contracts directly with the United States government to construct a new mess hall on a military base. As part of the project, Prime Contracting LLC manufactures custom wall cabinet storage units at their workshop, then delivers and installs the units in the newly constructed kitchen. Prime Contracting LLC must report the value of the manufactured cabinets under the manufacturing B&O tax classification. Prime Contracting LLC is also subject to use tax on the value of the cabinets. The gross income from the government contract must be reported under the government contracting B&O tax classification.
Example 2. Assume the same facts as Example 1, except Prime Contracting LLC, after manufacturing the cabinets, hires a subcontractor, Classy Cabinets Ltd., to install them. If Prime Contracting LLC does not report and remit use tax on the value of the cabinets, Classy Cabinets would be responsible for paying the use tax. Both Prime Contracting LLC and Classy Cabinets Ltd. will report their income from the project under the government contracting B&O tax classification.
Example 3. Assume the same facts as Example 1, except Prime Contracting LLC hires subcontractor, Classy Cabinets Ltd., to build and install the custom cabinets. In this scenario, Classy Cabinets Ltd. is the manufacturer of the cabinet units and must report the value of the manufactured cabinets under the manufacturing B&O tax classification. Both Prime Contracting LLC and Classy Cabinets Ltd. will report their income from the project under the government contracting B&O tax classification. Classy Cabinets Ltd. is also subject to use tax on the value of the cabinets. If Classy Cabinets Ltd. does not report and remit use tax on the value of the manufactured cabinets, Prime Contracting LLC would be responsible for paying the use tax.
Example 4. Assume the same facts as Example 3, except the United States government provides Classy Cabinets Ltd. with a tool necessary to install the manufactured cabinets. Classy Cabinets Ltd. is subject to use tax on the value of the tool used. See RCW 82.12.010(7) and WAC 458-20-178 (4)(f) for information on the use tax value of articles used in bailment situations. If Classy Cabinets Ltd. does not report and remit use tax on the value of the tool used, Prime Contracting LLC would be responsible for paying the use tax.
(5) This rule does not apply to public road construction. See WAC 458-20-171.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-14-026, § 458-20-17001, filed 6/24/22, effective 7/25/22. Statutory Authority: RCW 82.32.300. WSR 86-10-016 (Order ET 86-9), § 458-20-17001, filed 5/1/86.]


PDF458-20-171

Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic.

Definitions
As used herein:
The word "contractor" means a person engaged in the business of building, repairing or improving any street, place, road, highway, easement, right of way, mass public transportation terminal or parking facility, bridge, tunnel, or trestle which is owned by a municipal corporation or political subdivision of the state or by the United States and which is used or to be used primarily for foot or vehicular traffic, either as a prime contractor or as a subcontractor. It does not include persons who merely sell or deliver road materials to such contractors or to the public authority whose property is being improved. It also does not include persons who construct streets, roads, etc. owned by the state of Washington. (See WAC 458-20-170 for the tax liability of such persons.)
The term "street, place, road, highway, etc." is used in the ordinary sense that the combination of such words implies. It includes docks used primarily by ferry boats operated in connection with a street, road or highway, but does not include railroads, wharves, moorings, hallways, catwalks, or runways, aprons or taxiways for the landing, take-off or movement of airplanes within airports or landing fields; nor does it include ferry boats, even though the ferry be operated in connection with a street, road or highway. It includes roads and walks which are not open to the public generally, but which may be restricted to use by the military or by employees of a department or instrumentality of the United States.
The word "place" means only an area similar to a street or pedestrian walk, such as thoroughfares in various cities designated "places" for the purpose of preserving the continuity of street names or house numbers; generally, a street of shorter length than others.
The term "building, repairing or improving of a publicly owned street, place, road, etc.," includes clearing, grading, graveling, oiling, paving and the cleaning thereof; the constructing of tunnels, guard rails, fences, walks and drainage facilities, the planting of trees, shrubs and flowers therein, the placing of street and road signs, the striping of roadways, and the painting of bridges and trestles; it also includes the mining, sorting, crushing, screening, washing and hauling of sand, gravel, and rock taken from a public pit or quarry. It also includes the constructing of road and street lighting systems, even though portions of such systems also are used for purposes other than street and road lighting; also the constructing of a drainage system in streets and roads, even though such system is also used for the carrying of sewage: Provided, That the drainage facilities are sufficient for disposal of the normal runoff of surface waters from the particular streets and roads in which the system is constructed or an ordinance authorizing the construction of a combined sewer system is incorporated by reference in the contract and the contract or specifications clearly indicate that the system is designed and intended for the disposal of the normal runoff of surface waters from the streets and roads in which the system is constructed.
The term includes any contract for the readjustment, reconstruction or relocation of the facilities of any public, private or cooperatively owned utility or railroad in the course of building, repairing or improving a street, place, road, etc., which is owned by a municipal corporation or political subdivision of the state or by the United States, the cost of which readjustment, reconstruction, or relocation is the responsibility of the public authority whose street, place, road, etc., is being built, repaired or improved. It also includes building or repairing mass transportation facilities owned by a municipal corporation or political subdivision of the state or by the United States.
Except as provided above, the term does not include the constructing of water mains, telephone, telegraph, electrical power, or other conduits or lines in or above streets or roads, unless such power lines become a part of a street or road lighting system as aforesaid; nor does it include the constructing of sewage disposal facilities, nor the installing of sewer pipes for sanitation, unless the installation thereof is within, and a part of, a street or road drainage system.
Business and Occupation Tax
Such contractors are taxable under the public road construction classification upon their total contract price.
The business and occupation tax does not apply to the cost of or charge made for labor and services performed in respect to the mining, sorting, crushing, screening, washing, hauling, and stockpiling of sand, gravel, and rock, when such sand, gravel, or rock is taken from a pit or quarry which is owned by or leased to a county or city and such sand, gravel or rock is
(a) Stockpiled in said pit or quarry for placement on the street, road, or highway by the county or city itself using its own employees, or
(b) Placed on the street, road, or highway by the county or city itself using its own employees, or
(c) Sold by the county or city at actual cost to another county or city for road use.
Retail Sales Tax
The retail sales tax applies upon the sale to such contractors of all materials including prefabricated and precast items, equipment and supplies used or consumed in the performance of such contracts.
The retail sales tax does not apply upon any portion of the charge made by such contractors.
The sales tax does not apply to charges made for labor and services which are exempt from business tax as indicated above.
Use Tax
The use tax applies to the use by all contractors of all materials including prefabricated and precast items, equipment and supplies upon which the retail sales tax has not been paid. This tax also applies in respect to articles produced or manufactured by them for commercial use. (See WAC 458-20-134.)
The use tax does not apply in respect to the use of any sand, gravel, or rock to the extent of the cost of or charges made for labor and services performed in respect to the mining, sorting, crushing, screening, washing, hauling, and stockpiling such sand, gravel, or rock, when such sand, gravel, or rock is taken from a pit or quarry which is owned by or leased to a county or a city, and such sand, gravel, or rock is either (1) stockpiled in said pit or quarry for placement or is placed on the street, road, place, or highway of the county or city by the county or city itself (i.e., by its own employees), or (2) sold by the county or city to a county or a city at actual cost for placement on a street, road, place, or highway owned by the county or city. This exemption shall not apply to the use of such material to the extent of the cost of or charge made for such labor and services, if the material is used for other than public road purposes or is sold otherwise than as here indicated.
(For lien of unpaid taxes on the retained percentage withheld on public improvement contract, see WAC 458-20-217.)
[Order ET 71-1, § 458-20-171, filed 7/22/71; Order ET 70-3, § 458-20-171 (Rule 171), filed 5/29/70, effective 7/1/70.]


PDF458-20-172

Clearing land, moving earth, cleaning, fumigating, razing or moving existing buildings, and janitorial services.

Persons engaged in performing well drilling, contracts for the grading or clearing of land or the moving of earth, and which do not involve the building, repairing or improving of any streets, roads, etc. which are owned by a municipal corporation or political subdivision of the state or by the United States (see WAC 458-20-171); and persons engaged in performing contracts which involve the cleaning, fumigating, razing or moving of existing buildings or structures and persons performing janitorial services are taxable as follows:
Business and Occupation Tax
Taxable under the classification retailing upon gross income from contracts to perform such services for consumers, but excluding gross income from contracts providing solely for the performance of janitorial services the mere core drilling of or testing of soil samples, or the mere leveling of land for agricultural purposes.
Taxable under the classification wholesaling—all others upon gross income from subcontracts to perform such services for resale.
Taxable under the classification service and other activities upon gross income from contracts to perform janitorial services the mere core drilling of or testing of soil samples, or the mere leveling of land for agricultural purposes.
The term "janitorial services" includes activities performed regularly and normally by commercial janitor service businesses. Generally, these activities include the washing of interior and exterior window surfaces, floor cleaning and waxing, the cleaning of interior walls and woodwork, the cleaning in place of rugs, drapes and upholstery, dusting, disposal of trash, and cleaning and sanitizing bathroom fixtures. The term "janitorial services" does not include, among others, cleaning the exterior walls of buildings, the cleaning of septic tanks, special clean up jobs required by construction, fires, floods, etc., painting, papering, repairing, furnace or chimney cleaning, snow removal, sandblasting, or the cleaning of plant or industrial machinery or fixtures.
Retail Sales Tax
Persons engaged in performing contracts for the grading or clearing of land, the moving of earth or the cleaning, fumigating, razing or moving of existing buildings or structures must collect the retail sales tax upon the full contract price when the work is performed for consumers. The retail sales tax is not applicable to charges for janitorial services or the mere leveling of land for agricultural purposes.
The retail sales tax applies upon the sales to such contractors of equipment and supplies used or consumed in the performance of such contracts and which are not resold as a component part of the work.
Use Tax
The use tax applies to the use by such contractors of equipment and supplies upon which the retail sales tax has not been paid.
[Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-172, filed 3/15/83; Order ET 71-1, § 458-20-172, filed 7/22/71; Order ET 70-3, § 458-20-172 (Rule 172), filed 5/29/70, effective 7/1/70.]


PDF458-20-173

Installing, cleaning, repairing or otherwise altering or improving personal property of consumers.

Business and Occupation Tax
Retailing. Persons installing, cleaning, decorating, beautifying, repairing or otherwise altering or improving tangible personal property of consumers or for consumers are taxable under the retailing classification upon the gross proceeds received from sales of tangible personal property and the rendition of services.
Wholesaling. Persons who sell tangible personal property to, or render any of the above services for others than consumers, are taxable under the wholesaling classification upon the gross proceeds of sales received.
There must be included within gross amounts reported for tax all fees for services rendered and all charges recovered for expenses incurred in connection therewith, such as transportation costs, hotel, restaurant, telephone and telegraph charges, etc.
Retail Sales Tax
Persons engaged in the business of installing, cleaning, decorating, beautifying, repairing or otherwise altering or improving tangible personal property of consumers or for consumers are required to collect the retail sales tax upon the total charge made for the rendition of such services, even though no tangible personal property in the form of materials or supplies is sold or used in connection with such services. Where tangible personal property in the form of materials and supplies is sold or used in connection with such services, the retail sales tax applies to the total charges made for the sale of the materials and supplies and the services rendered in connection therewith.
The following are illustrative of services upon which the retail sales tax applies to the total charge made to consumers:
Laundering, dyeing and cleaning;
Automobile repairing, washing and painting;
Boat repairing (see WAC 458-20-175 and 458-20-176 for certain exemptions); shoe repairing and shining;
Altering or repairing wearing apparel.
In general, the repairing of any personal property, such as radios, refrigerators, machines, watches and jewelry and other articles.
The retail sales tax does not apply to sales of materials which are resold as a part of the articles of tangible personal property being repaired, altered or improved. Therefore, for buyers giving a resale certificate for purchases made before January 1, 2010, or a reseller permit for purchases made on or after January 1, 2010, to sellers to document the wholesale nature of any sale as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits), the retail sales tax will not apply to purchases such as:
(1) Parts or paint by an automotive repairman;
(2) Lumber, chandlery, etc., by a boat repairman;
(3) Shoe findings, thread, nails, polish and dyes by a shoe repairman;
(4) Solder, wire, condensers, etc., by a radio or television repairman.
Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
On the other hand the retail sales tax does apply to the purchase of all other supplies which may be consumed and utilized by such persons in the rendition of such services, such as fuel, lubricant, machines, hand tools, stationery and other supplies and equipment.
repairs for out-of-state persons. Persons residing outside this state may ship into this state articles of tangible personal property for the purpose of having the articles repaired, cleaned, or otherwise altered, and then returned to them. The retail sales tax is not applicable to the charge made for labor and/or materials, provided the seller, as a requirement of the agreement, delivers the property to the purchaser at a point outside this state or delivers the property to a common or bona fide private carrier consigned to the purchaser at a point outside this state. Proof of exempt sales will be the same as that required for sales of tangible personal property in interstate commerce. See WAC 458-20-193. No deduction is allowed, however, under the business and occupation tax.
For taxability of warranties and maintenance agreements, see WAC 458-20-257.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-173, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-173, filed 3/15/83; Order ET 70-3, § 458-20-173 (Rule 173), filed 5/29/70, effective 7/1/70.]


PDF458-20-174

Sales of motor vehicles, trailers, and parts to motor carriers operating in interstate or foreign commerce.

(1) Introduction. This rule explains the application of the business and occupation tax on sales to for hire motor carriers operating in interstate or foreign commerce.
This rule also explains the retail sales tax exemptions provided by RCW 82.08.0262 and 82.08.0263 for sales to for hire motor carriers operating in interstate or foreign commerce, and addresses the requirements that must be met and the documents that must be preserved to substantiate a claim of retail sales tax exemption. Motor carriers should refer to WAC 458-20-17401 for a discussion of the use tax and use tax exemptions available to motor carriers for the purchase or use of vehicles and parts under RCW 82.12.0254. Use tax complements the retail sales tax, and in most but not all cases mirrors the retail sales tax. Purchases of tangible personal property used or certain services purchased in Washington are subject to use tax if the retail sales tax has not been paid, or where an exemption for sales and use taxes are not available.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) Component parts mean any tangible personal property that is attached to and becomes an integral part of the motor vehicle or trailer. It includes such items as motors, motor and body parts, batteries, paint, permanently affixed decals, and tires.
(i) Component parts include the axle and wheels, referred to as a "converter gear" or "dolly," that is used to connect a trailer behind a tractor and trailer. Component parts also include tangible personal property that is attached to the vehicle and used as an integral part of the motor carrier's operation of the vehicle, even if the item is not required mechanically for the operation of the vehicle. It includes cellular telephones, communication equipment, fire extinguishers, and other such items, whether they are permanently attached to the vehicle or held by brackets that are permanently attached. If held by brackets, the brackets must be permanently attached to the vehicle in a definite and secure manner with these items attached to the bracket when not in use and intended to remain with that vehicle.
(ii) Component parts do not include antifreeze, oil, grease, and other lubricants that are considered consumed at the time they are placed into the vehicle, even though they are required for operation of the vehicle. It does include items such as spark plugs, oil filters, air filters, hoses, and belts.
(b) Primary property location is the address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of this address does not constitute bad faith. The primary property location is not altered by intermittent use at different locations, such as use of business property that accompanies employees on business trips and service calls.
(3) Business and occupation tax. Business and occupation (B&O) tax is due on all sales to motor carriers that are sourced to Washington, notwithstanding that the retail sales tax may not apply because of the specific statutory exemptions provided by RCW 82.08.0262 and 82.08.0263.
(a) Retailing of interstate transportation equipment B&O tax classification. The retailing of interstate transportation equipment B&O tax classification (see RCW 82.04.250) applies to the following if the retail sales tax exemption requirements for RCW 82.08.0262 or 82.08.0263 are met:
(i) Sales of motor vehicles, trailers, and component parts thereof;
(ii) Leases of motor vehicles and trailers without operator; and
(iii) Charges for labor and services rendered in respect to constructing, cleaning, repairing, altering or improving vehicles and trailers or component parts thereof.
(b) Retailing B&O tax classification. The retailing B&O tax classification applies to the following:
(i) Sales and services as described in (a)(i) through (iii) of this subsection, that do not meet the exemption requirements provided in RCW 82.08.0262 or 82.08.0263;
(ii) Sales of equipment, tools, parts and accessories which do not become a component part of a motor vehicle or trailer used in transporting persons or property therein;
(iii) Sales of consumable supplies, such as oil, antifreeze, grease, other lubricants, cleaning solvents and ice; and
(iv) Towing charges.
(c) Allocation of income. Except as provided in (d) of this subsection, all income from sales to motor carriers is allocated to where the sales are sourced under the general sourcing provisions of RCW 82.32.730. This includes leases to motor carriers that do not require recurring periodic payments.
(d) Periodic lease payments.
(i) Recurring periodic lease payments of leasing transactions described in (a) of this subsection are sourced as follows:
(A) The first payment is sourced to the location where the lessee takes possession of the transportation equipment. This is often the lessor's store location or a delivery location.
(B) Periodic payments made after the first payment are sourced for each period covered by the payment to the primary property location.
(ii) All recurring periodic lease payments of leasing transactions described in (b) of this subsection are sourced to the primary property location provided by the lessee to the lessor. The location where the lessee takes delivery of this type of equipment is immaterial.
(4) Retail sales tax. RCW 82.08.0262 and 82.08.0263 provide retail sales tax exemptions for certain sales to motor carriers when the sale is sourced to Washington.
(a) Sales or leases of motor vehicles and trailers. RCW 82.08.0263 provides an exemption from the retail sales tax for sales and leases of motor vehicles and trailers to be used for transporting persons or property for hire in interstate or foreign commerce. This exemption is available whether such use is by a for hire motor carrier, or by persons operating the vehicles and trailers under contract with a for hire motor carrier. The for hire carrier must hold a carrier permit issued by the Interstate Commerce Commission (ICC) or its successor agency to qualify for this exemption. The seller, at the time of the sale, must retain as a part of its records an exemption certificate that must be completed in its entirety. The buyers' retail sales tax exemption certificate is available on the department's website at dor.wa.gov, or can be obtained by contacting the department at:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
If the department's buyers' retail sales tax exemption certificate is not used, the form used must be in substantially the following form:
Exemption Certificate
The undersigned hereby certifies that it is, or has contracted to operate for, the holder of carrier permit No. . . . ., issued by the Interstate Commerce Commission or its successor agency, and that the vehicle this date purchased from you being a    (specify truck or trailer and make)   , Motor No. . . . . , Serial No. . . . . . . is entitled to exemption from the Retail Sales Tax under RCW 82.08.0263. This certificate is given with full knowledge of, and subject to, the legally prescribed penalties for fraud and tax evasion.
Dated . . . .
 
 
. . . .
(name of carrier-purchaser)
 
By. . . .
(title)
. . . .
(address)
The lease of motor vehicles and trailers to motor carriers, with or without operator, must satisfy all conditions and requirements provided by RCW 82.08.0263 to qualify for the retail sales tax exemption. Failure to meet these requirements will require the lessor to collect the retail sales tax on the lease as provided in (c) of this subsection.
(b) Sales of component parts of motor vehicles and trailers and charges for repairs, etc. RCW 82.08.0262 provides an exemption from the retail sales tax for sales of component parts and repairs of motor vehicles and trailers. This exemption is available only if the user of the motor vehicle or trailer is the holder of a carrier permit issued by the ICC or its successor agency that authorizes transportation by motor vehicle across the boundaries of Washington. Because carriers are required to obtain these permits only when the carrier is hauling for hire, the exemption applies only to parts and repairs purchased for vehicles that are used in hauling for hire. The exemption includes labor and services rendered in constructing, repairing, cleaning, altering, or improving such motor vehicles and trailers.
(i) This exemption is available whether the motor vehicles or trailers are owned by, or operated under contract with, persons holding the carrier permit. This exemption applies even if the motor vehicle or trailer to which the parts are attached will not be used substantially in interstate hauls, provided the vehicles are used in for hire hauling.
(ii) The seller must retain as a part of its records a completed exemption certificate. This certificate may be:
(A) Issued for each purchase;
(B) Incorporated in or stamped upon the purchase order; or
(C) In blanket form certifying all future purchases as being exempt from sales tax. Blanket exemption certificates are valid for as long as the buyer and seller have a recurring business relationship. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months. RCW 82.08.050.
(iii) The buyers' retail sales tax exemption certificate is available on the department's website at dor.wa.gov, or can be obtained from the department using the address provided in (a) of this subsection.
If the department's buyers' retail sales tax exemption certificate is not used, the form used must be in substantially the following form:
Exemption Certificate
The undersigned hereby certifies that it is, or has contracted to operate for, the holder of a carrier permit, No.. . . . . ., issued by the Interstate Commerce Commission or its successor agency authorizing transportation by motor vehicle across the boundaries of this state. The undersigned further certifies that the motor truck or trailer to be constructed, repaired, cleaned, altered, or improved by you, or to which the subject matter of this purchase is to become a component part, will be used in direct connection with the business of transporting therein persons or property for hire; and that such sale and/or charges are exempt from the Retail Sales Tax under RCW 82.08.0262. This certificate is given with full knowledge of, and subject to, the legally prescribed penalties for fraud and tax evasion.
Dated. . . .
 
 
. . . .
(name of carrier-purchaser)
 
. . . .
(address)
 
By . . . .
(title)
(c) Taxable sales. Sales that do not qualify for exemption under the provisions of RCW 82.08.0262 or 82.08.0263, are subject to the retail sales tax or deferred sales tax when sourced to Washington as follows.
(i) Sales, including single payment leases, are sourced under the general sourcing provision of RCW 82.32.730.
(ii) All recurring periodic lease payments are sourced to the primary property location provided by the lessee to the lessor.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-174, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-15-028, § 458-20-174, filed 7/7/15, effective 8/7/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0262, and 82.08.0263. WSR 08-14-018, § 458-20-174, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300. WSR 97-11-022, § 458-20-174, filed 5/13/97, effective 6/13/97; WSR 94-18-003, § 458-20-174, filed 8/24/94, effective 9/24/94; WSR 83-07-033 (Order ET 83-16), § 458-20-174, filed 3/15/83; Order ET 71-1, § 458-20-174, filed 7/22/71; Order 70-3, § 458-20-174 (Rule 174), filed 5/29/70, effective 7/1/70.]


PDF458-20-17401

Use tax liability for motor vehicles, trailers, and parts used by motor carriers operating in interstate or foreign commerce.

(1) Introduction. This rule explains the use tax and available use tax exemptions provided by RCW 82.12.0254 that apply to for hire motor carriers operating in interstate or foreign commerce. See subsection (3) of this rule for information on the requirement of substantial use in the normal course of the carrier's business as a for hire carrier.
(a) Readers may want to refer to WAC 458-20-174. For hire motor carriers should refer to WAC 458-20-174 for a discussion of the retail sales tax and retail sales tax exemptions that apply to motor carriers for the purchase of vehicles, trailers, and parts under RCW 82.08.0262 and 82.08.0263.
(b) Definitions. Definitions in WAC 458-20-174 apply to this rule.
(c) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(2) Use tax. The use tax complements the retail sales tax by imposing a tax of like amount on 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. For additional information on use tax refer to WAC 458-20-178. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred retail sales or use tax directly to the department of revenue (department) unless the purchase and/or use is exempt from the retail sales and/or use tax. Use tax is determined by the fair market value of the property when first subject to the use tax. See subsection (5) of this rule.
(3) Motor vehicles and trailers. Purchasers of motor vehicles and trailers should note the differences in the conditions and requirements for the retail sales and use tax exemptions provided by RCW 82.08.0263 and 82.12.0254, respectively. The purchaser of a motor vehicle or trailer may qualify for the retail sales tax exemption at the time of purchase, yet incur a use tax liability for the subsequent use of the same vehicle or trailer.
(a) For vehicles purchased in Washington, RCW 82.12.0254 provides a use tax exemption for the use of any motor vehicle or trailer while being operated under the authority of a trip permit and moving from the point of delivery in this state to a point outside this state.
(b) RCW 82.12.0254 also provides a use tax exemption for the use of any motor vehicle or trailer owned by, or operated under contract with, a for hire motor carrier engaged in the business of transporting persons or property in interstate or foreign commerce if both of the following conditions are met:
(i) The user is, or operates under contract with, a holder of a carrier permit issued by the Interstate Commerce Commission (ICC) or its successor agency; and
(ii) The vehicle is used in substantial part in the normal and ordinary course of the user's business for transporting persons or property for hire across the boundaries of the state.
"In substantial part" means that the motor vehicle or trailer for which exemption is claimed actually crosses Washington boundaries and is used a minimum of twenty-five percent in interstate for hire hauling.
(c) Retaining the exemption. The motor carrier must continue to substantially use the motor vehicle or trailer in interstate for hire hauls during each calendar year to retain the exemption from use tax. This requires that at the start of each calendar year the carrier review the usage of each vehicle and trailer for a "view period" consisting of the previous calendar year. If a particular vehicle was purchased or sold during the year so that the vehicle was not available for use during the entire calendar year, the taxpayer at its option may elect to review the usage during the portion of the year during which the vehicle was owned or may use the twelve-month period beginning with the date of purchase of a vehicle or ending with the date of sale of a vehicle. For example, if a vehicle is traded-in on May 30, 2013, the taxpayer must meet the substantial use test for this vehicle for either the period January through May 2013 or for the period June 1, 2012, through May 30, 2013. Use tax is due for those vehicles which have not been used substantially in interstate commerce and on which retail sales or use tax has not been paid.
(d) Maintaining records on a fiscal year basis. Carriers who maintain their records on a fiscal year basis may, at their option, elect to review the usage of their vehicles using their fiscal year rather than the calendar year. If a fiscal year is used, it must be used for the entire fleet of vehicles, except for view periods based on the acquisition or disposal of vehicles. These carriers may not change to a calendar year basis without first obtaining prior approval from the department.
(e) Calendar or fiscal year basis only. Usage will be reviewed on a calendar or fiscal year basis and not on a "moving" twelve-month period. For example, a tractor purchased on August 1, 2012, will need to have met the substantial use test for the period August through December 2012, or for the period August 1, 2012, through July 31, 2013, the period selected being at the taxpayer's option, and for the calendar year 2013 and each calendar year thereafter to retain the use tax exemption.
(f) Methods for determining if motor vehicles and trailers qualify. The motor carrier may select one of the methods from those listed below to determine if its motor vehicles and trailers satisfy the substantial use threshold for exemption under RCW 82.12.0254. The particular method must be applied to all trucks, tractors, and trailers within the fleet. Regardless of the method selected, a vehicle will not be considered as used in interstate hauls unless the vehicle actually crosses the boundaries of the state and is used in part outside Washington. The motor carrier may change the method with the prior written consent of the department. The methods are:
(i) Line crossing. The line crossing method compares the number of interstate for hire hauls made by a particular motor vehicle or trailer to the total number of for hire hauls. It makes no difference whether the for hire hauls are partial or full loads. The motor vehicle or trailer must actually cross the boundaries of this state or be used for hauls which begin and end outside this state, for the haul to be considered an interstate haul.
(ii) Mileage. The mileage method compares the interstate mileage associated with the for hire hauls made by a particular motor vehicle or trailer, to the total mileage associated with its for hire hauls. All mileage associated with a specific haul that requires the motor vehicle or trailer to actually cross the boundaries of this state, or haul exclusively outside this state, is considered to be interstate mileage. Where a vehicle is returning empty after having delivered an interstate load or is empty on its way to pickup an interstate load, the empty mileage will be considered to be part of the mileage from an interstate haul.
(iii) Revenue. The revenue method compares the interstate for hire revenue generated by the particular motor vehicle or trailer to the total for hire revenue generated. The revenue generated by the motor vehicle or trailer actually crossing the boundaries of this state, or hauling exclusively outside this state, is considered to be interstate revenue for the purposes of determining use tax liability. If the motor carrier uses more than one motor vehicle or trailer to transport the cargo, the revenue generated from hauling this cargo must be allocated between the motor vehicles and/or trailers used. For the purposes of determining use tax liability, a vehicle will not be considered as having interstate revenue even if the haul originates or ends outside Washington unless the vehicle actually crosses the boundaries of the state.
(iv) Other. Any other method may be used only when approved in advance and in writing by the department.
(g) Examples.
(i) Example 1. ARC Trucking picks up a load of cargo in Spokane, Washington and delivers it to the dock in Seattle, Washington, for subsequent shipment to Japan. While ARC may claim an interstate and foreign sales deduction on its excise tax return for the income attributable to this haul if all of the requirements of RCW 82.16.050(8) are met, the haul itself is considered to be intrastate for the purposes of determining whether the tractor and trailer (tractor-trailer) rig meets the substantial use threshold discussed in RCW 82.12.0254. Both the pickup and delivery points are within the state of Washington.
(ii) Example 2. DMG Express picks up a load of cargo in Yakima, Washington for ultimate delivery in Billings, Montana. The cargo is initially hauled from the Yakima location to DMG's hub terminal in Spokane, Washington by truck A. It is unloaded from truck A at the hub terminal, reloaded on truck B, and delivered to Billings. For the purposes of determining qualification for the use tax exemption provided by RCW 82.12.0254, two hauls have taken place. The haul performed by truck A is considered to be intrastate because truck A did not cross the borders of Washington, while the haul performed by truck B is considered interstate for purposes of determining continued exemption from use tax on the trucks, even though the entire hauling income may be deductible from the motor transportation tax.
(iii) Example 3. AA Express operates one tractor-trailer rig, which has previously met the retail sales and use tax exemption requirements. AA verifies compliance with the twenty-five percent substantial use threshold on a calendar year basis, using the line crossing method. AA makes one hundred for hire hauls within the calendar year. Of these hauls, seventy-one are entirely in Washington, ten are performed entirely outside Washington, and nineteen require AA to cross the borders of Washington. AA Express has not incurred a use tax liability on the tractor-trailer rig as twenty-nine percent of the for hire hauls were interstate in nature.
(iv) Example 4. BDC Hauling operates one tractor-trailer rig that has previously met the retail sales and use tax exemption requirements. BDC verifies compliance with the twenty-five percent substantial use threshold on a calendar year basis, using the mileage method. BDC makes one hundred for hire hauls within the calendar year, for a total of one hundred thousand miles. Included in this mileage figure are the unladen or "empty" miles BDC incurs from delivery points to its terminal. Fifteen of these hauls were interstate in nature and involved laden travel of twenty thousand miles, including the Washington miles of the interstate hauls where the rig made border crossings. BDC's tractor-trailer rig also incurred an additional eight thousand miles as a result of having to drive unladen from the delivery point of an interstate haul to its Washington terminal. BDC Hauling has not incurred a use tax liability for its use of the tractor-trailer rig as twenty-eight percent of the tractor-trailer's usage was in interstate hauling.
(v) Example 5. GV Trucking operates one tractor-trailer rig that has previously met the retail sales and use tax exemption requirements. GV verifies compliance with the twenty-five percent substantial use threshold on a calendar year basis, using the revenue method. GV makes one hundred for hire hauls within the calendar year, for which GV earns eighty thousand dollars. Fifteen of these hauls were interstate in nature, for which GV earned twenty thousand dollars. GV Trucking has not incurred a use tax liability for its use of the tractor-trailer rig as twenty-five percent of GV's usage of the tractor-trailer rig was in interstate hauling.
(vi) Example 6. XYZ Trucking operates a single tractor-trailer rig that has previously met the retail sales and use tax exemption requirements. XYZ picks up two loads of cargo in Seattle, one load for delivery to Kent, Washington, and another for delivery to Portland, Oregon. At delivery of the cargo to Kent, XYZ picks up another load for delivery to Portland, Oregon. XYZ has performed three separate hauls, even if the loads are combined on the same tractor-trailer rig. The Seattle to Portland and Kent to Portland hauls are considered interstate hauls, and the Seattle to Kent haul is intrastate. Under the mileage method, the mileage associated with the Seattle to Portland and Kent to Portland hauls would be added together to determine total interstate miles, even though the tractor-trailer rig made only one trip to Portland. Under the revenue method, the revenue generated by the Seattle to Portland and Kent to Portland hauls would be considered interstate. The revenue associated with the Seattle to Kent haul would be considered intrastate.
(4) Special application to trailers. Motor carriers must keep appropriate records and determine qualification for the use tax exemption provided by RCW 82.12.0254 for each individual truck and tractor. Motor carriers are encouraged to keep similar records for each individual trailer. Where records are maintained to document the use of individual trailers, it is encouraged that use tax liability for trailers be determined on the basis of those records. However, it is recognized that some motor carriers do not have an adequate system of tracking or documenting the travel of their trailers and it would be an undue burden to require such recordkeeping, particularly where a tractor may be used to pull multiple trailers and the trailers are not assigned to a specific tractor. Motor carriers may elect to determine the use tax liability attributable to their use of trailers on the basis of their actual use of the tractors. Whether the motor carrier uses their records or the ratio of fleetwide trailers to tractors that method must be applied to all trailers within the fleet. The motor carrier may change the method with prior written consent of the department.
(a) Under the trailer to tractor ratio method, it is assumed that there is a direct correlation between the use of tractors and the use of trailers. Whenever use tax is incurred on a tractor because of the failure to maintain the twenty-five percent interstate usage, use tax will also be due on one or more trailers. The number of trailers subject to the use tax under this method shall correspond to the fleetwide trailer to tractor ratio. Any trailer to tractor ratio resulting in a fraction shall be rounded up when determining the number of trailers subject to the use tax. For example, if the fleetwide ratio of trailers to tractors is two and one quarter to one, and one tractor fails to maintain the substantial use threshold in a given year, the motor carrier shall incur a use tax liability on three trailers. If two tractors fail to maintain the substantial use threshold in a given year, the motor carrier shall incur a use tax liability on five trailers.
(b) The trailer or trailers subject to use tax under this method shall be those acquired nearest to the purchase date of the tractor triggering the use tax liability for those trailers meeting the following conditions:
(i) The trailer or trailers are compatible for towing with the tractor upon which use tax is incurred; and
(ii) The trailer or trailers have not previously incurred a retail sales or use tax liability; and
(iii) The trailer or trailers have been actively used in hauling for hire in the year tax liability is incurred.
(c) Under this method of reporting, use tax liability is generally incurred on one or more trailers whenever a tractor is subject to the use tax. If a tractor is purchased with the intent that less than twenty-five percent of the hauls will be across state borders, it will be presumed the tractor will also be pulling a trailer or trailers on which use tax is also due. For example, ABC Trucking has eight tractors and fifteen trailers in its fleet. The tractors and trailers met the exemption from retail sales tax and use tax at the time they were purchased, and it was determined during previous annual reviews that the tractors continued to be substantially used on interstate hauls. However, at the time of the annual review for the just-completed calendar year it was determined that one tractor was not used at least twenty-five percent in interstate hauls. Use tax is due on this tractor. Under this method, use tax is also due on two trailers. The two trailers on which use tax must be reported are the two purchased closest to the purchase date of the tractor.
(5) Valuation. The value of the motor vehicle or trailer subject to the use tax is its fair market value at the time of first use within the view period for which the exemption cannot be maintained. However, because the taxpayer will not know until the close of the period whether the usage met the exemption requirements, the use tax is due and should be reported on the last excise tax return for that view period. For example, a motor carrier who has previously met the exemption requirements for a particular truck determines this truck no longer was substantially used in interstate hauls during calendar year 2013. Use tax should be reported on the last tax return filed for 2013 with the taxable value based on the value of the truck at January 1, 2013. If the motor carrier is using a fiscal year as the view period (see subsection (3)(e) of this rule), the use tax should be reported, based on the value of the truck on the first day of the view period, on the last tax return filed for the view period. The motor carrier must not change from calendar to fiscal year view periods without prior written consent of the department.
(a) Determining valuation. The department will accept independent publications containing values of comparable vehicles if those values are generally accepted in the industry as accurately reflecting the value of used vehicles. The department will also consider notarized valuation opinions signed by qualified appraisers and/or dealers as evidence of the fair market value. In the absence of a readily available fair market value, the department will accept a value based on depreciation schedules in effect and used by the department of licensing to determine the value of vehicles for licensing purposes.
(b) Examples.
(i) Example 7. ABC Trucking purchased five trailers for use in both interstate and intrastate for hire hauls on January 1, 2012. All the necessary conditions for exemption under RCW 82.08.0263 were met; delivery was made in Washington, and the trailers were purchased without payment of the retail sales tax. The taxpayer uses the "line crossing" method for determining interstate use.
ABC Trucking keeps a journal showing the origin and destination for each haul that identifies each truck or tractor and trailer used on a per unit basis. This journal is reviewed at the end of each calendar year to verify compliance with the statutory provision that motor vehicles and trailers be substantially used for transporting persons or property for hire across the boundaries of the state. During the first year of use, all five of the trailers met the "substantial use" threshold. However, for the 2013 calendar year, ABC Trucking determines that two of the trailers failed to meet the twenty-five percent "substantial use" threshold. ABC Trucking must remit use tax directly to the department on its last excise tax return filed for 2013, based on the fair market values of the two trailers as of January 1, 2013. Because the taxpayer maintained specific usage records for each trailer, the "substantial use" in interstate hauling must be met by each trailer for which exemption is claimed. If detailed records for usage of trailers had not been kept, use tax liability of the trailers would have been based on the tractors. In any event, use tax liability may not be determined based on the overall experience of a fleet of vehicles. If a vehicle is used both in hauling for hire and in hauling the carrier's own products, the "substantial use" is determined solely on the usage in for hire hauling.
(ii) Example 8. DB Carriers is a motor carrier that is engaged in both intrastate and interstate for hire hauls. DB purchases and first uses a truck in Washington on January 1, 2012. All the necessary conditions for exemption under RCW 82.08.0263 were met; delivery was made in Washington, and the truck was purchased without payment of the retail sales tax. DB Carriers uses the "line crossing" method to determine interstate use.
DB Carriers keeps a journal showing the origin and destination for each haul that identifies each truck used on a per unit basis. This journal is reviewed at the end of the 2012 calendar year, and DB determines that the truck failed to meet the twenty-five percent "substantial use" threshold. DB Carriers must remit use tax directly to the department on its last excise tax return filed for 2012, based on the fair market value of the truck as of January 1, 2012. DB Carriers may not compute the use tax liability based on the December 31, 2012, fair market value as the vehicle never satisfied the substantial interstate use provision of RCW 82.12.0254.
(6) Leased vehicles. The use tax exemption requirements are the same for leased vehicles as for purchased vehicles. Motor vehicles and trailers, leased with or without operator are exempt from the use tax if the user is, or operates under contract with, a holder of a permit issued by the ICC or its successor agency and the vehicle is used in substantial part in the normal and ordinary course of the user's business for transporting persons or property for hire across the boundaries of the state. This requires that the leased vehicle be used a minimum of twenty-five percent in interstate hauls. The taxpayer may elect to use either the fiscal year of the business or a calendar year to determine if the leased vehicle was used substantially in interstate hauls for hire. Where the vehicle lease does not begin or end at the start of the calendar year (or fiscal year if the business uses a fiscal year view period), the same requirements apply to leased vehicles as to purchased vehicles (see subsection (3)(c) of this rule).
(a) Substantial use requirement not met. If the leased vehicle or trailer does not meet the substantial use requirement during the "view period," the use tax applies to each lease payment within the "view period" where there was use in Washington. Use tax will be determined first for each "view period," then for each periodic lease period within the "view period." For example, if a truck was leased on a monthly basis for the years 2013 and 2014 and failed to meet the substantial use requirement in 2013, but met the requirement in 2014, use tax would only be due for the monthly payments for January and September of 2013 if those are the only two months during which usage in Washington occurred in 2013.
(b) Examples.
(i) Example 9. BG Hauling, a for hire carrier, enters into a lease agreement for a truck without operator on January 1, 2013. All the necessary conditions for the retail sales and use tax exemptions for the first year of the lease were met. BG Hauling verifies compliance with the twenty-five percent substantial use threshold on a calendar year basis.
BG determines that this truck failed to meet the twenty-five percent substantial use threshold for calendar year 2014. Use tax will be due beginning with the period for which the exemption was not met, in this case beginning with January 2014. However, BG Hauling may report use tax only on each lease payment in which payment period there was actual instate use, provided it maintains accurate records substantiating the truck's instate and out-of-state activity. If BG Hauling continues to lease this truck in 2015, usage will again be reviewed for that period and use tax may or may not be due for the 2015 lease payments, depending on whether the vehicle was used substantially in interstate hauls during that year.
(ii) Example 10. MG Inc. is an equipment distributor which, in addition to hauling its own product to customers, is engaged in hauling for hire activities. MG is a holder of an ICC permit. MG enters into a lease agreement for a truck without operator on January 1, 2013. All conditions for retail sales and use tax exemption are satisfied for the first year of the lease.
Based upon the truck's for hire hauling activities during the 2014 calendar year, MG determines that the use of the truck failed to satisfy the twenty-five percent substantial use threshold. MG must remit use tax on the amount of lease payments made during 2014 at the time it files its last tax return for 2014. Provided accurate records are maintained to substantiate instate and out-of-state use, MG may remit use tax on each lease payment in which the payment period there was actual instate use. While only the hauling for hire activities are reviewed when determining whether the truck satisfies the substantial interstate use threshold, once it is established the exemption cannot be maintained, the use tax liability is based upon all instate activity, including the motor carrier's hauling of its own product.
(7) Component parts. RCW 82.12.0254 also provides a use tax exemption for the use of tangible personal property that becomes a component part (including purchases of services related to that component part) of any motor vehicle or trailer used for transporting persons or property for hire. This exemption is available only for motor vehicles or trailers owned by, or operated under contract with, a person holding a carrier permit issued by the ICC or its successor agency authorizing transportation by motor vehicle across the boundaries of this state. Since carriers are required to obtain these permits only when the carrier is hauling for hire, the exemption applies only to tangible personal property purchased for vehicles that are used in hauling for hire. The exemption for component parts will apply even if the parts are for use on a motor vehicle or trailer that is used less than twenty-five percent in interstate hauls for hire, provided the vehicle is used in hauling for hire.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-15-028, § 458-20-17401, filed 7/7/15, effective 8/7/15. Statutory Authority: RCW 82.32.300. WSR 97-11-022, § 458-20-17401, filed 5/13/97, effective 6/13/97; WSR 94-18-004, § 458-20-17401, filed 8/24/94, effective 9/24/94.]


PDF458-20-175

Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce.

The term "private carrier" means every carrier, other than a common carrier, engaged in the business of transporting persons or property for hire.
The term "watercraft" includes every type of floating equipment which is designed for the purpose of carrying therein or therewith persons or cargo. It includes tow boats, but it does not include floating dry docks, dredges or pile drivers, or any other similar equipment.
The term "carrier property" means airplanes, locomotives, railroad cars or watercraft, and component parts of the same.
The term "component part" includes all tangible personal property which is attached to and a part of carrier property. It also includes spare parts which are designed for ultimate attachment to carrier property. The said term does not include furnishings of any kind which are not attached to the carrier property nor does it include consumable supplies. For example, it does not include, among other things, bedding, linen, table and kitchen ware, tables, chairs, ice for icing perishables or refrigerator cars or cooling systems, fuel or lubricants.
"Such persons," and "such businesses" mean the persons and businesses described in the title of this rule.
Business and Occupation Tax, Public Utility Tax
Persons engaged in such businesses are not subject to business tax or utility tax with respect to operating income received for transporting persons or property in interstate or foreign commerce. (See WAC 458-20-193.)
When such persons also engage in intrastate business activities they become taxable at the rates and in the manner stated in WAC 458-20-179, 458-20-181 and 458-20-193. For example, such persons are taxable under the retailing business tax classification upon the gross proceeds of sales of tangible personal property, including sales of meals, when such sales are made within this state.
Persons selling tangible personal property to, or performing services for, others engaged in such businesses, are taxable to the same extent as they are taxable with respect to sales of property or services made to other persons in this state. However, on July 1, 1985, a statutory business and occupation tax deduction became effective for sales of fuel for consumption outside the territorial waters of the United States by vessels used primarily in foreign commerce. In order to qualify for this deduction sellers must take a certificate signed by the buyer or the buyer's agent stating: The name of the vessel for which the fuel is purchased; that the vessel is primarily used in foreign commerce; and, the amount of fuel purchased which will be consumed outside of the territorial waters of the United States. Sellers must exercise good faith in accepting such certificates and are required to add their own signed statement to the certificate to the effect that to the best of their knowledge the information contained in the certificate is correct. The following is an acceptable certificate form:
Foreign Fuel Exemption Certificate
seller: . . . .
 
vessel: . . . .
we hereby certify that this purchase of (kind and amount of product) from (seller) will be consumed as fuel outside the territorial waters of the United States by the above-named vessel. We further certify that said vessel is used primarily in foreign commerce and that none of the fuel purchased will be consumed within the territorial boundaries of the State of Washington.
dated . . . . . . . , 19 . .
. . . .
Purchaser
 
. . . .
Purchaser's Agent
 
By: . . . .
 
. . . .
Title or Office
When a completed certification such as this is taken in good faith by the seller, the sale is exempt of business and occupation tax, whether made at wholesale or retail, and even though the fuel is delivered to the buyer in this state.
Retail Sales Tax
Sales of meals (including those sold to employees, see WAC 458-20-119) and retail sales of other tangible personal property, made by such persons, are subject to the retail sales tax when such sales are made within this state.
By reason of specific exemptions contained in RCW 82.08.0261 and 82.08.0262 the retail sales tax does not apply upon the following sales:
(1) Sales of airplanes, locomotives, railroad cars, or watercraft for use in conducting interstate or foreign commerce by transporting therein or therewith property and persons for hire;
(2) Sales of tangible personal property which becomes a component part of such carrier property in the course of constructing, repairing, cleaning, altering or improving the same;
(3) Sales of or charges made for labor or services rendered with respect to the constructing, repairing, cleaning, altering or improving of such carrier property;
(4) Sales of any tangible personal property other than the type referred to in 1 and 2 above, for use by the purchaser in connection with such businesses, provided that any actual use thereof in this state shall, at the time of actual use, be subject to the use tax.
Except as to sales of or charges made for labor or services rendered with respect to the constructing, repairing, cleaning, altering or improving of carrier property, the foregoing exemptions are limited to sales of tangible personal property. Hence the retail sales tax applies upon the sales of or charges made for labor or services rendered in respect to (1) the installing, repairing, cleaning, altering, imprinting or improving of any other type of tangible personal property; and in respect to (2) the constructing, repairing, decorating or improving of new or existing buildings or other structures. Thus the retail sales tax applies upon the charge made for repairing within this state of such things as switches, frogs, office equipment, or any other property which is not carrier property. It also applies upon the charge made for laundering linen and bedding. The tax also applies upon the charge made for constructing buildings, such as depots, wharves and hangars, or for repairing, decorating or improving the same.
However, the cost of installing, repairing, cleaning, altering, imprinting or improving of tangible personal property prior to its initial use by the carrier is considered as part of the initial cost of the property involved and therefore exempt from the sales tax. Thus, for example, the treating of railroad ties prior to their initial use is considered as part of the original cost of the ties and therefore exempt from the sales tax under RCW 82.08.0261.
Exemption certificates required. Persons selling tangible personal property or performing services which come within any of the foregoing exemptions are required to obtain from the purchaser, or his authorized agent, a certificate evidencing the exempt nature of the transaction. This certificate must identify the operator of the carrier by name and by its department of revenue registration number, if registered, and if not registered, by address.
The certificate may be in blanket form—that is, may certify as to all future purchases, or individual certificates may be made for each purchase. Also the certificate may be incorporated in or stamped upon the purchase order.
The certificate should be in substantially the following form:
Exemption Certificate
we hereby certify that all the tangible personal property to be purchased from you will be for use in connection with our business of operating as a (private or common) carrier by (air, rail or water) in (interstate or foreign) commerce; that all (airplanes, locomotives, railroad cars or watercraft) or component parts thereof, to be constructed, repaired, cleaned, altered or improved by you, will be used in conducting (interstate or foreign) commerce; and that all such sales are entitled to exemption from the Retail Sales Tax under the provisions of RCW 82.08.0261 and 82.08.0262.
Dated . . . . . . . . , 19 . . .
 
 
. . . .
(Purchaser)
By
. . . .
(Title-Officer or Agent)
Address
. . . .
. . . .
Department of Revenue Registration No.
. . . .
 
Use Tax
The use tax does not apply upon the use of airplanes, locomotives, railroad cars or watercraft, including component parts thereof, which are used primarily in conducting such businesses.
"Actual use within this state," as used in RCW 82.08.0261 does not include use of durable goods aboard carrier property while engaged in interstate or foreign commerce. Thus the use tax does not apply upon the use of furnishings and equipment (whether attached to the carrier or not) intended for use aboard carrier property while operating partly within and partly without this state. Included herein are such items as bedding, table linen and wares, kitchen equipment, tables and chairs, hand tools, hawsers, life preservers, parachutes, and other durable goods which are necessary, convenient or desirable for the proper operation of such carrier property.
The use tax does apply upon the actual use within this state of all other types of tangible personal property purchased at retail and upon which the sales tax has not been paid. Included herein are all consumable goods for use on and placed aboard carrier property while within this state, but only to the extent of that portion consumed herein. Thus the tax applies upon the use of the amount consumed in this state of ice, fuel and lubricants which are placed aboard in this state, and upon food supplies or catered meals placed aboard carrier property in this state and served to customers in this state by transportation companies when the meals so served are included in the charge for transportation. (The retail sales tax must be collected upon separate sales within this state of meals or other tangible personal property.) The tax does not apply upon the use within this state of any part of consumable goods for use on carrier property and placed aboard outside this state.
Liability for the use tax arises at the time of actual use thereof in this state.
Due to the difficulty in many cases of determining at the time of purchase whether or not the property purchased or a part thereof will be put to use in this state and due to the resulting accounting problems involved, persons engaged in the business of operating as private or common carriers by air, rail or water in interstate or foreign commerce will be permitted to pay the use tax directly to the department of revenue rather than to the seller, and such sellers are relieved of the liability for the collection of such tax. This permission is limited, however, to persons duly registered with the department. The registration number given on the certificate which will be furnished to the seller ordinarily will be sufficient evidence that the purchaser is properly registered.
As to persons operating in interstate or foreign commerce as carriers by air, rail or water who are not registered with the department and who, therefore, are not regularly filing tax returns with the department, sellers of durable goods must either collect the use tax at the time of the sale or require from such purchasers a further certificate to the effect that no part of the subject matter of the sale is for actual use in this state.
Similarly, where consumable goods, such as ice, bunker fuel, or lubricants are purchased by or for carriers not registered with the department, and delivered on board a carrier regularly engaged in interstate or foreign commerce for consumption while both within and without the territorial boundaries of the state of Washington, the seller is required to collect from the buyer the amount of use tax applicable to that portion of the products sold which will be consumed within this state.
It will be presumed that the entire amount of the goods purchased will be consumed within this state unless the seller obtains from the buyer a certificate certifying as to the amount thereof which will be consumed while within the territorial boundaries hereof.
The certificate shall be made by the master or chief engineer of the carrier, or by some other person known by the seller to be competent to make the same, and shall be substantially in the following form:
Certificate
. . . .
Seller
. . . .
Purchaser
. . . .
Name of Carrier
. . . .
Name of Owner or Agent
The undersigned does hereby certify as follows:
(1) The purchaser has this day purchased from the seller in the State of Washington certain amounts of    (type of goods purchased)    and has taken delivery thereof aboard said carrier for its exclusive use while regularly engaged in transporting persons or property for profit in interstate or foreign commerce.
(2) While the said carrier is within the territorial boundaries of the state of Washington, it will consume the following amounts of the commodities purchased:
 
. . . . . . . . . . . barrels of fuel oil
 
. . . . . . . . . . . gallons of lubricants
 
. . . . . . . . . . . pounds of grease
 
. . . . . . . . . . . other consumable goods
Dated . . . . . . . , 19 . . .
 
 
. . . .
Name
 
. . . .
Office or Title
[Statutory Authority: RCW 82.32.300. WSR 86-07-005 (Order ET 86-3), § 458-20-175, filed 3/6/86; WSR 83-07-033 (Order ET 83-16), § 458-20-175, filed 3/15/83; Order ET 70-3, § 458-20-175 (Rule 175), filed 5/29/70, effective 7/1/70.]


PDF458-20-176

Commercial deep sea fishing—Commercial passenger fishing—Diesel fuel.

(1) Introduction. This rule explains the business and occupation (B&O) tax, sales tax and use tax responsibilities of those engaged in commercial deep sea fishing, and suppliers selling to those persons.
Other rules that may apply. Readers may want to refer to other rules for additional information, including those in the following list:
(a) WAC 458-20-119 Sales by caterers and food service contractors;
(b) WAC 458-20-135 Extracting natural products;
(c) WAC 458-20-178 Use tax and the use of tangible personal property;
(d) WAC 458-20-193 Interstate sales of tangible personal property;
(e) WAC 458-20-244 Food and food ingredients.
(2) Definitions. The following definitions apply to this rule.
(a) Commercial deep sea fishing. "Commercial deep sea fishing" means fishing done for profit outside the territorial waters of the state of Washington. It does not include sport fishing or the operation of charter boats for sport fishing. Nor does the phrase include the operation or purchase of watercraft for kelping, purse seining, or gill netting, because such fishing methods can be legally performed in Washington only within the territorial waters of the state (the three-mile limit). Therefore, watercraft rigged for fishing by any of these methods will be deemed for use in other than commercial deep sea fishing unless proof, including documentation to be retained by sellers, is furnished that said watercraft will be used for these purposes exclusively outside the Washington territorial limit.
(b) Commercial passenger fishing. "Commercial passenger fishing" means that done from charter boats for sport outside the territorial waters of the state of Washington.
(c) Component part. "Component part" includes all tangible personal property that is attached to and a part of a watercraft. It includes dories, gurdies and accessories, bait tanks, baiting tables and turntables. It also includes spare parts that are designed for ultimate attachment to a watercraft. The term "component part" does not include equipment or furnishings of any kind that are not attached to a watercraft, nor does it include consumable supplies. Thus, it does not include, among other things, bedding, table and kitchen wares, fishing nets, hooks, lines, floats, hand tools, ice, fuel or lubricants.
(d) Watercraft. "Watercraft" means every type of floating equipment that is designed for carrying fishing gear, fish catch or fishing crews, and used primarily in commercial deep sea fishing operations.
(3) Business and occupation tax.
(a) Persons engaged in commercial deep sea fishing are not taxable under the extracting classification with respect to catches obtained outside the territorial waters of this state.
(b) Such persons are taxable under either the retailing or the wholesaling classification with respect to sales made within this state, unless entitled to exemption by reason of the commerce clauses of the federal constitution.
(c) Such persons may qualify for a B&O tax exemption under RCW 82.04.4269. This exemption pertains to the value of products or the gross proceeds of sales derived from:
(i) Manufacturing seafood products that remain in a raw, raw frozen, or raw salted state at the completion of the manufacturing by that person; or
(ii) In the ordinary course of business, manufactured seafood products that remain in a raw, raw frozen or raw salted state to buyers that transport the goods out of the state of Washington. A person taking an exemption must keep and preserve records for the period required by RCW 82.32.070 establishing that the goods were transported by the buyer in the ordinary course of business out of the state of Washington.
(d) Persons claiming the exemption in (c) of this subsection must file a completed annual tax performance report with the department under RCW 82.32.534. In addition, persons claiming this tax preference must report the amount of the exemption on their monthly or quarterly excise tax return. For more information on reporting requirements for this tax preference see RCW 82.32.808.
(e) The exemption provided by RCW 82.04.4269 is scheduled to expire on July 1, 2035.
(4) Retail sales tax.
(a) Under RCW 82.08.0262, the retail sales tax does not apply to sales of watercraft (including component parts thereof) which are primarily for use in conducting commercial deep sea fishing operations, nor does retail sales tax apply to sales of or charges made for labor and services rendered in respect to the constructing, repairing, cleaning, altering or improving of such property.
(b) The retail sales tax applies to sales made to persons engaged in commercial deep sea fishing of every type of tangible personal property (except only sales of watercraft and component parts thereof) and to sales of or charges made for labor and services rendered in respect to the construction, repairing, cleaning, altering or improving of such types of property. Thus, the retail sales tax applies to sales to such persons of such things as fishing nets, hooks, lines, floats and bait; table and kitchen wares; hand tools, ice, fuel except diesel fuel as noted in subsection (7) of this rule, and lubricants for use or consumption. For sales of food and food ingredients see WAC 458-20-119 and 458-20-244.
(5) Exemption certificates required.
(a) Persons selling watercraft or component parts thereof to persons engaged in commercial deep sea fishing or performing services with respect to such craft or parts, are required to obtain from the buyer a certificate evidencing the exempt nature of the transaction.
(b) Buyers claiming the exemption may use the department's Buyers' Retail Sales Tax Exemption Certificate. The certificate can be found on the department's website at dor.wa.gov. Sellers must retain certificates in its records as evidence of the exempt nature of the sales to eligible buyers.
(c) Fishing boats used primarily in commercial deep sea fishing operations that are incidentally used within the waters of this state are still eligible for the exemption from retail sales tax.
(d) Sales of fishing boats, that are the types used in the waters of Puget Sound or the Columbia River and the tributaries thereof, and are not practical for use in deep sea fishing, are subject to the retail sales tax including sales of component parts thereof and on charges made for the repair of the same.
(e) It is a gross misdemeanor for a buyer to make a false certificate of exemption for the purpose of avoiding the tax.
(6) Use tax.
(a) The use tax does not apply to the use of watercraft or component parts thereof. RCW 82.12.0254.
(b) The use tax applies to the actual use within this state of all other types of tangible personal property purchased at retail where the sales tax has not been paid and no exemption exists.
(7) Diesel fuel.
(a) RCW 82.08.0298 and 82.12.0298 provide sales and use tax exemptions on diesel fuel for both commercial passenger fishing (charter boats for sport fishing) and commercial deep sea fishing operations.
(b) Neither retail sales nor use tax applies with respect to sales or use of diesel fuel in the operation of watercraft in commercial deep sea fishing operations or commercial passenger fishing operations by persons who are regularly engaged in the business of such operations outside the territorial waters (three-mile limit) of this state. For purposes of this exemption, a person is not regularly engaged in either business if the person has gross receipts from the extra territorial operations of less than five thousand dollars a year. For persons involved in both commercial deep sea fishing operations and commercial passenger fishing operations, the receipts from both will be added together to determine eligibility for this exemption.
(c) If a person qualifies for the exemptions by virtue of operating a deep sea fishing vessel, and has the requisite amount of gross receipts from that activity, all diesel fuel purchases and uses by such person for such vessel are tax exempt. It is not required that all the diesel fuel purchased be used outside the territorial waters of this state.
(d) Diesel fuel exemption certificates required. Persons selling diesel fuel to such persons are required to obtain from the buyer a certificate evidencing the exempt nature of the transaction. This certificate must identify the buyer by name and address, and by the registered name and number of the watercraft with respect to which the purchase is made. Blanket certificates covering all diesel fuel purchases for specified watercraft may be used, where appropriate. A seller of diesel fuel who accepts such a certificate is not liable for sales tax on the diesel fuel sold. Certificates must be retained by the sellers in their permanent records as evidence of the exempt nature of diesel sales to eligible buyers. It is a gross misdemeanor for a buyer to make a false certificate of exemption for the purpose of avoiding the tax. Buyers may use the Buyers' Retail Sales Tax Exemption Certificate found on the department's website at dor.wa.gov.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 24-04-005, § 458-20-176, filed 1/24/24, effective 2/24/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-176, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.04.4269. WSR 16-02-059, § 458-20-176, filed 1/4/16, effective 2/4/16. Statutory Authority: RCW 82.32.300. WSR 88-03-055 (Order 88-1), § 458-20-176, filed 1/19/88; WSR 83-07-033 (Order ET 83-16), § 458-20-176, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-176, filed 6/27/78; Order ET 70-3, § 458-20-176 (Rule 176), filed 5/29/70, effective 7/1/70.]


PDF458-20-177

Sales of motor vehicles, campers, and trailers to nonresident consumers.

(1) Introduction. This rule applies to any sale of a vehicle to a consumer who is not a resident of the state, including nonresident military personnel temporarily stationed in Washington. The rule describes the different business and occupation (B&O) and retail sales tax consequences that result from vehicle sales to nonresidents, particularly the sales tax exemption provided by RCW 82.08.0264. It also describes the documentation a seller must retain to demonstrate that a sale is exempt.
(a) For information on use tax liability associated with vehicles, see WAC 458-20-178 Use tax and the use of tangible personal property.
(b) For the collection of use tax by county auditors and the department of licensing, see WAC 458-20-17802 Collection of use tax by county auditors and department of licensing—Measure of tax.
(c) For sales of vehicles to Indians or Indian tribes and required documentation, see WAC 458-20-192 Indians—Indian country.
(d) Questions regarding vehicle licensing or registration requirements should be directed to the department of licensing.
(2) Definition of "vehicle." For the purposes of this rule, a "vehicle" is any vehicle of a type that may be lawfully licensed under chapter 46.16A RCW for operation on a public highway in this state, except that the term does not include any machinery and implements for use in conducting a farming activity subject to RCW 82.08.0268. The term "vehicle" includes, but is not limited to, a car, truck, camper, trailer, bus, motorhome, and motorcycles equipped for road use. It does not include farm tractors, bicycles, mopeds, motorized scooters, snowmobiles, or vehicles that are manufactured for exclusively off-road use.
(3) Tax consequences when a vehicle sold to a nonresident is delivered in-state. A sale of a vehicle to a nonresident where the vehicle is delivered in-state is exempt from retail sales tax if the sale meets the requirements of RCW 82.08.0264. In all other cases where the vehicle is delivered to the buyer in this state, the retail sales tax applies and must be collected at the time of sale, unless otherwise exempt by law. The mere fact that the buyer may be or claims to be a nonresident or that the buyer intends to, and actually does, use the vehicle in some other state does not, by itself, entitle the buyer to the exemption. In any case where the seller licenses or registers the vehicle in Washington on the buyer's behalf, the retail sales tax applies.
In computing the B&O tax liability of persons engaged in the business of selling vehicles, no deduction is allowed for a sale made to a nonresident for use outside this state if the nonresident buyer takes delivery in Washington. This is true even if the buyer is entitled to an exemption from the retail sales tax.
(a) Exemption requirements. If a vehicle is delivered within this state to a nonresident buyer, retail sales tax does not apply if the vehicle is purchased for use outside this state and, immediately upon delivery, the vehicle:
(i) Is removed from the state under the authority of a trip permit issued by the department of licensing pursuant to RCW 46.16A.320 or any agency of another state that has authority to issue similar permits; or
(ii) Is registered and licensed in the state of the buyer's residence, will not be used in this state more than three months, and will not be legally required to be registered and licensed in this state.
If the vehicle bears Washington state license plates, the seller must remove the Washington plates before delivering the vehicle and retain evidence of that removal to avoid liability for collection and payment of the retail sales tax.
(b) Seller obligations; documentation required from natural person buyers. The seller must retain the following documents, which must be made available upon request by the department of revenue (department):
(i) A copy of the buyer's currently valid out-of-state driver's license or other official picture identification issued by a jurisdiction other than Washington state;
(ii) A copy of any one of the following documents, on which there is an out-of-state address for the buyer:
(A) A current residential rental agreement;
(B) A property tax statement from the current or previous year;
(C) A utility bill, dated within the previous two months;
(D) A state income tax return from the previous year;
(E) A voter registration card;
(F) A current credit report; or
(G) Any other document determined by the department to be acceptable, with buyer's street address, such as:
(I) A bank statement issued within the previous two months;
(II) A government check issued within the previous two months;
(III) A pay check issued within the previous two months;
(IV) Mortgage documents of current personal residence;
(V) Current vehicle insurance card;
(VI) Letter or other documentation issued by the postmaster within the previous two months; or
(VII) Other government document issued within the previous two months;
(iii) A completed witnessed declaration in the form designated by the department, signed by the buyer, and stating that the buyer's purchase meets the requirements of this section (buyer's affidavit); and
(iv) A seller's certification, in the form designated by the department, that either a vehicle trip permit was issued or the vehicle was immediately registered and licensed in another state as required by RCW 82.08.0264.
To comply with these requirements, the seller must retain a properly completed buyer's affidavit and seller's certificate (in-state delivery). See the department's website dor.wa.gov for affidavit and certificate forms.
(c) Seller obligations; documentation required from corporate buyers. Sales tax does not apply to sales of vehicles to nonresident corporations for use outside of this state. The sale must meet the requirements stated in (b) of this subsection pertaining to qualified nonresident natural persons. Some documents listed in (b)(ii) of this subsection, such as residential rental agreement, voter registration card, or mortgage documents for a personal residence, do not pertain to corporate purchases. In addition to the applicable requirements in (b) of this subsection, the seller must establish that the corporation is the purchaser (i.e., paid for by corporate check and registered in the corporation's name). A distinction exists between the corporation and its employees or officers. The exemption still applies, for example, when an officer or employee, purchasing on behalf of the corporation, is a Washington resident when all other requirements are met.
A corporation with places of business in one or more other states outside Washington may qualify as a "nonresident" for purposes of RCW 82.08.0264. A Washington corporation purchasing a vehicle for out-of-state use by a nonresident salesperson or out-of-state office qualifies for this exemption if the vehicle leaves the state with a valid one-transit permit or with foreign state license plates attached at the time of delivery, and nonresident affidavits are completed. If the vehicle is subsequently used in Washington, use tax is due on the value of the vehicle at the time of its first use in Washington. See the department's website dor.wa.gov for affidavit and certificate forms.
(d) Consequences for noncompliance.
(i) Any seller that makes sales without collecting the tax from a person who does not provide the documents required under (b) of this subsection, and any seller who fails to retain the documents required under (b) of this subsection for the period prescribed by RCW 82.32.070 is personally liable for the amount of tax due.
(ii) Any seller that makes sales without collecting the retail sales tax pursuant to RCW 82.08.0264 and who has actual knowledge that the buyer's documentation required by (b) of this subsection is fraudulent is guilty of a misdemeanor and, in addition, is liable for the tax and subject to a penalty equal to the greater of one thousand dollars or the tax due on such sales. In addition, both the buyer and the seller are liable for any penalties and interest assessable under chapter 82.32 RCW.
(4) Tax consequences of a vehicle sold to a nonresident and delivered out-of-state. A sale of a vehicle to a nonresident where the seller delivers the vehicle out-of-state is exempt from retail sales tax. If the vehicle is delivered to the buyer outside the state, the seller may also deduct the sale amount from the gross proceeds of sales for B&O tax purposes. The deductible amount must be included in the gross income reported on the excise tax return and then deducted on the return to determine the amount of taxable income. The deduction must be identified on the deduction detail page of the return as an "interstate and foreign sales" deduction.
(a) Requirements. If a vehicle is delivered outside the state to a nonresident buyer, retail sales tax does not apply if:
(i) The seller, as required by the contract of sale, delivers possession of the vehicle to the buyer at a point outside Washington; and
(ii) The vehicle is not licensed or registered in this state. If the vehicle bears Washington state license plates, the seller must remove the Washington plates before delivery and retain evidence of that removal to avoid liability for collection and payment of the retail sales tax.
(b) Seller obligations; documentation. The seller must properly document the following facts:
(i) The buyer's out-of-state address;
(ii) The vehicle is not licensed or registered in this state or the Washington state license plates have been removed from the vehicle before delivery;
(iii) Under the terms of the sales agreement, the seller is required to deliver the vehicle to the buyer at a point outside this state; and
(iv) The out-of-state delivery was actually made by the seller or by a common carrier acting as the seller's agent.
To comply with these requirements, the seller must retain a properly completed buyer's certificate and seller's certificate (out-of-state delivery). The seller's certificate must be signed by the person who actually delivers the vehicle to the buyer at the out-of-state location and may be completed only after delivery occurs.
(5) Forms required to document an exempt sale. Where the vehicle is delivered determines which two properly completed documents: "Buyer's Affidavit" and "Seller's Certificate In-State Delivery," or "Buyer's Certificate Out-of-State Delivery" and "Seller's Certificate Out-of-State Delivery" are necessary to substantiate exempt sales to nonresidents. Do not send the documents to the department; keep them as part of the seller's permanent records for five years. Without this documentation, claims that a transaction was exempt from tax will be disallowed.
Copies of the forms can be obtained:
• From the department's website at dor.wa.gov or
• By writing to:
Taxpayer Services
Washington State Department of Revenue
P.O. Box 47478
Olympia, Washington 98504-7478
Documents in substantially the same form as the department's forms will be accepted in lieu of the department's documents.
(a) In-state delivery. A sale with in-state delivery requires a completed buyer's affidavit and seller's certificate-in-state delivery.
(b) Delivery out-of-state by seller. A sale with out-of-state delivery by a seller requires a completed buyer's certificate and seller's certificate-out-of-state.
(c) Delivery out-of-state by common carrier. When a vehicle is delivered outside the state by common carrier acting as the seller's agent, the seller must retain:
(i) Evidence that the vehicle's license plates (if licensed in Washington) were removed; and
(ii) A signed copy of the bill of lading issued by the carrier. The bill of lading must show the seller as the consignor and indicate that the carrier agrees to transport the vehicle to a point outside the state; or
(iii) A seller's certificate out-of-state delivery signed by the person who delivers the vehicle and provides the name of the hauling company.
(6) Seller's obligations to verify a buyer's statements on nonresidency.
(a) The seller must exercise a reasonable degree of care in accepting statements regarding a buyer's nonresidence. If delivery occurs in-state, the seller must examine and retain a copy of at least one form of documentary evidence showing the buyer's out-of-state residence. Lack of good faith on the part of the seller or lack of the exercise of the degree of care required is indicated, for example, in the following circumstances:
(i) If the seller knows that the buyer is living in Washington;
(ii) If the buyer gives a Washington address for the purpose of financing the purchase of the vehicle;
(iii) If, at the time of sale, arrangements are made for future servicing of the vehicle in the seller's shop and a Washington address or telephone number is shown for the shop customer; or
(iv) If the seller has ready access to any other information that discloses that the buyer is a resident of Washington.
(b) Questions about the authenticity of the information provided by the buyer. If the department has information indicating the buyer is a Washington resident, or if the addresses for the buyer shown on the documentation provided under subsection (3)(b) or (c) of this rule are not the same, the department may contact the buyer to verify the buyer's eligibility for the exemption provided by RCW 82.08.0264. If the department subsequently determines the buyer was not eligible for an exemption, the department will pursue collection of the retail sales tax from the buyer. The seller will not be liable for the retail sales tax except as provided in subsection (3)(d) of this rule.
(7) Military personnel qualifications for the nonresident exemptions. A member of the armed services who is temporarily stationed in Washington is presumed to be a nonresident, unless that person was a resident of this state when enlisted or inducted. This presumption does not apply to a civilian employee of the armed services. A sale to a nonresident member of the armed forces must meet all of the statutory requirements for a retail sales tax exemption or B&O tax deduction. If a vehicle sold to a member of the armed forces will remain in Washington for more than three months, retail sales tax is due on the sale, even if the vehicle is registered in the home state of the armed forces member.
(a) Military temporary license. In addition to the exemptions provided under RCW 82.08.0264, a member of the armed forces may alternatively qualify for the retail sales tax and use tax exemptions provided by RCW 46.16A.340 if the member obtains a forty-five day nonresident military temporary permit from the department of licensing and satisfies the requirements of RCW 46.16A.340.
(b) Additional documentation required. In addition to the documentation otherwise required by this rule, for a sale to a member of the armed forces a seller must retain a copy of military orders showing that the buyer:
(i) Is temporarily stationed in Washington and will leave within three months of the date of purchase; or
(ii) Is permanently reassigned to a new duty station outside Washington and will leave within three months of the date of purchase.
(c) Military personnel of NATO-member nations. Pursuant to treaty, a member of the armed forces of any NATO-member nation who is stationed in Washington is considered to be a nonresident for purposes of the RCW 82.08.0264 retail sales tax exemption. The buyer must meet all otherwise applicable requirements for exemption. In addition, the seller must retain proof of the buyer's military assignment in Washington as a member of a NATO-member nation's armed forces.
(8) Sales to residents of noncontiguous states are exempt from Washington retail sales tax. RCW 82.08.0269 exempts purchases of tangible personal property from the retail sales tax if the property is purchased for use in states, territories, and possessions of the United States that are not contiguous with any other state. However, the exemption only applies if, as a necessary incident to the contract of sale, the seller delivers the property to the purchaser or the purchaser's designated agent at the usual receiving terminal of the carrier selected to transport the goods, under such circumstances that it is reasonably certain that the goods will be transported directly to a destination in a noncontiguous state, territory, or possession.
RCW 82.08.0269 applies to the sale of motor vehicles when the requirements stated above are met. Therefore, in addition to being exempt from retail sales tax under RCW 82.08.0264 (discussed above), a sale of a motor vehicle to a resident of a noncontiguous state, territory, or possession may qualify for exemption under RCW 82.08.0269. If so, the sale is exempt from retail sales tax but does not qualify for a B&O tax deduction. For more information on the requirements of the RCW 82.08.0269 exemption, including the documentation requirements, see WAC 458-20-193, Inbound and outbound interstate sales of tangible personal property.
(9) Washington retail sales tax exemption for qualified nonresidents. RCW 82.08.0273 provides an exemption, in the form of a remittance from the department, of the state portion of the retail sales tax on purchases of tangible personal property, digital goods, and digital codes, if the purchaser is a resident of another state or possession or a province of Canada that does not impose a retail sales tax or use tax of three percent or more. That statute does not apply to purchases of vehicles. Because RCW 82.08.0264 more specifically applies to the sale of vehicles, it takes precedence over RCW 82.08.0273. A nonresident of this state may purchase and take delivery of a vehicle in Washington free of retail sales tax only if the person meets the requirements of RCW 82.08.0264. For sales to residents of noncontiguous states, territories, and possessions see RCW 82.08.0269.
(10) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances. In each example concluding that the sale qualifies for a retail sales tax and/or B&O tax exemption, the Dealer must retain the documents required in subsection (3)(b) or (c) of this rule.
(a) Buyer purchases a vehicle from Dealer. Buyer provides identification indicating that Buyer is a resident of California and provides California license plates for the vehicle. However, Buyer also states that he intends to use the vehicle in the state of Washington for four months before returning to California. Buyer does not qualify for a sales tax exemption because Buyer will use the vehicle for more than three months in the state.
(b) Buyer provides proof of residency in Idaho; there are no contrary facts regarding Buyer's residency. Buyer completes the buyer's affidavit, stating that the vehicle is for use out-of-state. Buyer obtains and uses a trip permit issued under authority of RCW 46.16A.320 to remove the vehicle from Washington. The Dealer completes a seller's certificate and certifies that the Dealer removed the Washington license plates before delivering the vehicle to Buyer. This sale qualifies for the retail sales tax exemption but not the B&O tax deduction.
(c) Buyer is a Washington resident, employed by out-of-state Corporation X. On behalf of Corporation X, Buyer purchases and accepts in-state delivery of a vehicle from Dealer. The vehicle will be used as a company car out-of-state and will not be used or garaged in Washington. Payment is made by corporate check. Buyer provides a trip permit for transport of the vehicle out of Washington. This sale qualifies for the retail sales tax exemption (but not for the B&O tax deduction) notwithstanding the Washington residency of its employee.
(d) Buyer is a resident of Alaska and purchases a vehicle from Dealer in Washington. The sales contract requires Dealer to deliver the vehicle to Buyer in Anchorage, Alaska. Before shipping the vehicle, Dealer removes the vehicle's Washington state license plates and retains a photocopy of the plates as evidence of the removal. Seller ships the vehicle to Alaska by common carrier. Seller retains a signed copy of the bill of lading, indicating the Seller as consignor and the Buyer as consignee. This sale qualifies for the retail sales tax exemption and a B&O tax deduction.
(e) Buyer is a resident of Alaska and purchases a vehicle from Dealer in Washington. Dealer delivers the vehicle to the Buyer at dockside in Seattle to be shipped to Anchorage, Alaska by common carrier. Before shipping the vehicle, Dealer removes the vehicle's Washington state license plates and retains a photocopy of the plates as evidence of the removal. Dealer retains the exemption certificate and documentation required by WAC 458-20-193. This sale qualifies for the retail sales tax exemption provided by RCW 82.08.0269 but not for a B&O tax deduction.
(f) Buyer is a member of the armed forces and provides a copy of her orders showing that she is temporarily stationed in Washington. Before entering military service, buyer resided in another state. Buyer purchases a vehicle from Dealer and licenses it in her home state, but intends to keep the vehicle in this state for over three months. This sale does not qualify for any exemption or deduction. If the vehicle were to be removed from the state within three months, the sale would qualify for the RCW 82.08.0264 retail sales tax exemption but not for a B&O tax deduction.
(g) Buyer owns homes in Washington and Arizona, spending summers in Washington and winters in Arizona. In October, Buyer purchases a vehicle from Dealer, asserting that he will immediately drive the vehicle to Arizona and license it in that state. Buyer presents an Arizona driver's license for identification and provides a trip permit to remove the vehicle from Washington. Dealer is aware that Buyer lives in Washington for a significant portion of each year. In such a case, the sale would not qualify for the retail sales tax exemption. Under these facts, Buyer is not a nonresident of Washington for tax purposes because the buyer has dual residency in Washington and Arizona.
(h) Buyer purchases a motorcycle from Dealer in Vancouver, Washington. The motorcycle is equipped for use on public highways. Buyer provides an Oregon driver's license and asserts that the motorcycle will be licensed in Oregon. Buyer also states that the motorcycle will only be used outside of Washington. Buyer places the motorcycle in the back of a truck for transport to Oregon. This sale does not qualify for any exemption or deduction. To qualify for the sales tax exemption, RCW 82.08.0264 requires the Buyer to obtain a trip permit or provide license plates from another state before removing the vehicle from Washington.
(11) Buyer obligations when claiming exemption. It is the buyer's responsibility to provide the seller with valid identification that entitles the buyer to purchase a motor vehicle, trailer, or camper exempt from retail sales tax as provided by RCW 82.08.0264.
(a) A buyer making fraudulent statements, which includes the offer of fraudulent identification or fraudulently procured identification to a seller, to purchase without paying retail sales tax a motor vehicle, trailer, or camper is guilty of perjury under chapter 9A.72 RCW.
(b) Any buyer making tax exempt purchases under RCW 82.08.0264 by displaying proof of identification not the buyer's own, or counterfeit identification, with intent to violate the provisions of RCW 82.08.0264 is guilty of a misdemeanor and, in addition, is liable for the tax and subject to a penalty equal to the greater of one hundred dollars or the tax due on such purchases.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0264, 82.08.0269, and 82.08.0273. WSR 19-24-084, § 458-20-177, filed 12/3/19, effective 1/3/20. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-01-106, § 458-20-177, filed 12/18/14, effective 1/18/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.08.0264. WSR 08-16-041, § 458-20-177, filed 7/29/08, effective 8/29/08. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-14-086, § 458-20-177, filed 6/30/05, effective 7/31/05. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-177, filed 3/30/83; Order ET 70-3, § 458-20-177 (Rule 177), filed 5/29/70, effective 7/1/70.]


PDF458-20-178

Use tax and the use of tangible personal property.

(1) Introduction. This rule provides general use tax-reporting information for consumers. It discusses who is responsible for remitting use tax, and when and how to remit the tax. The rule also explains the imposition of use tax as it applies to the use of tangible personal property within this state when the acquisition of the tangible personal property was not subject to retail sales or deferred sales tax.
(a) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(b) Additional information available. For information on use tax exemptions please refer to chapter 82.12 RCW. When appropriate, this rule refers the reader to applicable statutes and rules. In addition, the reader may wish to refer to the following:
(i) WAC 458-20-112, Value of products, provides information on the measure of tax for certain sales.
(ii) WAC 458-20-145, Local sales and use tax, provides information on sourcing local sales and use taxes.
(iii) WAC 458-20-15503, Digital products, provides information on sales and use tax liability on digital products such as: Digital goods, including digital audio works, digital audio-visual works, and digital books; digital automated services; digital codes used to obtain digital goods or digital automated services; and remote-access software.
(iv) WAC 458-20-169, Nonprofit organizations, provides information on a use tax exemption for donated items to a nonprofit charitable organization.
(v) WAC 458-20-17803, Use tax on promotional material, provides information about the use tax reporting responsibilities of persons who distribute or cause the distribution of promotional material, except newspapers, the primary purpose of which is to promote the sale of products or services in Washington.
(vi) WAC 458-20-190, Sales to and by the United States—Doing business on federal reservations—Sales to foreign governments, provides tax reporting information for businesses doing business with the United States.
(vii) WAC 458-20-192, Indians—Indian country, provides information on use tax pertaining to Indians and Indian tribes and use tax pertaining to non-Indians in Indian country.
(viii) WAC 458-20-257, Warranties and service contracts, provides information on tax responsibilities of persons selling or performing services covered by warranties, service contracts, and mixed agreements for tangible personal property.
(2) What is use tax? Use tax complements the retail sales tax, and in most cases mirrors the retail sales tax. Articles of tangible personal property used or certain services purchased in Washington are subject to use tax when the state's retail sales tax has not been paid, or where an exemption is not available. Tangible personal property or services used or purchased by the user in any manner are taxable including, but not limited to:
• Purchases directly from out-of-state sellers;
• Purchases through the internet, telemarketing, mail order; or
• Acquisitions at casual or isolated sales.
(a) Example 1. ABC Company (ABC) orders office supplies from out-of-state vendors and also through catalogs. In addition, ABC pays annual subscriptions for magazines for their own use. None of these vendors is required to collect Washington's retail sales tax. Use tax is due on all taxable items ordered including the annual subscriptions.
(b) Example 2. Mary is a music instructor that teaches adults how to play the piano. Mary does not charge her students retail sales tax on the costs of the weekly piano lessons. Use tax is not due on the lessons, as the lessons are not a retail sales taxable service. See WAC 458-20-224, Service and other business activities.
(3) "Use" defined. For purposes of this rule, "use," "used," "using," or "put to use" have their ordinary meaning and include the first act by which a person takes or assumes dominion or control over the article (as a consumer). It includes installation, storage, withdrawal from storage, or any other act preparatory to subsequent actual use or consumption within the state. (See RCW 82.12.010.) Multiple uses of the same article by the same person do not generally result in multiple use tax liabilities.
(4) Measure of tax – Value of article used. Use tax generally is levied and collected on an amount equal to the value of the article used by the taxpayer. RCW 82.12.010 defines this value to generally be the purchase price of the article. There are a number of specific situations where this value may be different than the amount of consideration paid or given by the buyer to the seller. See subsection (7) of this rule for exceptions.
(a) When the value is the purchase price. The term "purchase price" has the same meaning as "selling price." The selling price is the total amount of consideration, except trade-in property of like kind, including cash, credit, property, and services, for which tangible personal property is sold, leased, or rented, valued in money, whether received in money or otherwise. The selling price, and therefore the "value of the article used" also includes delivery charges. Delivery charges are charges made by the seller for preparing and delivering tangible personal property to a location designated by the buyer and include, but is not limited to, charges for transportation, shipping, postage, handling, crating, and packing. (See RCW 82.08.010 and 82.12.010.)
(b) When the purchase price does not represent true value. When an article is sold under conditions in which the purchase price does not represent the true value, the "value of the article used" is to be determined as nearly as possible according to the retail selling price at place of use of similar products of like quality and character. (See RCW 82.12.010.) This is frequently referred to as the fair market value of the property. For additional information regarding the measure of tax for articles in these situations, refer to WAC 458-20-112, Value of products. Refer to subsection (4)(i)(i) of this rule for determining use tax when there is no similar article of like quality and character.
A comparison and examination of arm's length sales transactions is required when determining the value of the article used on the basis of the retail selling price of similar products. An arm's length sale generally involves a transaction negotiated by unrelated parties, each acting in his or her own self-interest.
(i) In an arm's length sales transaction, the value placed on the property by the parties to the transaction may be persuasive evidence of the true value of the property. Where there is a conflict regarding the true value of tangible personal property between sales documents, entries in the accounting records, or value reported for use tax purposes, the department often looks to the person's accounting records as an indication of the minimum value of capitalized property. Neither the department nor the taxpayer is necessarily bound by this value if it is established that the entry in the books of account does not fairly represent the true value of the article used.
(ii) Some arm's length sales transactions involve multiple pieces of property or different types of property (such as when both real and personal property are sold). While the total sales price may represent a true value for the property in total, the values allocated to the specific components may not in and of themselves represent true values for those components. This is especially apparent when the values assigned by the parties to the sales transaction vary from those entered into the accounting records or reported for use tax purposes. In such cases, the value of the article used for the purpose of the use tax must be determined as nearly as possible according to the retail selling price, at the place of use, of similar products of like quality and character.
(c) Property acquired and used outside Washington before use occurs in Washington. The purchase price of property acquired and used outside Washington before being used in this state may not represent the property's true value. Under these circumstances, the value of article used is the retail selling price at place of use of similar products of like quality and character as of the time the article is first used in Washington.
(d) Imported property. When property is imported from outside the United States for use in Washington state, the value of the article used includes any amount of tariff or duty paid with respect to importation.
(e) Articles produced for commercial or industrial use. A person who extracts or manufactures products or by-products for commercial or industrial use is subject to use tax and the business and occupation (B&O) tax on the value of products or by-products used. "Commercial or industrial use" is the use of products, including by-products, as a consumer by the person who extracted or manufactured the products or by-products. See WAC 458-20-134, Commercial or industrial use and WAC 458-20-136, Manufacturing, processing for hire, fabricating.
Tax applies even if the person is not generally in the business of extracting, producing, or manufacturing the products, or the extracting or manufacturing activity is incidental to the person's primary business activity. Thus, a clothing retailer who manufactures signs or other materials for display purposes incurs a liability even though the clothing retailer is not otherwise in the business of manufacturing signs and other display materials for sale.
(i) The extractor or manufacturer is responsible for remitting retail sales or use tax on all materials used while developing or producing an article for commercial or industrial use. This includes materials that are not components of the completed article.
(ii) The value of the extracted or manufactured article is subject to use tax when the article is completed and used. The measure of use tax due for the completed article may be reduced by the value of any materials actually incorporated into that article if the manufacturer or extractor previously paid sales or use tax on the materials. See subsection (4)(g) of this rule for an explanation of the measure of tax for a completed prototype.
(f) Bailment. For property acquired by bailment, the "value of the article used" for the bailee is an amount representing a reasonable rental for the use of the bailed article, determined as nearly as possible according to the value of such use at the places of use of similar products of like quality and character. (See RCW 82.12.010.) If the nature of the article is such that it can only be used once, the reasonable rental value is the full value of the article used. See also WAC 458-20-211, Leases or rentals of tangible personal property, bailments.
(g) Prototypes. The value of the article used with respect to an article manufactured or produced for purposes of serving as a prototype for the development of a new or improved product is:
• The retail selling price of such new or improved product when first offered for sale; or
• The value of materials incorporated into the prototype in cases where the new or improved product is not offered for sale. (See RCW 82.12.010.)
(h) Articles manufactured and used in the production of products for the department of defense. When articles are manufactured and used in the production of products for the department of defense, use tax is due except where there is an exemption. The value of the article used with respect to an article manufactured or produced by the user and used in the manufacture or production of products sold or to be sold to the department of defense of the United States is the value of the ingredients of the manufactured or produced article. (See RCW 82.12.010.) However, refer to WAC 458-20-13601, Manufacturers and processors for hire—Sales and use tax exemption for machinery and equipment, to determine if such articles qualify for exemption under RCW 82.12.02565.
(i) Property temporarily brought into Washington for business use. In the case of articles owned by a user engaged in business outside the state which are brought into the state for no more than 180 days in any period of 365 consecutive days and which are temporarily used for business purposes by the person in this state, the value of the article used must be an amount representing a reasonable rental for the use of the articles, unless the person has paid tax under chapter 82.08 or 82.12 RCW upon the full value of the article used.
However, this measure of "value of article used" is a separate provision from RCW 82.12.0251 use tax exemption. The use tax exemption is provided to nonresidents bringing property into Washington for his or her use or enjoyment while temporarily within the state, unless the property is used in conducting a nontransitory business activity. The term "nontransitory business activity," for the purposes of this exemption, means and includes the business of extracting, manufacturing, selling tangible and intangible property, printing, publishing, and performing contracts for constructing or improving real or personal property. It does not include the business of conducting a circus or other form of amusement when the personnel and property of such business regularly moves from one state into another, nor does it include casual or incidental business done by a nonresident lawyer, doctor or accountant.
(i) Reasonable rental value. A reasonable rental value is normally determined by the rental price or using the fair market rental value of similar products of like quality and character if rental price is not reasonable. If a reasonable rental value cannot be determined because of the nature of property, such as it may not be possible to find similar products of like quality and character, monthly reasonable rental value may be determined based on depreciation plus one percent (per month) of the purchase price. For the purpose of this computation, depreciation should be computed on a straight-line basis with an assumption that there is no salvage value. The life of the asset must be based on "book" life rather than an accelerated life that might be used for federal tax purposes. This calculation applies even if the asset is fully depreciated.
(ii) Example. A piece of equipment that originally cost $100,000 and has a book life of 48 months results in a monthly rental value of $3,083 ((100,000/48) + (100,000 x .01)). This monthly value applies even if the asset is fully depreciated or is greater or less than the actual depreciation used for federal tax purposes. A lesser value can be used if the taxpayer retains documentation supporting the lesser value and that value is based on rental values.
(j) Special provisions for vessel dealers and manufacturers. The value of an article used for a vessel held in inventory and used by a vessel dealer or vessel manufacturer for personal use is the reasonable rental value of the vessel used. This value applies only if the vessel dealer or manufacturer can show that the vessel is truly held for sale and that the dealer or manufacturer is and has been making good faith efforts to sell the vessel. (See RCW 82.12.802.) This may result in a vessel manufacturer incurring multiple use tax liabilities with respect to multiple uses of the same vessel.
The use of a vessel by a vessel dealer or vessel manufacturer for certain purposes is not subject to use tax. For specific information on these exemptions see RCW 82.12.800 and 82.12.801.
(k) Special provision for asphalt and aggregate. In the case of a person manufacturing or extracting asphalt or aggregates used in providing services taxable under RCW 82.04.280 (1)(b), the value of the asphalt or aggregates used is based on cost. Specifically, the value of the asphalt or aggregates equals the sum of all direct and indirect costs attributable to the asphalt or aggregates used, plus a public road construction market adjustment of five percent of those costs.
(5) Who is liable for the tax? RCW 82.12.020 imposes use tax upon every person using tangible personal property or certain retail services as a consumer in the state of Washington. The law does not distinguish between persons using property (or certain retail services) for business or personal use. Thus, a Washington resident purchasing personal items via the internet or through a mail-order catalog has the same legal responsibility to report and remit use tax as does a corporation purchasing office supplies. The rate of the use tax is the same as the retail sales tax rate in the location where the property is used. Refer to WAC 458-20-145, Local sales and use tax, for further discussion about determining where use occurs.
(a) When tax liability arises. Use tax is owed at the time the tangible personal property is first put to use in this state, unless an exemption is available.
(b) Reporting and remitting payment to the department of revenue.
(i) Registered taxpayers. Persons registered with the department under RCW 82.32.030 to do business in Washington should use their excise tax return to report and remit use tax.
(ii) Unregistered persons. Persons not required to be registered with the department should use a Consumer Use Tax Return to report and remit use tax. The Consumer Use Tax Return is available by:
(A) Using the department's website at dor.wa.gov;
(B) Calling the department's telephone information center at 360-705-6705; or
(C) Requesting the form at any of the department's local field offices.
The completed Consumer Use Tax Return, with payment, is due on or before the 25th day of the month following the month in which the tax liability occurs. For example, a person acquires clothing without payment of the retail sales tax during August. The Consumer Use Tax Return and the tax are due by September 25th.
The return and payment can be submitted electronically using the department's online system at dor.wa.gov, mailed, or delivered to any of the department's local field offices.
(6) How does use tax differ from the retail sales tax? There are circumstances where the law does not provide a use tax exemption to complement a retail sales tax exemption. Where there is no complementary use tax exemption, the buyer or user is still responsible for remitting use tax on his or her use of the purchased property.
For instance, there is no complementary use tax exemption to the retail sales tax exemption in RCW 82.08.0251. This exemption provides a retail sales tax exemption for articles acquired in casual sales transactions, if the seller is not required to be registered with the department. Because there is no complementary use tax exemption, the buyer or user is responsible for remitting the use tax on his or her use of the purchased property. For example, if a person purchases furniture through a classified ad from a homeowner, the buyer is responsible for reporting and paying the use tax although the sale is exempt from retail sales tax.
(7) Exceptions. The law provides certain exceptions to the imposition of tax on a single event. These exceptions occur when the law provides a method of determining the measure of tax different than the full value of the article being used.
(a) Destroyed property. The mere destruction or discarding of tangible personal property as unusable or worthless is usually not considered a taxable "use." The following examples identify a number of facts and then state a conclusion.
(i) Example 4. AA Computer Software (AA) has some obsolete inventory that will no longer sell as an updated version of the software is now available for purchase. AA decides to throw away this inventory even though it has never been used. As the software was never used, use tax is not owed on the destroyed inventory.
(ii) Example 5. WW Dealer purchases a used vehicle for resale. WW Dealer publicizes an upcoming sale by airing a television commercial in which WW Dealer destroys the vehicle. WW Dealer's destruction of the vehicle for publicity purposes is considered use by a consumer. The vehicle is subject to use tax sourced at the location where WW Dealer destroys the vehicle.
(b) Tangible personal property acquired by gift or donation. Using property acquired by gift or donation is subject to the use tax, unless the person giving or donating the property previously paid or remitted Washington retail sales or use tax on the purchase or use of the property. (See RCW 82.12.020.) However, a credit for tax paid in another jurisdiction is available if documentation of tax paid is provided. See subsection (8) of this rule for additional information.
Use tax does not apply when the same property is given or donated back to the original giver or donor if the original giver or donor previously paid the retail sales tax or use tax.
Example 6. John purchases a vehicle, pays retail sales tax on the purchase, and gives the vehicle to Mary. Mary's use of the vehicle is not subject to use tax because John paid sales tax when he purchased the vehicle. After two years, Mary returns the vehicle to John. John's use of the vehicle is not subject to use tax because he paid sales tax when he originally purchased the vehicle. However, use tax is due if Mary gives or donates the vehicle to a person other than John because Mary has not previously paid retail sales or use tax.
(c) Tangible personal property put to both an exempt and taxable use. If property is first used for an exempt or nontaxable purpose and is later used for a nonexempt or taxable purpose, use tax is due on the value of the property when first used for the nonexempt or taxable purpose. For instance, RCW 82.12.0251 provides a use tax exemption for the temporary use within Washington of watercraft brought in by certain nonresidents. (See WAC 458-20-238, Sales of watercraft to nonresidents—Use of watercraft in Washington by nonresidents, for a detailed explanation of the exemption requirements.) However, use tax is due if the nonresident exceeds the temporary use threshold or the nonresident subsequently becomes a Washington resident.
(d) Intervening use of property purchased for resale. Persons purchasing tangible personal property for resale in the regular course of business may purchase the property at wholesale without paying retail sales tax provided the property is not put to intervening use, and the buyer provides the seller with a completed reseller permit. (See RCW 82.04.050 and 82.04.060.)
A buyer who purchases taxable property at wholesale and subsequently puts the property to intervening use is subject to either the retail sales tax (commonly referred to as "deferred retail sales tax") or use tax, unless a specific use tax exemption applies to the intervening use. The tax applies even if the property is at all times held out for sale and is in fact later sold. Tax is due even if the intervening use is the result of an unforeseen circumstance, such as when property is purchased for resale, the customer fails to satisfy the terms of the sales agreement, and the property is used until another customer is found. See WAC 458-20-102 Reseller permits regarding tax-reporting requirements when a person purchases property for both resale and consumption.
(e) Using inventory to promote sales. Intervening use does not include the use of inventory for floor or window display purposes if that merchandise is subsequently sold as new merchandise. Likewise, intervening use does not include the use of inventory for demonstration purposes occurring with efforts to sell the same merchandise if that merchandise is subsequently sold as new merchandise. The fact that the selling price may be discounted because the property is shop worn from display or demonstration is not, by itself, controlling for the purposes of determining whether intervening use has occurred.
Evidence that property has been put to intervening use includes, but is not limited to, the following:
(i) Property not sold as new merchandise. Intervening use occurs if, after use of the property for display or demonstration purposes, the property can no longer be sold as new merchandise. An indication that intervening use has occurred is if property is without a new model warranty if the sale of the property normally includes such a warranty.
(ii) Capitalizing demonstrator or display property. The capitalization and depreciation of property is evidence of intervening use. Thus, there is a rebuttable presumption that intervening use occurs if the accounting records identify the property as a demonstrator or as display merchandise. The burden is on the person making such entries in the accounting records to substantiate any claims the property was not put to intervening use.
(iii) Loaning property to promote sales. Intervening use includes loaning property to a customer or potential customer for the purpose of promoting sales of other products. For example, intervening use occurs if a coffee manufacturer or distributor loans brewing equipment to a customer to promote coffee sales, even if the equipment is subsequently sold to the same or different customer. In this example, the coffee manufacturer or distributor loaning the equipment would owe use tax on the full value of the equipment. If the manufacturer or distributor had not paid use tax, the customer would owe use tax on the reasonable rental value as this is a bailment situation. See subsection (4)(f) of this section for the measure of tax on bailed articles.
(f) Effect of the trade-in exclusion. The exclusion for the value of trade-in property from the measure of tax applies only if the trade-in property is of the same general type or classification as the property for which it was traded-in. There is no requirement that Washington's retail sales or use tax be previously paid on the trade-in property. There is also no requirement that the property subject to use tax be acquired in Washington, or that the user be a Washington resident at the time he or she acquired the property. For additional information refer to WAC 458-20-247, Trade-ins, selling price, sellers' tax measure.
(8) Credit for taxes paid in other jurisdictions. RCW 82.12.035 provides a credit against Washington's use tax for legally imposed retail sales or use taxes paid by the purchaser to: Any other state, possession, territory, or commonwealth of the United States, or any political subdivision of a state, the District of Columbia, or any foreign country or political subdivision of a foreign country. (See RCW 82.56.010.)
(a) This use tax credit is available only if the present user, or his or her bailor or donor, has documentation that shows the retail sales or use tax was paid with respect to such property, extended warranty, digital products, digital codes, or service defined as a retail sale in RCW 82.04.050 to the other taxing jurisdiction.
(b) This credit is not available for other types of taxes such as, but not limited to, value-added taxes (VATs).
(c) For the purposes of allocating state and local use taxes, the department first applies the credit against the amount of any use tax due the state. Any unused portion of the credit is then applied against the amount of any use tax due to local jurisdictions. RCW 82.56.010, Multistate Tax Compact, Article V. Elements of Sales and Use Tax Laws.
(9) No apportionment of use tax liability. Unless specifically provided by law, the value of the article or use tax liability may not be apportioned even though the user may use the property both within and without Washington, or use the property for both taxable and exempt purposes.
(a) Example 7. A construction company using an airplane for traveling to and from its Washington office and out-of-state job sites must remit use tax on the full value of the airplane, even if the airplane was purchased and delivery taken outside Washington. There is no apportionment of this value even though the airplane is used both within and outside of Washington.
(b) Exemption. For an exemption pertaining to use tax liability, see WAC 458-20-17401, Use tax liability for motor vehicles, trailers, and parts used by motor carriers operating in interstate or foreign commerce.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-04-001, § 458-20-178, filed 1/24/24, effective 2/24/24; WSR 23-14-002, § 458-20-178, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-02-017, § 458-20-178, filed 12/29/14, effective 1/29/15; WSR 14-09-036, § 458-20-178, filed 4/10/14, effective 5/11/14. Statutory Authority: RCW 82.32.300. WSR 87-01-050 (Order ET 86-19), § 458-20-178, filed 12/16/86; Order ET 71-1, § 458-20-178, filed 7/22/71; Order ET 70-3, § 458-20-178 (Rule 178), filed 5/29/70, effective 7/1/70.]


PDF458-20-17802

Collection of use tax by county auditors and department of licensing—Measure of tax.

(1) Introduction. The department of revenue (department) has authorized county auditors and the department of licensing to collect the use tax imposed by chapter 82.12 RCW when a person applies to transfer the certificate of title of a vehicle acquired without the payment of sales tax. See RCW 82.12.045. This rule explains how county auditors, their subagents, and the department of licensing determine the measure of the use tax. This rule does not relieve a seller registered with the department of the statutory requirement to collect sales tax when selling tangible personal property, including vehicles. RCW 82.08.020 and 82.08.0251. The use tax reporting responsibilities of Washington residents in other situations and the general nature of the use tax are addressed in WAC 458-20-178 (Use tax). The application of tax to vehicles acquired by Indians and Indian tribes is discussed in WAC 458-20-192 (Indians—Indian country).
Vehicle licensing locations and information about vehicle titles and registration are available from the department of licensing on their website at: dol.wa.gov. This information is also available by contacting the local county auditor's office listed in the government pages of a telephone directory.
(2) What is use tax based on? For purposes of computing the amount of use tax due, the value of the article used is the measure of tax. The value of the article used is generally the purchase price. If the purchase price does not represent the true value of the article used, the value must be determined as nearly as possible according to the retail selling price at place of use of similar vehicles of like quality and character. RCW 82.12.010.
(3) Use of automated system to verify measure of tax. When a person applies to transfer the certificate of title of a vehicle, county auditors, their subagents, or the department of licensing must verify that the purchase price represents the true value. In doing so, county auditors, their subagents, or the department of licensing compare the vehicle's purchase price to the average retail value of comparable vehicles using an automated valuing system. The automated valuing system identifies the average retail value using a database that is provided by a regional industry standard source specializing in providing valuation services to local, state, and federal governments, and the private sector.
In limited situations, the automated valuing system's database may not provide the average retail value for a vehicle. For example, the automated valuing system's database does not provide average retail value information for collectible vehicles or vehicles that are over twenty years of age. In the absence of an average retail value, county auditors, their subagents, or the department of licensing will determine the true value as nearly as possible according to the retail selling price at place of use of similar vehicles of like character and quality. To assist in this process, the department of revenue and the department of licensing may approve the use of alternative valuing authorities as necessary.
(4) What happens when the purchase price is presumed to represent the true value? County auditors, their subagents, or the department of licensing will use the purchase price to compute the amount of use tax due when the purchase price represents the vehicle's true value. County auditors, their subagents, or department of licensing will presume the purchase price represents the vehicle's true value if one of the following conditions is met:
(a) The vehicle's average retail value, as provided by the automated valuing system, is less than $7,500.
For example, a person buys a vehicle for $2,800. The automated valuing system indicates that the vehicle's average retail value is $4,900. The purchase price is presumed to represent the vehicle's true value because the average retail value is less than $7,500.
(b) The vehicle's purchase price is not more than 20 percent below the average retail value as provided by the automated valuing system.
For example, a person buys a used vehicle for $17,000. The automated valuing system indicates the vehicle's average retail value is $20,000. When compared to the average retail value, the purchase price is not more than 20 percent ($4,000) below the average retail value. Consequently, the purchase price is presumed to represent the vehicle's true value.
(5) What happens when the purchase price is not presumed to represent the true value? If the vehicle's purchase price is not presumed to be the true value as explained in subsection (4) of this rule, a person may remit use tax based on the average retail value as indicated by the automated valuing system or substantiate the true value of the vehicle using any one of the following methods.
(a) Industry-accepted pricing guide. A person applying to transfer a certificate of title may provide the county auditor, a subagent, or the department of licensing with documentation from one of the various industry-accepted pricing guides. The value from the industry-accepted pricing guide must represent the retail value of a similarly equipped vehicle of the same make, model, and year in a comparable condition. The purchase price is presumed to represent the vehicle's true value if the purchase price is not more than 20 percent below the retail value.
For example, a person buys a vehicle for $6,500. The automated valuing system indicates that the vehicle's average retail value is $8,700. An industry-accepted pricing guide shows that the retail value of a similarly-equipped vehicle in a comparable condition of the same make, model, and year is $8,000. When compared to the retail value established by the industry-accepted pricing guide, the purchase price is not more than 20 percent ($1,600 in this case) below the retail value. Consequently, the purchase price is presumed to represent the vehicle's true value.
(b) Declaration of buyer and seller. A person applying to transfer a certificate of title may provide to the county auditor, a subagent, or the department of licensing a Declaration of Buyer and Seller Regarding Value of Used Vehicle Sale (REV 32 2501) to substantiate that the purchase price is the true value of the vehicle. The declaration must be signed by both the buyer and the seller and must certify to the purchase price and the vehicle's condition under penalty of perjury. The department may review a declaration and assess additional tax, interest, and penalties. A person may seek review of an assessment to the department as provided in WAC 458-20-100 (Informal administrative reviews).
The declaration is available on the department's website at dor.wa.gov. It is also available at all vehicle licensing locations, department's field offices, or by writing:
Department of Revenue
Taxpayer Services
P.O. Box 47478
Olympia, WA 98504-7478
(c) Written appraisal. A person applying to transfer a certificate of title may present to the county auditor, a subagent, or the department of licensing a written appraisal from an automobile dealer, insurance or other vehicle appraiser to substantiate the true value of the vehicle. If an automobile dealer performs the appraisal, the dealer must be currently licensed with the department of licensing dealer services division or be a licensed vehicle dealer in another jurisdiction.
The written appraisal must appear on company stationery or have the business card attached and include the vehicle description, including the vehicle make, model, and identification number (VIN). The person performing the appraisal must certify that the stated value represents the retail selling price of a similarly equipped vehicle of the same make, model, and year in a comparable condition. The department may review an appraisal and assess additional tax, interest, and penalties. A person may seek review of an assessment to the department as provided in WAC 458-20-100 (Informal administrative reviews).
(d) Declaration of use tax. A person applying to transfer a certificate of title may present to the county auditor, a subagent, or the department of licensing a Declaration of Use Tax (REV 32 2486e) to substantiate the true value of the vehicle. An authorized employee of the department must complete the declaration. Determining the true value may require a visual inspection that is not available at all department locations.
(e) Repair estimate. A person applying to transfer a certificate of title may present to the county auditor, a subagent, or the department of licensing a written repair estimate, prepared by an auto repair or auto body repair business. This estimate will then be used to assist with determining the true value of the vehicle. The written estimate must appear on company stationery or have the business card attached. In addition, the written estimate must include the vehicle description, including the vehicle make, model, and identification number (VIN), and an itemized list of repairs. The department may review an appraisal and assess additional tax, interest, and penalties. A person may seek review of an assessment to the department as provided in WAC 458-20-100 (Informal administrative reviews).
The purchase price is presumed to represent the true value if the total of the purchase price and the repair estimate is not more than 20 percent below the average retail value. For example, a person purchases a vehicle with extensive bumper damage for $13,700. The automated valuing system indicates that the vehicle's average retail value is $18,000. An estimate from an auto body repair business indicates a cost of $2,500 to repair the bumper damage. The purchase price is presumed to represent the vehicle's true value because when the total of the purchase price and the repair estimate ($13,700 + $2,500 = $16,200) is compared to the average retail value, the total is not more than 20 percent below the average retail value ($18,000).
[Statutory Authority: RCW 82.01.060(2), 82.32.300, and 82.12.045. WSR 21-01-130, § 458-20-17802, filed 12/16/20, effective 1/16/21; WSR 20-14-064, § 458-20-17802, filed 6/26/20, effective 10/1/20. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-17802, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.12.045. WSR 14-21-104, § 458-20-17802, filed 10/15/14, effective 12/14/14. Statutory Authority: RCW 82.32.300 and 82.12.045. WSR 01-22-008, § 458-20-17802, filed 10/26/01, effective 11/26/01.]


PDF458-20-17803

Use tax on promotional material.

(1) Introduction. Persons who distribute or cause to be distributed any article of tangible personal property, except newspapers, the primary purpose of which is to promote the sale of products or services, are subject to use tax on the value of the property. RCW 82.12.010, 82.12.020, and chapter 367, Laws of 2002. This section explains the use tax reporting responsibilities of consumers when such property is delivered directly to persons other than the consumer from outside Washington. For the purposes of this section, the term "promotional material" is used in describing such property where applicable.
This rule provides numerous examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. Similar determinations for other situations can be made only after a review of all facts and circumstances. For purposes of these examples, presume the promotional material is delivered to persons within Washington.
Chapter 514, Laws of 2005, changed the taxability of delivery charges associated with direct mail. Refer to subsection (5) of this section for further information.
(2) What is the use tax? The use tax complements the retail sales tax by imposing a tax of a like amount when a consumer uses tangible personal property or certain retail services within this state. RCW 82.12.020. The tax does not apply to the use of any property or service if the present user, donor, or bailor previously paid retail sales tax under chapter 82.08 RCW with respect to the property used or the service obtained. See WAC 458-20-178 (Use tax) for an explanation of the use tax and use tax reporting requirements.
(3) Who is liable for the use tax on promotional material? The use tax is imposed on the consumer. Effective June 1, 2002, the law provides that with respect to promotional material distributed to persons within this state, the consumer is the person who distributes or causes the distribution of the promotional material. A consumer as defined in this rule is responsible for remitting use tax only if the consumer has nexus in Washington.
(a) Example 1. Department Store contracts with Printer to print promotional material advertising sale merchandise available at Department Store's Washington locations. Printer distributes promotional material to Department Store's customers. Department Store is the consumer of the promotional material and is liable for use tax on promotional material distributed into Washington. Neither Printer nor Department Store's customers are consumers of this promotional material.
(b) Example 2. Retailer contracts with Seattle Advertising Agency for advertising services. Advertising Agency makes a single charge for all services, which includes designing, printing, and distributing catalogs to potential customers. Advertising Agency contracts with California Printer to print and prepare for distribution promotional material advertising a new Washington location. Retailer is the consumer of the catalogs and is liable for use tax on the promotional material sent to Washington addresses. Neither Advertising Agency nor potential customers are consumers of this promotional material.
(4) What is promotional material? Promotional material is any article of tangible personal property, except newspapers, displayed or distributed in the state of Washington for the primary purpose of promoting the sale of products or services. Examples of promotional material include, but are not limited to, advertising literature, circulars, catalogs, brochures, inserts (but not newspaper inserts), flyers, applications, order forms, envelopes, folders, posters, coupons, displays, signs, free gifts, or samples (such as carpet or textile samples).
(a) Is advertising contained on billing statements promotional material? It is presumed that the primary purpose of billing statements and statements of account is to secure payment for goods or services previously purchased. Thus, unless the facts and circumstances indicate that the primary purpose of the property is to promote the sale of goods and services, billing statements and statements of account are not considered promotional material. Attaching, affixing, or otherwise incorporating property promoting the sale of goods or services does not alter the primary purpose of billing statements and statements of account. However, flyers, inserts, or other separate property enclosed with billing statements or statements of account that promote the sale of goods or services are promotional material and subject to use tax.
(i) Example 1. Richland Attorney contracts with Oregon Printer to print and prepare for distribution monthly billing statements and return remittance envelopes to Attorney's clients. The contract also includes printing and inserting flyers promoting Attorney's estate planning services. The primary purpose of the flyers is to solicit the sale of services. Consequently, the flyers are promotional material. The primary purpose of the billing statements is to secure payment for services rendered. The billing statements are not promotional material.
(ii) Example 2. Department Store prints the monthly billing statements for its store credit card in Atlanta, Georgia, and mails them to customers located in Washington. Although the billing statement includes three sentences noting an upcoming sale, this information does not alter the primary purpose of the billing statement, which is to secure payment for services rendered. The billing statements are not promotional material.
(iii) Example 3. The following month, Department Store's billing statement includes a detachable coupon for fifteen percent off selected items purchased during a specified period. Although the detachable coupon solicits the sale of goods or services, it does not alter the primary purpose of the billing statement, which is to secure payment for goods or services already purchased. The billing statement and detachable coupon are not promotional material.
(iv) Example 4. In the third month, Department Store lengthens the billing statement to include information promoting the grand opening of a location. Although the lengthened portion of the billing statement contains information promoting the sale of goods or services, it does not alter the primary purpose of the billing statement, which is to secure payment for goods or services already purchased. The lengthened billing statement is not promotional material.
(b) When are envelopes considered promotional material? Envelopes used solely to mail property to promote the sale of goods or services are considered promotional material and subject to use tax.
Envelopes used to mail nonpromotional material, such as billing statements and statements of account, are used to secure payment for goods purchased or services rendered. The same is true of return envelopes that are enclosed for submitting payment. Unless the facts and circumstances indicate otherwise, the presumption is that the primary purpose of envelopes used for mailing both promotional and nonpromotional material in the same envelope is not to promote the sale of goods and services. Thus, envelopes and return envelopes used for dual purposes are not subject to use tax, even though promotional material may be printed on or attached to the envelopes. Although the imprinted or attached material promotes the sale of goods or services, it does not alter the primary purpose of the envelopes.
(i) Example 1. Bank mails brochures, applications, and return envelopes from Atlanta, Georgia, to Washington addresses promoting Bank's credit card. The primary purpose of envelopes used to mail the brochures, applications, and return envelopes is to solicit the sale of services. The envelopes, brochures, and applications are promotional material.
(ii) Example 2. Telephone Company mails monthly billing statements to Washington customers from St. Louis, Missouri. Inserts promoting the sale of various telephone accessories are included. Return envelopes to be used in making payment of the statement amount are also enclosed. The primary purpose of the envelopes used to mail the billing statements and the return envelopes is to secure payment. Neither the mailing envelopes nor the return envelopes are promotional material.
(iii) Example 3. Mortgage Company mails monthly billing statements to Washington residents from its administrative offices in Nevada. The enclosed return envelope for customers to use in making payment includes an attachment promoting additional banking services. Although the attachment to the return envelopes contains advertising information, it does not alter the primary purpose of the envelope which is to obtain payment. Neither the mailing envelopes nor the return envelopes are promotional material.
(5) What is the measure of tax? The measure of the use tax is the value of the article used. For the purposes of computing the use tax due on promotional material, the measure of tax is the amount of consideration paid for the promotional material without deduction for the cost of materials, labor, or other service charges, even though such charges may be stated or shown separately on invoices. Except as noted below, it also includes the amount of any freight, delivery, or other like transportation charge paid or given by the consumer to the seller. The value of the promotional material also includes any tariffs or duties paid. If the total consideration paid does not represent the true value of the article used, the value must be determined as nearly as possible according to the retail selling price at place of use of similar materials of like quality and character. RCW 82.12.010.
A consumer who has paid retail sales or use tax that is due in another state with respect to promotional material that is subject to use tax in this state may take a credit for the amount of tax so paid. RCW 82.12.035. For further information, refer to WAC 458-20-178 (Use tax).
(a) Delivery charges. Chapter 514, Laws of 2005, altered the measure of the use tax with respect to the value of delivery charges made for the delivery of direct mail.
(i) Delivery charges May 17, 2005, and after. Effective May 17, 2005, amounts derived from delivery charges for the delivery of direct mail may be deducted from the measure of use tax when the delivery charge is separately stated on an invoice or similar billing invoice provided to the buyer.
(ii) Delivery charges from June 1, 2002, through May 16, 2005. The measure of tax includes all delivery charges. Postage is a delivery charge and is therefore included in the measure of tax if the cost is part of the consideration paid by the consumer to the seller. RCW 82.08.010 and 82.12.010. It is immaterial if amounts charged for postage are stated or shown separately on invoices. Amounts charged for postage and other delivery costs are not included in the measure of tax only if the amounts are not part of the consideration paid.
(A) When are delivery charges part of the consideration paid? Charges for postage or other delivery costs are considered part of the consideration paid if the permit to use precanceled stamps, a postage meter, or an imprint account for bulk mailings is in the name of the party contracted to provide and/or prepare promotional material for distribution. Such parties are liable to the post office for payment and the consumer's payment of such amounts represents a payment on the sale of tangible personal property or the services provided. For further information, refer to WAC 458-20-111 (Advances and reimbursements).
(B) When are delivery charges not part of the consideration paid? Charges for postage or other delivery costs are not considered part of the consideration paid if the permit to use precanceled stamps or a permit imprint account for bulk mailings is in the consumer's name. The consumer in these cases has primary or secondary liability for payment of the postage costs. (Refer to WAC 458-20-111 for information about advances and reimbursements.)
(iii) What is direct mail? "Direct mail" means printed material delivered or distributed by United States mail or other delivery service to a mass audience or to addressees on a mailing list provided by the purchaser or at the direction of the purchaser when the cost of the items is not billed directly to the recipients. "Direct mail" includes tangible personal property supplied directly or indirectly by the purchaser to the direct mail seller for inclusion in the package containing the printed material. "Direct mail" does not include multiple items of printed material delivered to a single address. RCW 82.08.010 and chapter 514, Laws of 2005.
(iv) What are delivery charges? "Delivery charges" means charges by the seller of personal property or services for preparation and delivery to a location designated by the purchaser of personal property or services including, but not limited to, transportation, shipping, postage, handling, crating, and packing. RCW 82.08.010.
(b) What is the measure of tax when a consumer contracts with one person for the promotional material and a separate person to prepare the material for distribution? A consumer of promotional materials is subject to use tax on the value of the promotional material and the value of certain services rendered in respect to promotional material used in this state when the retail sales tax has not been paid.
The use tax is imposed on the value of the article used in this state. The tax is also imposed on the value of labor and services rendered in respect to altering, imprinting, or improving tangible personal property for use in this state when the retail sales tax has not been paid. RCW 82.12.020. With respect to promotional material, this includes activities typically performed by mailing bureaus or mail houses to prepare material for distribution, such as addressing, labeling, binding, folding, sealing, and tabbing.
(i) For discussion about activities performed by mailing bureaus, refer to WAC 458-20-141 (Duplicating activities and mailing bureaus).
(ii) For discussion about activities performed by the printing industry, refer to WAC 458-20-144 (Printing industry).
(c) What is the measure of tax when a consumer manufactures its own promotional materials? The measure of use tax is the value of the promotional material. Refer to WAC 458-20-112 (Value of products). A consumer who manufactures its own promotional material may also be conducting manufacturing activities and should refer to WAC 458-20-134 (Commercial or industrial use) and WAC 458-20-136 (Manufacturing, processing for hire, fabricating).
(6) Determining the applicable local use tax rate. For purposes of determining the applicable rate of local use tax for promotional material, the following guidelines must be followed unless the consumer obtains prior written approval from the department to use an alternative method. Refer to (c) of this subsection for an explanation of the circumstances under which the department will consider approving alternate methods and how to obtain such approval.
(a) Operations directed from within Washington. The applicable local taxing jurisdiction and tax rate is the in-state location from where the consumer directs or manages its Washington operations.
(i) Example 1. Department Store operates ten locations in western Washington. Department Store's corporate headquarters, the location from where it manages its in-state operations, is in Seattle. The local use tax rate for Seattle is the applicable rate.
(ii) Example 2. Retailer, a national company with headquarters in Chicago, Illinois, operates multiple locations in Washington. Retailer manages its Washington operations from a location in Spokane. The local use tax rate for Spokane is the applicable rate.
(b) Operations directed from outside Washington. A consumer that manages or directs its Washington activities from outside the state must equally apportion the value of the promotional material among the local tax jurisdictions where the consumer conducts its business activities. Promotional material that is targeted to specific business locations of the consumer must be apportioned solely between those business locations. Targeted material is material specifically distributed to promote sales of products or services solely at a specific location(s) and at a different price(s) or terms than those offered at all other Washington locations.
(i) Example 1. Bank directs the operations of its four Washington branches from its headquarters in Sacramento, California. The branches are in Seattle, unincorporated King County, Tacoma, and Everett. For purposes of determining use tax liability, twenty-five percent of the value of the promotional material must be equally apportioned to Seattle, unincorporated King County, Tacoma, and Everett.
(ii) Example 2. Furniture Store, headquartered in Nevada, orders 100,000 flyers from a Portland, Oregon, printer to be mailed to Washington households announcing the opening of its new store in Spokane. Customers will receive a ten percent discount on all items purchased at the Spokane store. This discount will not apply to purchases made at Store C's other Washington locations. The local use tax rate for Spokane is the applicable rate.
(iii) Example 3. Restaurant manages the operations of its Washington locations from Portland, Oregon. Restaurant contracts to have coupon books printed and mailed to households in Clark and Cowlitz counties. The coupons are accepted only at the Vancouver and Longview locations. The value of the promotional material must be equally apportioned to both locations.
(iv) Example 4. Ohio Manufacturer has no offices, warehouses, or storefront locations in Washington. A salesperson operating from the person's Kent home solicits sales from Washington distributors for the manufacturer. Manufacturer mails promotional material to its distributors' customers in Washington. The local use tax rate for Kent is the applicable rate.
(v) Example 5. Michigan Wholesaler without offices, warehouses, or storefront locations in Washington sends salesperson into Washington to solicit sales. Wholesaler mails promotional material to potential customers in Washington. The applicable local use tax rate is a uniform statewide local rate of .005.
(c) Are there alternative methods for determining the place of first use? For purposes of reporting use tax on promotional material, the department may agree to allow a consumer to use another method of determining the applicable local use tax rate provided that the method proposed by the consumer results in an equal or more equitable distribution of the tax. A consumer may request written approval for the use of an alternative method by contacting the department's taxpayer services division at:
Department of Revenue
Taxpayer Services
P.O. Box 47478
Olympia, WA 98504-7478
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 06-06-046, § 458-20-17803, filed 2/24/06, effective 3/27/06; WSR 05-03-051, § 458-20-17803, filed 1/11/05, effective 7/1/05.]


PDF458-20-179

Public utility tax.

Introduction. This rule explains the public utility tax (PUT) imposed by chapter 82.16 RCW. The PUT is a tax for engaging in certain public service and transportation businesses within this state.
The department of revenue (department) has adopted other rules that relate to the application of PUT. Readers may want to refer to rules in the following list:
(1) WAC 458-20-104 Small business tax relief based on income of business;
(2) WAC 458-20-121 Sales of heat or steam—Including production by cogeneration;
(3) WAC 458-20-13501 Timber harvest operations;
(4) WAC 458-20-175 Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce;
(5) WAC 458-20-180 Motor carriers;
(6) WAC 458-20-192 Indians—Indian country;
(7) WAC 458-20-193D Transportation, communication, public utility activities, or other services in interstate or foreign commerce; and
(8) WAC 458-20-251 Sewerage collection and other related activities.
This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
Part I - General Information
(101) Persons subject to the public utility tax. The PUT is imposed by RCW 82.16.020 on certain public service and transportation businesses including railroad, express, railroad car, water distribution, sewerage collection, light and power, telegraph, gas distribution, motor transportation, urban transportation, log transportation, vessels under sixty-five feet in length operating upon the waters within the state of Washington, and tugboat businesses.
(a) Hauling by watercraft. Income from hauling persons or property for hire by watercraft between points in Washington is subject to one of two PUT classifications, depending on the nature of the service. Income from:
(i) Operating tugboats of any size, and the sale of transportation services by vessels sixty-five feet and over, is subject to tax under the "other public service business" PUT classification.
(ii) The sale of transportation services using vessels under sixty-five feet, other than tugboats, is subject to tax under the "vessels under sixty-five feet" PUT classification.
Hauling persons or property for hire by watercraft does not include sightseeing tours, fishing charters, or activities that are in the nature of guided tours, where the tour may include some water transportation. Persons engaged in providing tours should refer to WAC 458-20-258, Travel agents and tour operators.
(b) Other businesses subject to the public utility tax. The PUT also applies to any other public service business subject to control by the state, or having the powers of eminent domain, or any business declared by the legislature to be of a public service nature, unless the activity is subject to tax under chapter 82.04 RCW, Business and occupation (B&O) tax.
(i) The phrase "subject to control by the state" means control by the utilities and transportation commission or any other state agency required by law to exercise control of a business of a public service nature regarding rates charged or services rendered. Examples of other public service businesses include, but are not limited to: Airplane transportation, boom, dock, ferry, pipe line, toll bridge, toll logging road, water transportation, and wharf businesses. RCW 82.16.010.
(ii) Persons engaged in the same business activities as the businesses described above are subject to the PUT even if they are not publicly recognized as providing these types of services or the amount of income from these activities is not substantial. For example, an industrial manufacturing company that owns and operates a well, and that sells a relatively small amount of water to its wholly owned subsidiary, is subject to the PUT as a water distribution business on its sales of water.
(c) Taxability of amounts derived from interest and penalties. Amounts charged to customers as interest or penalties are generally subject to the service and other activities B&O tax. This includes interest charged for failure to timely pay for utility services or for incidental services. Incidental services include for example meter installation or other activities which are performed prior to the customer receiving utility services. Any interest or penalty resulting from the failure to timely pay a local improvement district or utility local improvement district assessment is not subject to public utility or B&O taxes.
(102) Tax rates and measure of tax. The rates of tax for each business activity subject to the PUT are imposed under RCW 82.16.020 and set forth on appropriate lines of the state public utility tax addendum for the excise tax return. The measure of the PUT is the gross income of the business. The term "gross income" means the value proceeding or accruing from the performance of the particular public service or transportation business involved, including operations incidental to that business. No deduction may be taken on account of the cost of the commodity furnished or sold, the cost of materials used, labor costs, interest, discounts, delivery costs, taxes, or any other expense whatsoever paid or accrued, nor on account of losses. RCW 82.16.010.
(103) Persons subject to public utility tax may also be subject to B&O tax. The B&O tax does not apply to any business activities for which the PUT is specifically imposed, including amounts derived from activities for which a deduction from the PUT is available under RCW 82.16.050. RCW 82.04.310(1). However, many persons engaged in business activities subject to the PUT are also engaged in other business activities subject to the B&O tax.
For example, a gas distribution company operating a system for the distribution of natural gas for sale may also make retail sales of gas appliances. The gas distribution company is subject to the PUT on its distribution of natural gas to consumers. It is also subject to retailing B&O tax and must collect and remit retail sales tax on its retail sales of gas appliances. Repairs of customer owned appliances are also a retailing activity subject to retail sales tax.
In distinguishing gross income taxable under the PUT from gross income taxable under the B&O tax, the department is guided by the uniform system of accounts established for the specific type of utility concerned. Because of differences in the uniform systems of accounts established for various types of utility businesses, such guides are not controlling for the purposes of classifying revenue under the Revenue Act.
(104) Charges for service connections, line extensions, and other similar services.
(a) For existing customers, amounts derived from services that are incidental to a public utility activity are subject to the PUT. Thus, amounts received for the following are subject to the PUT:
(i) Service connection, start-up, and testing fees;
(ii) Charges for line extensions, repairs, raisings, and/or drops;
(iii) Meter or pole replacement;
(iv) Meter reading or load factor charges; and
(v) Connecting or disconnecting.
(b) For new customers, amounts received for any of the services noted above in Part (104)(a) of this rule are subject to service and other activities B&O tax.
A "new customer" is a customer who previously has not received the utility service at the location. For example, a customer of a water distribution company who currently receives water at a residence and constructs a new residence at a different location is considered a "new customer" with respect to any meter installation services performed at the new residence, until the customer actually receives water at that location. It is immaterial that this customer may be receiving water at the old residence. The charge for installing the meter for this customer at the new location is subject to service and other activities B&O tax.
(105) Contributions of equipment or facilities. Contributions to a utility business in the form of equipment or facilities are not considered income to the utility business, if the contribution is a condition of receiving service.
(a) Example 1. An industrial customer purchases and pays sales tax on transformers it installs. The customer then provides the transformers to a public utility district as a condition of receiving future service. The public utility district is not subject to the PUT or B&O tax on the receipt of the transformers. Use tax is not owed by the utility district as the customer paid sales tax at the time of purchase.
(b) Example 2. For a water or sewerage collection business, the value of pipe, valves, pumps, or similar items provided by a developer for purposes of servicing the developed area is likewise not subject to PUT or B&O tax.
Part II - Exemptions, Deductions, and Nontaxable Receipts
(201) Exemptions. This subsection describes PUT exemptions. Also see subsections in this rule that discuss specific utilities.
(a) Income exemption. Persons subject to the PUT are exempt from the payment of the tax if their gross income from utility activities does not meet a minimum threshold. RCW 82.16.040. For detailed information about this exemption, refer to WAC 458-20-104, Small business tax relief based on income of business.
(b) Ride sharing. RCW 82.16.047 exempts amounts received in the course of commuter ride sharing or ride sharing for persons with special transportation needs in accordance with RCW 46.74.010. For detailed information about this exemption, refer to WAC 458-20-261, Commute trip reduction incentives.
(c) State route number 16. RCW 82.16.046 exempts amounts received from operating state route number 16 corridor transportation systems and facilities constructed and operated under chapter 47.46 RCW.
(202) Deductions. In general, costs of doing business are not deductible under the PUT. However, RCW 82.16.050 provides for limited deductions. This subsection describes a number of those deductions. The deductible amounts should be included in the gross income reported on the state public utility tax addendum for the excise tax return and then deducted on the deduction detail page to determine the amount of taxable income. Deductions taken but not identified on the appropriate deduction detail page may be disallowed. Also see Parts III and IV of this rule, which identify additional deductions available to power and light, gas distribution, and water distribution businesses.
(a) Cash discounts. The amount of cash discount actually taken by the purchaser or customer is deductible under RCW 82.16.050(4).
(b) Credit losses. The amount of credit losses actually sustained by taxpayers whose regular books of account are kept on an accrual basis is deductible under RCW 82.16.050(5). For additional information regarding credit losses see WAC 458-20-196, Bad debts.
(c) Taxes. Amounts derived by municipally owned or operated public service businesses directly from taxes levied for their support are deductible under RCW 82.16.050(1). However, service charges that are spread on the property tax rolls and collected as taxes are not deductible.
Local improvement district and utility local improvement district assessments, including interest and penalties on such assessments, are not income because they are exercises of the jurisdiction's taxing authority. These assessments may be composed of a share of the costs of capital facilities, installation labor, connection fees, etc.
(d) Prohibitions imposed by federal law or the state or federal constitutions. Amounts derived from business that the state is prohibited from taxing under federal law or the state or federal constitutions are deductible under RCW 82.16.050(6).
(e) Sales of commodities for resale. Amounts derived from the sale of commodities to persons in the same public service business as the seller, for resale within this state, are deductible under RCW 82.16.050(2). This deduction is allowed only with respect to water distribution, gas distribution, or other public service businesses that furnish water, gas, or any other commodity in the performance of a public service business. For example, income from the sale of natural gas by a gas distributing company to natural gas companies located in Washington, who resell the gas to their customers, is deductible from the gas distributing company's gross income.
(f) Services furnished jointly. In general, costs of doing business are not deductible under the PUT. However, RCW 82.16.050(3) allows a deduction for amounts actually paid by a taxpayer to another person taxable under the PUT as the latter's portion of the consideration due for services furnished jointly by both, provided the full amount paid by the customer for the service is received by the taxpayer and reported as gross income subject to the PUT. The services must be furnished jointly by both the taxpayer and another person taxable under the PUT.
Example 1. Manufacturing Company hires ABC Transport (ABC) to haul goods from Tacoma to a manufacturing facility in Bellingham. ABC subcontracts part of the haul to XYZ Freight (XYZ) and has XYZ haul the goods from Tacoma to Everett, where the goods are loaded into ABC's truck and transported to Bellingham. Assuming all other requirements of the deduction are met, ABC may deduct the payments it makes to XYZ from its gross income as XYZ's portion of the consideration paid by Manufacturing Company for transportation services furnished jointly by both ABC and XYZ. See WAC 458-20-180 for additional information on motor carriers.
Example 2. Dakota Electricity Generator (DEG) sells electricity to Mod Industrial Firm (MIF). DEG hires Wheeler #1 to transmit the electricity from DEG to MIF. Wheeler #1 subcontracts a portion of the transmission service to Wheeler #2.
• Wheeler #1 and Wheeler #2 are jointly furnishing transmission services to DEG. Assuming all other requirements of the deduction are met, Wheeler #1 may claim a "services jointly provided" deduction in the amount paid to Wheeler #2.
• DEG may not claim a "services jointly provided" deduction for the amount DEG paid Wheeler #1. DEG and Wheeler #1 are not jointly furnishing a service to MIF. DEG is selling electricity to MIF, and Wheeler #1 is selling transmission services to DEG.
Example 3. City A's water department purchases water from City B's water department. City A sells the water to its customers. City A may not take a deduction for its payment to City B's water department as "services jointly provided." The sale of water by City A to its customers is not a service jointly provided to City A's customers by both City A and City B.
City B, however, may take a deduction under RCW 82.16.050(2) for its sales of water to City A since this is a sale of commodities to a person in the same public service business, for resale within this state.
(203) Nontaxable amounts. The following amounts are not considered taxable income.
(a) Insurance claim amounts. Amounts received from insurance companies in payment of losses, which are distinguishable from amounts received to settle contract payment disagreements.
(b) Payment of damages. Amounts received from individuals and others in payment of damages caused by them to the utility's plant or equipment.
(c) Amounts from eminent domain proceedings or governmental action. Amounts received as compensation for compensatory or involuntary taking of facilities of a public utility, by the exercise of eminent domain or governmental action, are considered liquidated damages.
Part III - Light and Power Business
(301) Light and power business. Public utility tax is imposed by RCW 82.16.020 on gross income from providing light and power services. Light and power business means the business of operating a plant or system for the generation, production or distribution of electrical energy for hire or sale and includes the wheeling of electricity for others. RCW 82.16.010.
(302) Requirements for light and power businesses. RCW 82.16.090 requires that customer billings issued by light and power businesses serving more than twenty thousand customers include the following information:
(a) The rates and amounts of taxes paid directly by the customer on products or services rendered by such business;
(b) The rate, origin, and approximate amount of each tax levied on the revenue of such business which has been added as a component of the amount charged to the customer. This does not include taxes levied by the federal government or taxes levied under chapters 54.28, 80.24, or 82.04 RCW; and
(c) The total amount of kilowatt-hours of electricity consumed for the most recent twelve-month period or other information that provides the customer their energy usage over a twelve-month period.
(303) Wheeling of electricity. "Wheeling of electricity" is the activity of delivering or distributing electricity owned by others using power lines and equipment of the person doing the wheeling. Income from wheeling electricity is subject to the PUT.
(304) Exchanges of electricity by light and power businesses. There is no specific exemption that applies to an "exchange" of electrical energy or its rights. However, exchanges of electrical energy between light and power businesses qualify for deduction in computing the PUT as sales of power to another light and power business for resale. RCW 82.16.050(11). An exchange is a transaction that is considered to be a sale and involves a delivery or transfer of energy or its rights by one party to another for which the second party agrees, subject to the terms and conditions of the agreement, to deliver electrical energy at the same or another time. Examples of deductible exchange transactions include, but are not limited to, the following:
(a) The exchange of electric power for electric power between one light and power business and another light and power business;
(b) The transmission of electric power by one light and power business to another light and power business pursuant to the agreement for coordination of operations among power systems of the Pacific Northwest executed as of September 15, 1964;
(c) The acquisition of electric power by the Bonneville Power Administration (BPA) for resale to its Washington customers in the light and power business;
(d) The residential exchange of electric power entered into between a light and power business and the administrator of the BPA pursuant to the Pacific Northwest Electric Power Planning and Conservation Act, P.L. 96-501, Sec. 5(c), 16 U.S.C. Sec. 839c. In some cases, power is not physically transferred, but the purpose of the residential exchange is for BPA to pay a "subsidy" to the exchanging utilities. These subsidies are considered a nontaxable adjustment (rebate or discount) for purchases of power from BPA.
(305) Exemptions. The following exemptions are available for sales of electricity, and are in addition to the general exemptions found in Part II of this rule.
(a) Sales of electricity to an electrolytic processor. RCW 82.16.0421 provides an exemption for sales of electricity made by light and power businesses to chlor-alkali electrolytic processing businesses or sodium chlorate electrolytic processing businesses for the electrolytic process. This exemption, which is scheduled to expire July 1, 2029, applies to sales of electricity occurring on or before December 31, 2028.
The exemption does not apply to amounts received from the remarketing or resale of electricity originally obtained by contract for the electrolytic process.
(i) Exemption certificate required. To claim the exemption, the chlor-alkali electrolytic processing business or the sodium chlorate electrolytic processing business must provide the light and power business with an exemption certificate. RCW 82.16.0421. A certificate can be obtained from the department's website at: dor.wa.gov.
(ii) Annual tax performance report requirement. RCW 82.16.0421 requires taxpayers receiving the benefit of this tax preference to file an annual tax performance report by May 31st of the year following any calendar year in which a taxpayer becomes eligible to claim the tax preference. See RCW 82.32.534 for more information on the annual tax performance report requirement for tax preferences.
(iii) Qualification requirements. To qualify all the following requirements must be met:
(A) The electricity used in the electrolytic process must be separately metered from the electricity used for the general operations of the business;
(B) The price charged for the electricity used in the electrolytic process must be reduced by an amount equal to the tax exemption available to the light and power business; and
(C) Disallowance of all or part of the exemption is a breach of contract and the damages to be paid by the chlor-alkali electrolytic processing business or the sodium chlorate electrolytic processing business is the amount of the tax exemption disallowed.
(b) Sales of electricity to aluminum smelters. RCW 82.16.0498 provides an exemption to be taken in the form of a credit. The credit is allowed if the contract for sale of electricity to an aluminum smelter specifies that the price charged for the electricity will be reduced by an amount equal to the credit. The exemption does not apply to amounts received from the remarketing or resale of electricity originally obtained by contract for the smelting process. The credit allowed is the same amount as the utility tax that would otherwise have been due under RCW 82.16.020.
(306) Deductions. The following deductions are available for sales of electricity, and are in addition to the general deductions found in Part II of this rule.
(a) Sales of electricity for resale or for consumption outside Washington. Amounts derived from the production, sale, or transfer of electrical energy for resale within or outside the state of Washington or for consumption outside the state are deductible under RCW 82.16.050(11). These sales of electricity are also not subject to the manufacturing B&O tax. RCW 82.04.310.
(b) Low density light and power businesses. RCW 82.16.053 provides a deduction for light and power businesses having seventeen or fewer customers per mile of distribution power lines with retail power rates that exceed the state average power rate. The statute requires the department to determine the state average electric power rate each year and make this rate available to these businesses. This rate and additional information regarding this deduction can be found on the department's website at: dor.wa.gov.
(c) Conservation - Electrical energy and gas. RCW 82.16.055 provides deductions relating to the production or generation of energy from cogeneration or renewable resources, and for measures to improve the efficiency of energy end-use.
(i) Restrictions. Use of the deductions is subject to the following restrictions:
(A) They apply only to new facilities for the production or generation of energy from cogeneration or renewable energy resources or measures to improve the efficiency of energy end-use on which construction or installation was begun after June 12, 1980, and before January 1, 1990;
(B) The measures or projects must be, at the time they are placed in service, reasonably expected to save, produce, or generate energy at a total incremental system cost per unit of energy delivered to end-use which is less than or equal to the incremental system cost per unit of energy delivered to end-use from similarly available conventional energy resources that utilize nuclear energy or fossil fuels and that the gas or electric utility could acquire to meet energy demand in the same time period; and
(C) They may be taken for a period not exceeding thirty years after the project is placed in operation. Any recurring costs determined to be eligible for deduction under this rule will cease to be eligible in whole or part at the time of termination of any energy conservation measure or project that originally authorized the deduction under RCW 82.16.055.
(ii) What can be deducted. The following may be deducted from a taxpayer's gross income:
(A) Amounts equal to the cost of production at the plant for consumption within the state of Washington of electrical energy produced or generated from cogeneration, as existing on June 30, 2006. For purposes of this deduction, "cogeneration" means the sequential generation of electrical or mechanical power and useful heat from the same primary energy source or fuel. See RCW 82.16.055; RCW 82.35.020 (prior to July 1, 2006, repeal);
(B) Amounts equal to the cost of production at the plant for consumption within the state of Washington of electrical energy or gas produced or generated from renewable energy resources such as solar energy, wind energy, hydroelectric energy, geothermal energy, wood, wood wastes, municipal wastes, agricultural products and wastes, and end-use waste heat;
(C) Amounts expended to improve consumers' efficiency of energy end-use or to otherwise reduce the use of electrical energy or gas by the consumer;
(D) Amounts received by a utility as a contribution for the installation of service, and later refunded to the customer, are deductible from gross income at the time the amounts are refunded;
(E) Production expenses, eligible fuel costs and book depreciation of capital costs. Eligible fuel costs are all fuels if used for cogeneration or nonfossil fuel costs if not a cogeneration facility.
(307) Credits. Credit is available to light and power businesses that make incentive payments to eligible customers under the state energy performance standard early adoption incentive program. The credit is equal to the amount of incentive payments made under RCW 19.27A.220 in any calendar year, plus documented administrative costs not to exceed eight percent of the incentive payments.
(a) A light and power business may take the credit against its PUT liability, but the credit may not exceed the PUT that would normally be due. The credit may be claimed during the same calendar year that the light and power business made incentive payments and incurred administrative expenses, or carried forward for the following two calendar years. A light and power business may not carry the credit backward or receive a refund in the place of a credit.
(b) A business that claims credit in excess of the amount actually earned must repay the excess amount, in addition to interest accruing from the date the credit was claimed to the date of repayment. The department must provide written notice of the amount of any excess credit and interest due. The amount due must be paid within thirty days of the date of notice. The interest rate for excess credit claimed is equal to the rate for delinquent excise taxes under chapter 82.32 RCW. However, businesses do not need to repay excess credits claimed based on amounts reported to the business by the department of commerce under RCW 19.27A.220, if the amounts are later found abnormal or inaccurate through no fault of the business.
(c) The right to earn credits under this early adoption incentive program expires June 30, 2032.
Part IV - Gas and Water Distribution Businesses
(401) Gas distribution. Gross income received for the distribution of gas is taxable under PUT as provided by RCW 82.16.020. Gas distribution business means the business of operating a plant or system for the production or distribution for hire or sale of gas, whether manufactured or natural. RCW 82.16.010. See Part II for general exemptions and deductions that may apply to gas distribution businesses.
(402) Requirements for gas distribution businesses. RCW 82.16.090 requires that customer billings issued by gas distribution businesses serving more than twenty thousand customers include the following information:
(a) The rates and amounts of taxes paid directly by the customer on products or services rendered by such business;
(b) The rate, origin, and approximate amount of each tax levied on the revenue of such business which has been added as a component of the amount charged to the customer. This does not include taxes levied by the federal government or taxes levied under chapters 54.28, 80.24, or 82.04 RCW; and
(c) The total kilowatt-hours of electricity consumed for the most recent twelve-month period or other information that provides the customer their energy usage over a twelve-month period.
(d) In addition to the general exemptions and deductions noted in Part II of this rule, the law provides the following:
(i) Sales of natural or manufactured gas to aluminum smelters. RCW 82.16.0498 provides an exemption to be taken in the form of a credit for sales of natural or manufactured gas to aluminum smelters. The credit is allowed if the contract for sale of gas to an aluminum smelter specifies that the price charged for the gas will be reduced by an amount equal to the credit. The credit allowed is the same amount as the utility tax that would otherwise have been due under RCW 82.16.020.
(ii) Conservation - Energy from gas. RCW 82.16.055 provides deductions for the production or generation of energy from cogeneration or renewable resources and for measures to improve the efficiency of energy end-use. See subsection (306)(c) of this rule.
(iii) Compressed natural gas and liquefied natural gas used as transportation fuel.
(A) Effective July 1, 2015, RCW 82.16.310 provides an exemption for sales by a gas distribution business of natural gas, compressed natural gas, and liquefied natural gas if the:
(I) Compressed natural gas or liquefied natural gas is sold or used as transportation fuel; or
(II) Buyer uses natural gas to manufacture compressed natural gas or liquefied natural gas to be sold or used as transportation fuel.
(B) Effective July 28, 2019, RCW 82.16.310 provides an exemption for sales by a gas distribution business of renewable natural gas.
(C) The buyer must provide and the seller must retain an exemption certificate. See the department's website at dor.wa.gov for the "Purchases of Compressed or Liquefied Natural Gas for Use as Transportation Fuel" form. RCW 82.16.310.
(D) Although sales of natural gas, compressed natural gas, liquefied natural gas, and renewable natural gas may be exempt under RCW 82.16.310, the income from such sales may be subject to other taxes such as B&O tax and retail sales tax.
(E) For the purpose of this subsection, "transportation fuel" means fuel for the generation of power to propel a motor vehicle as defined in RCW 46.04.320, a vessel as defined in RCW 88.02.310, or a locomotive or railroad car. "Renewable natural gas" is defined in RCW 54.04.190 to mean a gas consisting largely of methane and other hydrocarbons derived from the decomposition of organic material in landfills, wastewater treatment facilities, and anaerobic digesters.
(403) Credits for gas distribution businesses. Credit is available to gas distribution businesses that make incentive payments to eligible customers under the state energy performance standard early adoption incentive program. The credit is equal to the amount of incentive payments made under RCW 19.27A.220 in any calendar year, plus documented administrative costs not to exceed eight percent of the incentive payments.
(a) A gas distribution business may take the credit against its PUT liability, but the credit may not exceed the PUT that would normally be due. The credit may be claimed during the same calendar year that the gas distribution business made incentive payments and incurred administrative expenses, or carried forward for the following two calendar years. A gas distribution business may not carry the credit backward or receive a refund in the place of a credit.
(b) A business that claims credit in excess of the amount actually earned must repay the excess amount, in addition to interest accruing from the date the credit was claimed to the date of repayment. The department must provide written notice of the amount of any excess credit and interest due. The amount due must be paid within thirty days of the date of notice. The interest rate for excess credit claimed is equal to the rate for delinquent excise taxes under chapter 82.32 RCW. However, businesses do not need to repay excess credits claimed based on amounts reported to the business by the department of commerce under RCW 19.27A.220, if the amounts are later found abnormal or inaccurate through no fault of the business.
(c) The right to earn credits under this early adoption incentive program expires June 30, 2032.
(404) Water distribution. PUT is imposed on amounts derived from the distribution of water under RCW 82.16.020. Water distribution business means the business of operating a plant or system for the distribution of water for hire or sale. RCW 82.16.010. In addition to the general exemptions and deductions noted in Part II of this rule, the law provides the following:
(a) Water distribution by a nonprofit water association. Amounts derived from the distribution of water by a nonprofit water association and used for capital improvements, related to the water distribution service, by that association are deductible under RCW 82.16.050(12).
(b) Distribution of irrigation water. Amounts derived from the distribution of water through an irrigation system, for irrigation purposes, are deductible under RCW 82.16.050(7). The phrase "for irrigation purposes" means water used solely for nourishing plant life. Thus, when a water distribution business supplies potable water and some of the water is segregated and separately supplied solely for the nourishing of plant life as opposed to water supplied for domestic, municipal, or industrial uses, charges for such separately supplied irrigation water may be deducted from gross income subject to the PUT.
To meet the "irrigation system" requirement, a water distribution business must demonstrate that its distribution system has turnouts or similar connections for irrigation purposes that are separate from service hookups or similar connections for domestic, industrial, or municipal uses. Under the appropriate circumstances, the use of separate meters and cross-connection or back flow devices may be evidence of such separate connections.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 20-24-064, § 458-20-179, filed 11/24/20, effective 12/25/20; WSR 20-04-022, § 458-20-179, filed 1/27/20, effective 2/27/20. Statutory Authority: RCW 82.16.080, 82.32.300, and 82.01.060(2). WSR 18-21-166, § 458-20-179, filed 10/23/18, effective 11/23/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-179, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-01-037, § 458-20-179, filed 12/9/15, effective 1/9/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.16.310. WSR 15-04-047, § 458-20-179, filed 1/29/15, effective 3/1/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.16 RCW. WSR 13-14-121, § 458-20-179, filed 7/3/13, effective 8/3/13. Statutory Authority: RCW 82.32.300. WSR 94-13-034, § 458-20-179, filed 6/6/94, effective 7/7/94; WSR 86-18-069 (Order 86-16), § 458-20-179, filed 9/3/86; WSR 85-22-041 (Order 85-6), § 458-20-179, filed 11/1/85; WSR 83-01-059 (Order ET 82-13), § 458-20-179, filed 12/15/82; Order ET 71-1, § 458-20-179, filed 7/22/71; Order ET 70-3, § 458-20-179 (Rule 179), filed 5/29/70, effective 7/1/70.]


PDF458-20-17902

Brokered natural gas—Use tax.

(1) Introduction. RCW 82.12.022 and 82.14.230 impose state and local use taxes on the use of natural gas or manufactured gas by a consumer, including compressed natural gas and liquefied natural gas, if the person who sold the gas to the consumer has not paid public utility tax on that sale. This use tax is imposed only for natural gas delivered to a consumer through a pipeline. The use tax is applied at the same rate as the state and city public utility taxes. This rule explains how this use tax applies and how it is reported to the department.
(2) Definitions. For the purpose of this rule:
(a) "Brokered natural gas" means natural gas purchased by a consumer from a source out of the state and delivered to the consumer in this state.
(b) "Value of gas consumed or used" means the purchasing price of the gas to the consumer and generally must include all or part of the transportation charges as explained later.
(3) Applicability of use tax. The distribution and sale of natural gas in this state is generally taxed under the state and city public utility taxes. With changing conditions and federal regulations, it is now possible to have natural gas brokered from out of the state and sold directly to the consumer. If this occurs and the public utility taxes have not been paid, RCW 82.12.022 (state) and RCW 82.14.230 (city) impose a use tax on the brokered natural gas at the same rate as the state and city public utility taxes.
(4) State tax. When the use tax applies, the rate of tax imposed is equal to the public utility tax on gas distribution business under RCW 82.16.020. The rate of tax applies to the value of the gas consumed or used and is imposed upon the consumer.
(5) City tax. Cities are given the authority to impose a use tax on brokered natural gas. When imposed and applicable, the rate of tax is equal to the tax on natural gas business under RCW 35.21.870 on the value of gas consumed or used and is imposed on the consumer.
(6) Transportation charges.
(a) If all or part of the transportation charges for the delivery of the brokered natural gas are separately subject to the state's and cities' public utility taxes (RCW 82.16.020 (1)(c) and RCW 35.21.870), those transportation charges are excluded from measure of the use tax. The transportation charges not subject to the public utility taxes are included in the value of the gas consumed or used.
(b) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. In actual practice, the tax status of a situation must be determined after a review of all of the facts and circumstances.
(i) Public university purchases natural gas from an out of the state source through a broker. The natural gas is delivered by interstate pipeline to the local gas distribution system who delivers it to the university. The university pays the supplier for the gas, the pipeline for the interstate transportation charge, and the gas distribution system for its local transportation charge. The transportation charge by the pipeline is not subject to public utility tax because it is an interstate transportation charge. The transportation charge paid to the local gas distribution system is subject to the public utility taxes as an intrastate delivery. The value of the gas consumed or used is the purchase price paid to the supplier plus the transportation charge paid to pipeline company.
(ii) The above factual situation applies except that the natural gas is delivered directly by the interstate pipeline to the university. The university pays the supplier for the gas and the pipeline for the transportation charge. As the transportation charge is not subject to the public utility tax, it will be included in the measure of the tax. The value of the gas consumed or used is the purchase price plus the transportation charge paid to the pipeline.
(7) Credits against the taxes.
(a) A credit is allowed against the use taxes described in this rule for any use tax paid by the consumer to another state which is similar to this use tax and is applicable to the gas subject to this tax. Any other state's use tax allowed as a credit will be prorated to the state's and cities' portion of the tax based on the relative rates of the two taxes.
(b) A credit is also allowed against the use tax imposed by the state for any gross receipts tax similar that imposed pursuant to RCW 82.16.020 (1)(c) by another state on the seller of the gas with respect to the gas consumed or used.
(c) A credit is allowed against the use tax imposed by the cities for any gross receipts tax similar to that imposed pursuant to RCW 35.21.870 by another state or political subdivision of the state on the seller of the gas with respect to the gas consumed or used.
(8) Compressed natural gas and liquefied natural gas sold or used as transportation fuel.
(a) For the purposes of this subsection, "transportation fuel" means fuel for the generation of power to propel a motor vehicle as defined in RCW 46.04.320, a vessel as defined in RCW 88.02.310, or a locomotive or railroad car.
(b) Effective July 1, 2015, RCW 82.12.022 and 82.14.230 exempt from state and local use taxes:
(i) Compressed natural gas or liquefied natural gas to be sold or used as transportation fuel; or
(ii) Natural gas used to manufacture compressed natural gas or liquefied natural gas to be sold or used as transportation fuel.
(c) The buyer must provide and the seller must retain an exemption certificate. See the department's website dor.wa.gov for the appropriate form. Although the sale and use of natural gas, compressed natural gas, and liquefied natural gas may be exempt from PUT under RCW 82.16.310 and state and local use taxes under RCW 82.12.022 and 82.14.230, other taxes may apply.
(9) Reporting requirements. The person who delivers the gas to the consumer must make and submit a report to the local sales and use tax unit of the department's taxpayer account administration division by the fifteenth day of the month following a calendar quarter. The report must contain the following information:
(a) The name and address of the consumer to whom gas was delivered;
(b) The volume of gas delivered to each consumer during the calendar quarter; and
(c) Service address of consumer if different from mailing address.
(10) Collection and administration. Use tax on brokered natural gas must be filed and paid electronically either monthly or quarterly by consumers to the department. The department's authority to collect this tax is found in RCW 82.12.020 and 82.14.050.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.12.022, and 82.14.230. WSR 15-04-001, § 458-20-17902, filed 1/21/15, effective 2/21/15; WSR 07-24-055, § 458-20-17902, filed 12/3/07, effective 1/3/08. Statutory Authority: RCW 82.32.300. WSR 90-17-068, § 458-20-17902, filed 8/16/90, effective 9/16/90.]


PDF458-20-180

Motor carriers.

(1) Introduction. This rule explains the tax reporting responsibilities of persons engaged in the business of transporting by motor vehicle persons or property for hire. It explains transportation business and the application of public utility tax (PUT), business and occupation (B&O), and retail sales taxes to persons engaged in the business.
(a) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(b) References to related rules. The department of revenue (department) has adopted other rules that relate to the application of the PUT. Readers may want to refer to the rules in the following list:
(i) WAC 458-20-104 Small business tax relief based on income of business;
(ii) WAC 458-20-13501 Timber harvest operations;
(iii) WAC 458-20-171 Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic;
(iv) WAC 458-20-174 Sales of motor vehicles, trailers, and parts to motor carriers operating in interstate or foreign commerce;
(v) WAC 458-20-175 Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce;
(vi) WAC 458-20-178 Use tax and the use of tangible personal property;
(vii) WAC 458-20-179 Public utility tax; and
(viii) WAC 458-20-193D Transportation, communication, public utility activities, or other services in interstate or foreign commerce.
(2) What is a motor transportation business? A "motor transportation business" is a business operating any motor propelled vehicle transporting persons or property of others for hire and includes, but is not limited to, the operation of any motor propelled vehicle as an auto transportation company, common carrier, or contract carrier as defined by RCW 81.68.010 and 81.80.010. See RCW 82.16.010. The term "motor transportation business" does not include any "urban transportation business" as described in subsection (4) of this rule.
(a) It includes hauling for hire any extracted or manufactured material, over the state's highways and over private roads but does not include:
(i) The transportation of logs or other forest products exclusively on private roads or private highways (which is subject to the service B&O tax, e.g., see WAC 458-20-13501 Timber harvest operations); and
(ii) A log transportation business as described in subsection (3) of this rule.
(b) It does not include the hauling of any earth or other substance excavated or extracted from or taken to the right of way of a publicly owned street, place, road, or highway, by a person taxable under the public road construction B&O tax classification, regardless of whether or not the earth moving portion is separately stated. See WAC 458-20-171 for more information.
(3) What is a log transportation business? A "log transportation business" means the business of transporting logs by truck, except when such transportation meets the definition of urban transportation business or occurs exclusively on private roads. See RCW 82.16.010. Effective August 1, 2015, RCW 82.16.020 provides a preferential public utility tax rate for log transportation businesses.
(4) What is an urban transportation business? An "urban transportation business" is a business operating any vehicle for public use in the transportation of persons or property for hire, when:
• Operating entirely within the corporate limits of any city or town, or within five miles of the corporate limits thereof; or
• Operating entirely within and between cities and towns whose corporate limits are not more than five miles apart or within five miles of the corporate limits of either thereof.
(a) The five mile standard. "Operating entirely within five miles of the corporate limits thereof" means the five-mile standard is applied on a straight line from the corporate limits and not based on road mileage. It is immaterial how many miles the carrier travels from the origin to the termination of the haul as long as the origin and the termination of the haul are within five miles of the corporate limits. See RCW 82.16.010.
(b) What is included in urban transportation? Urban transportation includes, but is not limited to, the business of operating passenger vehicles of every type and also the business of operating cartage, pickup or delivery services, including the collection and distribution of property arriving from or destined to a point within or without the state, whether or not such collection or distribution be made by the person performing a local or interstate line-haul of such property. See subsection (7)(d) of this rule for deduction information for interstate transportation of persons or property.
(c) What is not urban transportation? Urban transportation does not include the business of operating any vehicle for transporting persons or property for hire when the origin or termination is more than five miles beyond the corporate limits of any city (or contiguous cities) through which it passes. Thus an operation extending from a city to a point which is more than five miles beyond its corporate limits does not constitute urban transportation. This is true even if the route is through intermediate cities that enable the vehicle to always be within five miles of a city's corporate limits. See subsection (2) of this rule for "What is a motor transportation business?"
(5) What does "motor transportation" and "urban transportation" include? Motor and urban transportation include the business of operating motor-driven vehicles, on public roads, used in transporting persons or property belonging to others, on a for-hire basis. These terms include the business of:
(a) Operating taxicabs, armored cars, and contract mail delivery vehicles, but do not include the businesses of operating auto wreckers or towing vehicles (taxable as sales at retail under RCW 82.04.050), school buses, ambulances, nor the collection and disposal of solid waste (taxable under the service and other activities B&O tax classification); and
(b) Renting or leasing trucks, trailers, buses, automobiles, and similar motor vehicles to others for use in the conveyance of persons or property when as an incident of the rental contract such motor vehicles are operated by the lessor or by an employee of the lessor.
(6) Why is the distinction between the motor and urban transportation classifications important? These tax classifications have different tax rates and it is important to segregate the gross income of each activity. The gross income of persons engaged in the business of motor transportation is taxed under the motor transportation PUT classification. The gross income of persons engaged in the business of urban transportation is taxed under the urban transportation PUT classification. The gross income of persons engaged in both urban and motor transportation is taxed under the motor transportation classification, unless the revenue is segregated as shown by their records.
(7) Are deductions available? Income, as described below, may be deducted from the taxable amounts reported, provided the amounts were originally included in the gross income. See WAC 458-20-179 for generally applicable deductions for PUT, such as bad debt and cash discount.
(a) Fees and charges for public transportation services. RCW 82.16.050 provides a deduction for amounts derived from fees or charges imposed on persons for transit services provided by a public transportation agency. Public transportation agencies must spend an amount equal to the tax reduction provided by this deduction solely to:
• Adjust routes to improve access for citizens using food banks and senior citizen services; or
• To extend or add new routes to assist low-income citizens and seniors.
(b) Services furnished jointly. In general, costs of doing business are not deductible under the public utility tax (PUT). However, RCW 82.16.050 does allow a deduction for amounts actually paid by a taxpayer to another person taxable under the PUT as the latter's portion of the consideration due for services furnished jointly by both, provided the full amount paid by the customer for the service is received by the taxpayer and reported as gross income subject to the PUT.
This includes the amount paid to a ferry company for the transportation of a vehicle and its contents (but not amounts paid to state owned or operated ferries) when the vehicle is carrying freight or passengers for hire and is being operated by a person engaged in the business of motor or urban transportation. This does not include amounts paid for transporting such vehicles over toll bridges.
Example 1. A customer hires ABC Transport (ABC) to haul goods from Tacoma to a manufacturing facility in Bellingham. ABC subcontracts part of the haul to XYZ Freight (XYZ) and has XYZ haul the goods from Tacoma to Everett where the goods are loaded into ABC's truck and transported to Bellingham. Assuming all other requirements of the deduction are met, ABC may deduct the payments it makes to XYZ from its gross income as XYZ's portion of the consideration paid by the customer for transportation services furnished jointly by ABC and XYZ.
(c) Transportation of commodities to export facilities. Income received from transporting commodities from points of origin in this state to an export elevator, wharf, dock, or ship side on tidewater or its navigable tributaries is deductible under RCW 82.16.050. The deduction is only available when the commodities are forwarded, without intervening transportation, by vessel, in their original form, to interstate or foreign destinations. However, this deduction is not available when the point of origin and the point of delivery to the export elevator, wharf, dock, or ship side are located within the corporate limits of the same city or town.
(i) Example 2. AB Transport moves freight by tug and barge from points in Washington to terminal facilities at tidewater ports in Washington. The freight is subsequently shipped from the ports by vessel to interstate and foreign destinations. AB Transport may deduct the gross income from these shipments under RCW 82.16.050.
(ii) Example 3. ABC Trucking hauls widgets from the manufacturing plant to a storage area that is adjacent to the dock. The storage area is quite large and the widgets are moved from the storage area to alongside the ship in time for loading. The widgets are loaded on the ship and then transported to a foreign country. ABC Trucking may take a deduction for the amounts received for transporting the widgets from the manufacturer to the storage area. The movement of the widgets within the storage area is not considered "intervening transportation," but is part of the stevedoring activity.
(iii) Example 4. ABC Trucking hauls several types of widgets from the manufacturing plant to a "staging area" where the widgets are sorted. After sorting, XY Hauling transports some of the widgets from the staging area to local buyers and other widgets to the dock that is located approximately five miles from the staging area where the widgets are immediately loaded on a vessel for shipment to Japan. The dock and staging area are not within the corporate city limits of the same city. ABC Trucking may not take a deduction for amounts received for hauling widgets to the staging area. Even though some of the widgets ultimately were exported, ABC Trucking did not deliver the widgets to the dock where the widgets were loaded on a vessel.
However, XY Hauling may take a deduction for the gross income for hauls from the staging area to the dock. The widgets were loaded on the vessel in their original form with no additional processing. The haul also did not originate or terminate within the corporate city limits of the same city or town. All the conditions were met for XY Hauling to claim the deduction.
(d) Interstate transportation of persons or property. Income received from transporting persons or property by motor transportation equipment where either the origin or destination of the haul is outside the state of Washington is deductible. The interstate movement originates or terminates at the point where the transport obligation of the interstate carrier begins or ends. See WAC 458-20-193D for additional information on interstate activities. Transportation provided within the state prior to the point of origin of the interstate movement or subsequent to the point of destination within this state is wholly intrastate and not deductible.
Example 5. Airport B Shuttle provides transportation to and from the airport for persons departing or arriving from destinations that may or may not be out of state. This service is not incidental to any interstate movement and thus gross income is taxable under either motor or urban transportation.
(e) Interstate transportation of commodities. Income received from the transportation of commodities from points of origin in this state to final destination outside this state, or from points of origin outside this state to final destination in this state are deductible under RCW 82.16.050 where the carrier grants to the shipper the privilege of stopping the shipment in transit at some point in this state for the purpose of storing, manufacturing, milling, or other processing, and thereafter forwards the same commodity, or its equivalent, in the same or converted form, under a through freight rate from point of origin to final destination.
(f) Transportation of agricultural commodities. Certain income received from the transportation of agricultural commodities can be deducted when the commodities do not include manufactured substances or articles. For the income to be deducted, the commodities must be transported from points of origin in the state to interim storage facilities in this state for transshipment, without intervening transportation, to an export elevator, wharf, dock, or ship side on tidewater or its navigable tributaries to be forwarded, without intervening transportation, by vessel, in their original form, to interstate or foreign destinations. If agricultural commodities are transshipped from interim storage facilities in this state to storage facilities at a port on tidewater or its navigable tributaries, the same agricultural commodity dealer must operate both the interim storage facilities and the storage facilities at the port. RCW 82.16.050.
(i) The deduction under this subsection is available only when the person claiming the deduction obtains a completed "Certificate of Agricultural Commodity Shipped to Interstate and Foreign Destinations" from the agricultural commodity dealer operating the interim storage facilities.
(ii) A blank certificate can be found on the department's website at dor.wa.gov. The form may also be obtained by contacting the department's telephone information center at 360-705-6705, or by writing the department at:
Taxpayer Information and Education
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
(8) Exemption for income from persons with special transportation needs. RCW 82.16.047 provides an exemption from PUT for amounts received for providing commuter share riding or ride sharing for persons with special transportation needs in accordance with RCW 46.74.010. Transportation must be provided by a public social service agency or a private, nonprofit transportation provider as defined in RCW 81.66.010.
(9) Business activities other than hauling. Persons engaged in the business of motor or urban transportation may also receive income from other business activities. The tax consequences of this income is generally based on whether or not these services are performed as a part of or are incidental to the hauling activity, or are services where the taxpayer does not haul the shipment.
(a) Handling and other services that are a part of or incidental to the hauling activity. When a person performs activities such as packing, crating, loading or unloading of goods that the person is hauling for the customer, those services are considered to be performed as a part of the hauling activity, or are services incidental to the haul itself. The gross income from those services is taxed in the same manner as the hauling activity, e.g., motor or urban transportation.
Example 6. Mary hires Luke's Packing & Hauling Co. (Luke's) to load, haul, and unload her belongings at a local storage facility just a couple of miles down the street from the city apartment she is vacating. Luke's will report the gross income from Mary under the urban transportation PUT classification.
(b) Handling and other services that are not a part of or incidental to the hauling activity.
(i) If a person engaged in hauling activities packs, crates, loads, or unloads goods that the person is not also hauling for the customer, the gross income from these activities will generally be subject to service and other activities B&O tax.
Example 7. James hires Luke's Packing & Hauling (Luke's) to wrap, pack, and crate his belongings in preparation for long-term storage. Luke's will not be hauling James' belongings as Haul and Storage Inc. has been hired to pick up the belongings and put them in their storage facility. Luke's will report the gross income for wrapping, packing, and crating James' belongings under the service and other activities B&O tax classification.
(ii) A person engaged in hauling activities may also perform services that are not a part of or are separate from the hauling activity. The gross income from these activities is not subject to the motor or urban transportation PUT, but is instead subject to tax based on the nature of the activity and other provisions of the law.
Example 8. Affordable Hauling and Storage (Affordable) hauls products for hire and also operates a warehouse. Big Manufacturing Company (Big) hires Affordable to pick-up and deliver products to and from Affordable's warehouse for long-term storage. Affordable charges Big for the hauling services as they occur and also separately invoices Big a monthly fee for storing the products. The income from the hauling services is subject to the motor transportation or urban transportation PUT classification, as the case may be. The monthly storage charges are subject to the warehousing B&O tax classification. See WAC 458-20-182 for an explanation of the tax-reporting responsibilities of warehouse businesses.
(c) Sales, leases, or rentals of tangible personal property by motor carriers. Persons engaged in either motor or urban transportation may also sell, lease, or rent tangible personal property, such as forklifts or trailers. Gross income from the sale, lease, or rental of tangible personal property without an operator to a consumer, is subject to retailing B&O and retail sales taxes, unless a specific exemption applies. If the sale is a sale for resale, the sale is subject to the wholesaling B&O tax classification. For information regarding the tax reporting responsibilities of persons that lease or rent tangible personal property see WAC 458-20-211.
If the sale, lease, or rental of the property qualifies for one of the retail sales tax exemptions for equipment used in interstate commerce provided by RCW 82.08.0262 or 82.08.0263 (e.g., as may be the case with a trailer used in interstate commerce), the retailing of interstate transportation equipment B&O tax classification applies. Refer to WAC 458-20-174 for information on limited exemptions that may apply to motor carriers operating in interstate or foreign commerce.
(10) Purchases of tangible personal property. Persons engaged in the business of motor or urban transportation must pay retail sales tax to their vendors when purchasing motor vehicles, trailers, parts, equipment, tools, supplies, and other tangible personal property for use in conducting their business. Refer to WAC 458-20-174 for limited exemptions that may apply to motor carriers operating in interstate or foreign commerce.
(11) Purchases made for rental or lease to others. Persons buying motor vehicles, trailers and similar equipment solely for the purpose of renting or leasing the same without an operator are making purchases for resale. The seller must obtain a copy of the buyer's reseller permit from the buyer to document the wholesale nature of any sale as provided in WAC 458-20-102 Reseller permits.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-180, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-01-037, § 458-20-180, filed 12/9/15, effective 1/9/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.16 RCW. WSR 13-14-121, § 458-20-180, filed 7/3/13, effective 8/3/13. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-180, filed 3/15/83; Order ET 70-3, § 458-20-180 (Rule 180), filed 5/29/70, effective 7/1/70.]


PDF458-20-181

Vessels, including log patrols, tugs and barges, operating upon waters in the state of Washington.

(1) Introduction. This rule explains the business and occupation (B&O) tax, sales tax, use tax, and public utility tax responsibilities of those operating vessels upon waters in Washington.
(2) Other rules that may apply. Readers may want to refer to other rules for additional information, including the following:
(a) WAC 458-20-119 Sales by caterers and food service contractors;
(b) WAC 458-20-135 Extracting natural products;
(c) WAC 458-20-145 Sourcing retail sales for business and occupation tax and state and local retail sales tax—Sourcing of use tax for purchasers;
(d) WAC 458-20-175 Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce;
(e) WAC 458-20-176 Commercial deep sea fishing—Commercial passenger fishing—Diesel fuel;
(f) WAC 458-20-178 Use tax and the use of tangible personal property;
(g) WAC 458-20-179 Public utility tax;
(h) WAC 458-20-183 Recreational services and activities;
(i) WAC 458-20-193 Interstate sales of tangible personal property;
(j) WAC 458-20-238 Sales of watercraft to nonresidents—Use of watercraft in Washington by nonresidents;
(k) WAC 458-20-244 Food and food ingredients.
(3) Definitions. The following terms apply to this rule.
(a) Lighter. A lighter is a large boat or barge used in loading and unloading vessels to transfer goods and passengers to and from moored vessels that cannot reach the place of shipment or delivery.
(b) Dry-docking. The act of placing a vessel on a dock that can be kept dry for use during the construction or repairing of the vessel, or the act of bringing a vessel to dry land so that the submerged portions of the hull can be cleaned or inspected.
(c) Vessel haul-out. The act of removing a vessel from the water. Vessel haul-out is generally accomplished with a large mobile hoist or crane.
(d) Dry stack storage. Land-based vessel storage in the form of stacking berths.
(4) Business and occupation tax. Retailing B&O tax applies to retail sales and is measured by the gross proceeds of sale unless the sale is for resale, in which case the wholesaling B&O tax applies. RCW 82.04.050, 82.04.060, 82.04.070, 82.04.250 and 82.04.270. Warehousing B&O tax applies to persons engaging in warehousing activities. RCW 82.04.080 and 82.04.280. The gross income of the business from activities that fall into no other B&O tax classification are subject to the service and other activities B&O tax. RCW 82.04.080 and 82.04.290. Subsection (4) of this rule illustrates how the B&O tax applies in a number of common situations.
(a) Retailing.
(i) Tangible personal property. Persons engaged in the business of operating vessels and tugs are taxable under the retailing B&O tax classification upon the gross sales to consumers of tangible personal property that are retail sales, including meals (including meals to employees).
(ii) Services. Charges to consumers made by others for the repair of any boat or barge are retail sales and subject to retailing B&O tax. Also, sales of sightseeing or scenic cruises lasting fewer than 24 hours are retail sales and subject to retailing B&O tax, including sales of sightseeing cruises that are combined with other goods and services when sold for one nonitemized price.
(iii) Dry-docking and haul-out. Sales of dry-docking and vessel haul-out services are retail sales if the services are performed with respect to the sale of retail services, such as repair or maintenance of the vessel for consumers. The gross income from sales of dry-docking and haul-out services in these instances is taxable under the retailing B&O tax classification. The tax treatment described in this subsection applies regardless of whether the charges are separately itemized.
(b) Service and other business activities.
(i) Operation of lighters. The business of operating lighters is a service taxable under the service and other business activities B&O tax classification upon the gross income from such service.
(ii) Dry-docking and haul-out. Charges for dry-docking and vessel haul-out services are taxable under the service and other activities B&O tax classification if sold alone or performed only in conjunction with other services taxable under the service and other activities B&O tax classification. RCW 82.04.290.
(c) Warehousing.
(i) Dry stack storage. Gross income from operating a dry stack storage warehouse is taxable under the warehousing B&O tax classification.
(ii) Haul-out. Vessel haul-out services are taxable under the warehousing B&O tax classification if performed with respect to the sale of dry stack or warehouse storage of the vessel. RCW 82.04.080 and 82.04.280.
(5) Retail sales tax. Retail sales tax is imposed on retail sales unless an exemption applies. RCW 82.04.050 and 82.08.020. The retail sales tax is imposed on the selling price of the product sold in the retail sale. RCW 82.08.010. While not exhaustive, (a) through (c) of this subsection list a number of common situations where retail sales tax will or will not apply.
(a) Tangible personal property.
(i) Sales of tangible personal property to consumers, including prepared food, soft drinks, bottled water, or dietary supplements by persons operating vessels and tugs are sales at retail and retail sales tax must be collected. RCW 82.04.050, 82.08.020, and 82.08.0293.
(ii) For applicability of retail sales tax where prepared food, including meals, are furnished to members of the crew or to other employees as a part of their compensation for services rendered, see WAC 458-20-119.
(iii) Sales of tangible personal property, including food products, to operators for resale aboard ship are not subject to retail sales tax. RCW 82.04.050, 82.04.190, 82.08.0293. Operators claiming a resale exemption should obtain a reseller permit. For more information on reseller permits see WAC 458-20-102.
(iv) Sales to all such operators of fuel, lubricants, machinery, equipment, and supplies, which are not resold, are sales at retail and retail sales tax must be paid.
(b) Services.
(i) Charges to consumers made by others for the repair of any boat or barge are sales at retail and retail sales tax must be paid upon the total charge made for both labor and materials.
(ii) Sales of sightseeing or scenic cruises lasting fewer than 24 hours are subject to retail sales tax, including sales of sightseeing cruises that are combined with other goods and services when sold for one nonitemized price.
(c) Dry-docking and haul-out. Sales of dry-docking and vessel haul-out services are retail sales, and subject to retail sales tax, if the services are performed with respect to the sale of retail services, such as repair or maintenance of the vessel for consumers.
(6) Use tax. The use tax applies for the privilege of using within this state as a consumer, among other things, any articles of tangible personal property or services defined as a retail sale in RCW 82.04.050 and identified in RCW 82.12.020, upon which the retail sales tax has not been paid, unless an exemption applies.
(7) Public utility tax. Persons operating vessels upon waters wholly within the state of Washington as common carriers regulated by the utilities and transportation commission are taxable under the public utility tax as follows:
(a) Persons operating vessels under 65 feet in length, other than tugboats, are subject to the public utility tax under the rate applicable to vessels under 65 feet in length on gross income.
(b) Persons operating vessels 65 feet or more in length, are taxable under the "other public service business" classification on gross income.
(c) The "other public service business" classification of the public utility tax applies to the business of operating tugs, barges, and log patrols.
(d) Vessel haul-out services are subject to public utility tax under the motor transportation or urban transportation classification if they are performed in conjunction with hauling or transporting the vessel on public roads.
[Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 22-23-134, § 458-20-181, filed 11/21/22, effective 12/22/22. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-181, filed 3/15/83; Order ET 70-3, § 458-20-181 (Rule 181), filed 5/29/70, effective 7/1/70.]


PDF458-20-182

Warehouse and other storage businesses.

(1) Introduction. This rule explains the application of the business and occupation (B&O) tax and retail sales and use taxes to warehouse and other storage businesses. It also clarifies the taxability for some specific storage-related activities.
(2) Other rules that may apply. You may want to refer to other rules for additional information, including the following:
(a) WAC 458-20-115 Sales of packing materials and containers;
(b) WAC 458-20-118 Sale or rental of real estate, license to use real estate;
(c) WAC 458-20-133 Frozen food lockers;
(d) WAC 458-20-180 Motor carriers;
(e) WAC 458-20-181 Vessels, including log patrols, tugs and barges, operating upon waters in the state of Washington;
(f) WAC 458-20-193D Transportation, communication, public utility activities, or other services in interstate or foreign commerce; and
(g) WAC 458-20-211 Leases or rentals of tangible personal property, bailments.
(3) Definitions. The following terms and meanings apply to this rule:
(a) "Automobile storage garage" means any off-street building, structure, or area where vehicles are parked or stored, for any period of time, for a charge.
(b) "Cold storage warehouse" means a storage warehouse used to store either fresh or frozen, or both types of perishable fruits or vegetables, meat, seafood, dairy products, or fowl, or any combination, at a desired temperature to maintain the quality of the product for orderly marketing. RCW 82.04.280. This term does not include freezer space or frozen food lockers. See WAC 458-20-133.
(c) "Storage warehouse" means any part of a building or structure in which goods, wares, or merchandise are received for storage for compensation. "Storage warehouse" does not include field warehouses, fruit warehouses, fruit packing plants, warehouses licensed under chapter 22.09 RCW, automobile storage garages, railroad freight sheds, docks and wharves, and "self-storage" or "mini-storage" facilities where customers have direct access to individual storage areas by a separate entrance. RCW 82.04.280. "Storage warehouse" also does not include a building or structure, or that part of the building or structure, in which an activity taxable under RCW 82.04.272, warehousing and reselling prescription drugs, is conducted. RCW 82.04.280.
(d) "Warehouse" means every structure where facilities are used for the storage of tangible personal property.
(4) Business and occupation tax. The B&O tax is imposed on privilege of engaging in business in Washington. The measure of the B&O tax is the gross income of the business (gross income) or gross proceeds of sale (gross proceeds) as the case may be. RCW 82.04.080 and 82.04.090. Businesses that provide storage services are taxable under the B&O tax classification according to the nature of their activities and the specific kinds of goods stored, as follows:
(a) Warehousing classification.
(i) Persons engaged in operating any "storage warehouse" or "cold storage warehouse," as defined in subsection (3) of this rule, are subject to B&O tax under the warehousing classification. See RCW 82.04.280.
(ii) Types of activities that fall within the warehousing classification include dry stack storage and storing a third-party's items within a storage container in the person's warehouse. The fact that the third party lacks dominion and control over the warehouse storage area distinguishes, in part, a warehousing activity from activities taxable under other B&O tax classifications.
Example 1.
Facts: Safe Harbor, LLC (Safe Harbor) is a Washington business engaged in providing dry stack storage. Dave purchases a boat storage space from Safe Harbor for the boating season. When Dave wishes to use his boat, he contacts Safe Harbor and the Safe Harbor operator removes Dave's boat from its storage slot and places it in the water. When Dave is finished using his boat, he leaves it in Safe Harbor's dock where the operator lifts the boat from the water and returns it to the stack. The haul-out service is included as part of the dry stack storage.
Result: Dave lacks dominion and control over the stacking berth. Consequently, the charge for the use of a stacking berth is a warehousing activity and not a rental of real estate. The haul-out service is taxable under the warehousing B&O tax classification because it is performed with respect to the dry stack storage of Dave's boat. Safe Harbor must report and pay warehousing B&O tax on its gross income from operating a dry stack storage warehouse. RCW 82.04.080 and 82.04.280.
Example 2.
Facts: Your PNW Storage, LLC (YPS) is engaged in the business of storing a third-party's items within a storage container in YPS' warehouse. YPS maintains control over the storage container when it is stored at YPS' warehouse.
Result: YPS is subject to B&O tax under the warehousing classification. The third party lacks dominion or control over the warehouse storage area which distinguishes, in part, a warehousing activity from activities taxable under other B&O tax classifications.
(iii) If a person is engaged in warehousing and also provides related services including handling, sorting, weighing, measuring, and loading or unloading tangible personal property for storage, the gross income from these services is included in the person's gross income from warehousing.
(iv) A person storing third-party goods, incidental to the person's provision of order fulfillment services to the third party, is not operating a storage warehouse or cold storage warehouse for purposes of the warehousing B&O tax classification.
(b) Retailing classification.
(i) Persons engaged in operating any automobile storage garage for consumers are generally subject to B&O tax under the retailing classification. RCW 82.04.050 and 82.04.250.
However, amounts received for the rental of designated parking spaces are derived from the rental of real estate and are not subject to retail sales tax or B&O tax. See (4)(e) of this rule for more information on the exemption for rental of real estate.
(ii) Persons renting or leasing to a consumer tangible personal property used to store goods are making retail sales. See RCW 82.04.040 and 82.04.050 and WAC 458-20-211.
Example 3.
Facts: Porta-Closet, LLC (Porta-Closet) is engaged in renting portable self-storage containers to customers that are stored at the customer's site rather than in a warehouse.
Result: Porta-Closet is subject to B&O tax under the retailing classification on the gross proceeds of sales from the activity. B&O tax under the retailing classification also applies to any transportation charges for delivery or pick-up of the portable storage containers to or from the customer's site. See WAC 458-20-211. However, public utility tax applies to transportation charges for moving the portable storage containers between the customer's different sites.
(c) Prescription drug warehousing classification. Persons engaged in warehousing and reselling drugs for human use under a prescription are subject to B&O tax under the warehousing and reselling prescription drugs classification. See RCW 82.04.272.
(i) A person qualifies for the prescription drug warehousing classification only if it satisfies all of the following requirements:
(A) Purchases prescription drugs from a manufacturer or wholesaler;
(B) Warehouses and resells the prescription drugs directly to a qualified buyer;
(C) Is registered with the Federal Drug Enforcement Administration;
(D) Is licensed as either a wholesaler or retailer by the state pharmacy quality assurance commission established by RCW 18.64.001; and
(E) Resells the prescription drugs directly to a retailer with a pharmacy facility license or nonresidential pharmacy license issued by the department of health under RCW 18.64.043 or 18.64.370, respectively, or to a hospital, clinic, health care provider, or other provider of health care services.
(ii) While the person must be engaged in both the warehousing and reselling of prescriptions drugs to be eligible for the preferential B&O tax rate, it is not necessary for the person's warehouse to be located in Washington to qualify.
(d) Wholesaling. A person engaged as a lessor of storage equipment or containers is not required to pay retail sales or use tax on purchases of storage containers and other related equipment that are leased to a customer and subsequently leased to other customers without intervening use. The original rental is subject to wholesaling B&O tax and the subsequent rental is subject to the retailing B&O tax. The original seller is required to obtain a reseller permit (WAC  458-20-102) to substantiate the wholesale nature of the transaction. WAC 458-20-211.
(e) Service and other classification.
(i) Persons engaged in storage activities not described in subsection (4) (a), (b), (c), or (d) of this rule, and that are not otherwise addressed in any other specific B&O tax classification, are subject to B&O tax under the service and other B&O classification.
(ii) Granting of a license to use real estate is taxable under the service and other B&O tax classification unless specifically classified otherwise by statute. RCW 82.04.290 and WAC 458-20-118(1). A license to use real estate grants merely a right to use the real property of another but does not confer exclusive control or dominion over the same.
(iii) Storage activities that fall within the service and other classification include freezer space and frozen food lockers, field warehouses, agricultural commodities warehouses, and freight storage warehouses.
Example 4.
Facts: South Pole Storage (South Pole) is engaged in the business of renting frozen food lockers. Cara rents a frozen food locker from South Pole for the purpose of storing large cuts of beef, which she purchases from a local cattle ranch for her family's consumption. South Pole does not alter the meat in any way; it merely provides storage.
Result: South Pole's gross income from the rental of the frozen food lockers is taxable under the service and other activities classification. See WAC 458-20-133.
(f) Exempt from B&O tax. Amounts derived from the sale and rental of real estate are exempt from B&O tax. See RCW 82.04.390 and WAC 458-20-118. A transaction will be considered the rental of real estate if all of the following five elements are met:
(i) A rental period of 30 days or longer;
(ii) The lessee has the right to exclusive use of the rented space;
(iii) The lessee has the right of continuous possession over the space;
(iv) The lessee has dominion and control of the rented space; and
(v) A landlord/tenant relationship exists between the lessor and lessee. See WAC 458-20-118.
Example 5.
Facts: More Space Company (MSC) rents self-service storage units. All of the storage units have separate entrances. Carter enters into a six-month contract with MSC for an individual storage unit for his furniture while he works in Denmark.
Result: Carter likely has dominion and control of the rented space. Thus, MSC's gross income received from the rental of its storage unit to Carter is exempt from B&O tax because it is a rental of real estate.
(5) Grain warehouses storing own grain. Where a grain warehouser purchases or owns grain stored in such warehouse, taxable gross income includes:
(a) An amount equal to the charges at the customary rate for all services given in connection with the grain up to the time of purchase by the warehouser; and
(b) The amount of any charges for services that are given during the period of the warehouser's ownership of the grain, billed and stated separately from the price of the grain on the invoice to the purchaser at the time of the sale by the warehouser.
(6) Retail sales tax and use tax. Retail sales tax is due on the sale of tangible personal property or retail services to a consumer as provided in chapter 82.04 RCW. Persons operating any of the business activities described in this rule must pay retail sales tax on their purchases of their consumable supplies, equipment, and materials for their own use as consumers in operating the businesses. Use tax is due on the value of all tangible personal property used as consumers by persons operating warehouse businesses, upon which the retail sales tax has not been paid.
(a) Portable storage containers. A person engaged in the business of providing portable self-storage containers to customers for temporary storage must pay retail sales tax upon their purchases of property used in the operation of the business. A purchase of a storage container is subject to retail sales tax when the container is used for storage at the purchaser's warehouse rather than rented to customers for use at the customer's location. A reseller permit may not be used to purchase consumable supplies, equipment, and materials used in the operation of a business. See WAC 458-20-211.
(b) Automobile garage parking/storage. Persons operating any automobile storage garage must collect and report retail sales tax upon the gross selling price of the parking/storage services to consumers.
[Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 24-14-071, § 458-20-182, filed 6/28/24, effective 7/29/24. Statutory Authority: RCW 82.32.300. WSR 87-05-042 (Order 87-1), § 458-20-182, filed 2/18/87; Order ET 74-1, § 458-20-182, filed 5/7/74; Order ET 70-3, § 458-20-182 (Rule 182), filed 5/29/70, effective 7/1/70.]


PDF458-20-18201

Warehouse and grain elevators and distribution centers exemption—Remittance.

Part 1. General.
(101) Introduction. Wholesalers or third-party warehousers that own or operate qualifying warehouses or grain elevators, and retailers who own or operate qualifying distribution centers, may be eligible for a limited sales/use tax exemption on qualifying construction costs and qualifying purchases of material-handling and racking equipment. The exemption is in the form of a remittance. See RCW 82.08.820 and 82.12.820. This rule provides details on the qualifying criteria for the exemption.
(102) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Construction" means the actual construction of a warehouse or grain elevator that did not exist before the construction began. Construction also includes expansion, if the expansion adds at least 200,000 square feet of additional space to an existing warehouse or additional storage capacity of at least 1,000,000,000 bushels to an existing grain elevator. Construction does not include renovation, remodeling, or repair. Activities not involving actual construction do not fall within the definition of construction. For example, costs related to housing, meals, trailers, permit fees, insurance, bonds, dumpsters, etc., are not construction costs. Similarly, "actual" construction generally does not include activities in the preparation of building a warehouse or grain elevator. Thus, except for design and engineering activities, activities occurring prior to the issuance of a building permit do not constitute construction.
(b) "Distribution center" means a warehouse used exclusively by a retailer solely for the storage and distribution of finished goods to retail outlets of the retailer, i.e., to physical locations owned or operated by the retailer at which retail sales occur. Distribution center does not include any warehouse at which retail sales occur, and distribution centers are not used to fulfill retail orders directly to customers. RCW 82.08.820.
(c) "Finished goods" means tangible personal property intended for sale by a retailer or wholesaler. Finished goods do not include any of the following:
(i) Agricultural products stored by wholesalers, third-party warehouses, or retailers if the storage takes place on the land of the person who produced the agricultural product;
(ii) Logs, minerals, petroleum, gas, or other extracted products stored as raw materials or in bulk; or
(iii) Cannabis, useable cannabis, or cannabis-infused products. RCW 82.08.820.
(d) "Grain elevator" means a structure used for storage and handling of grain in bulk. RCW 82.08.820. The term "structure" as it relates to a grain elevator is not limited to a single building or edifice of a single foundation or footprint.
(e) "Material-handling equipment and racking equipment" means equipment in a warehouse or grain elevator used primarily (more than 50 percent of the time) to handle, store, organize, convey, package, or repackage finished goods. RCW 82.08.820. The term includes tangible personal property with a useful life of at least one year that becomes an ingredient or component part of the equipment, including repair and replacement parts. See subsection 203(a) of this rule for additional information about the types of costs related to material handling and racking equipment that do and do not qualify for this exemption.
(f) "Material-handling equipment" means equipment that physically moves tangible personal property and equipment used in the process of moving tangible personal property. The term generally includes, but is not limited to, the following:
(i) Conveyers, carousels, lifts, positioners, pick-up-and-place units, cranes, hoists, mechanical arms, and robots;
(ii) Mechanized systems, including containers that are an integral part of the system, the purpose of which is to lift or move tangible personal property;
(iii) Automated handling, storage, and retrieval systems, including computers that control them, the purpose of which is to lift or move tangible personal property;
(iv) Forklifts and other off-the-road vehicles that are used to lift or move tangible personal property and that cannot be operated legally on roads and streets; and
(v) Equipment used to organize and track products, such as handheld scanners and stand-alone scales used to organize goods by weight. In contrast, stand-alone scales used to weigh goods to determine postage are not material-handling equipment.
(g) "Qualifying activity" means the storage by a wholesaler of finished goods for wholesaling purposes, the storage by a third-party warehouser of another person's finished goods, or the storage by a retailer of its finished goods for the purpose of distributing the goods to retail outlets of the retailer.
(h) "Racking equipment" means equipment used to physically store tangible personal property. The term generally includes conveying systems, chutes, shelves, racks, bins, drawers, pallets, and other containers and storage devices that form a necessary part of the storage system. Examples of racking equipment include stand-alone tables, when the tables are used during packaging or storing finished goods; drawers, when used to handle, store, or organize finished goods; and refrigeration systems that are a necessary part of the storage system for finished goods that must be stored in a refrigerated state. Dock doors and dock levelers are not racking equipment.
(i) "Third-party warehouser" means a person taxable under the B&O tax classification in RCW  82.04.280 (1)(d) for persons operating cold storage warehouses or storage warehouses. RCW 82.08.820.
(j) "Warehouse" means a single enclosed building or structure in which finished goods are stored. RCW 82.08.820. A warehouse building or structure may have more than one storage room and more than one floor. Office space, lunchrooms, restrooms, and other space within the warehouse and necessary for the operation of the warehouse are considered part of the warehouse, as are loading docks and other such space attached to the building and used for handling of finished goods. A guard shack or any external building is not considered part of the warehouse. Landscaping and parking lots are not considered part of the warehouse. A storage yard is not a warehouse, nor is any building in which manufacturing takes place.
Part 2. Remittance Eligibility.
(201) Qualifying owner/operator. The remittance is available only to the following types of businesses:
(a) A wholesaler that owns or operates a warehouse or a grain elevator;
(b) A third-party warehouser that owns or operates a warehouse or a grain elevator; or
(c) A retailer that owns or operates a distribution center.
(202) Effect of nonqualifying activities.
(a) Distribution centers. A distribution center may qualify for the exemption only if the retailer that operates the distribution center uses it solely for a qualifying activity. For example, a retailer that operates its distribution center for its own retail outlets and also fulfills retail orders directly to consumers does not qualify for the exemption because the distribution center is not used exclusively for the qualifying activity of storing and distributing finished goods to the retailer's retail outlets.
(b) Warehouses.
(i) A single warehouse accommodating multiple business activities may qualify for the exemption if none of the activities is excluded by statute and at least one of the activities carried on at the warehouse is a qualifying activity, provided that at least 200,000 square feet of the warehouse is dedicated to the qualifying activity.
(ii) A warehouse that accommodates both qualifying and nonqualifying activities must be able to demonstrate that it meets the 200,000 square feet requirement in order to receive the exemption. Office space, lunchrooms, restrooms, and other space within the warehouse and necessary for the operation of the warehouse are included within the 200,000 square feet warehouse space measure. The department determines eligibility under this section based on information provided by the taxpayer and through audit and other administrative records.
Examples.
(A) Example 1. Company A operates a 250,000 square foot warehouse that it uses to store goods of third parties. Company A also fulfills retail orders directly to its retail customers. Company A designates 200,000 square feet of the warehouse exclusively to its third-party warehousing activity, i.e., storing goods of third parties. The other 50,000 square feet of Company A's warehouse has separately stored goods, and Company A exclusively uses those goods (not the goods in the other 200,000 square feet) to fulfill Company A's retail sales. Company A's warehouse may qualify for the exemption because 200,000 square feet of its warehouse space is dedicated for use solely as a third-party warehouse, which is a qualifying activity, and retail order fulfillment is not a prohibited use of warehouses under RCW 82.08.820.
(B) Example 2. Company B operates a 500,000 square foot warehouse that it uses to store and distribute finished goods from the warehouse to its retail outlets. Company B also uses the warehouse to fulfill orders directly to its retail customers. Company B dedicates 300,000 square feet of the warehouse to storing the goods to be distributed to its retail outlets, and the remaining 200,000 square feet is segregated and dedicated exclusively to fulfillment of retail orders. Company B's warehouse is a distribution center; retail fulfillment is a disqualifying activity if it occurs in a retail distribution center. See subsection (102)(b) of this rule. Therefore, Company B's distribution center does not qualify for the exemption.
(C) Example 3. Company C operates a 500,000 square foot warehouse that it uses to store finished goods for wholesale. Company C also uses the warehouse to fulfill orders directly to its retail customers. The wholesale goods and the products for fulfilling retail orders are intermingled throughout the warehouse. Company B's warehouse does not qualify for the exemption because it does not dedicate 200,000 square feet of the warehouse's physical space exclusively to the wholesaling activity, the qualifying activity.
(203) Payment of sales/use tax required. The remittance is available only to an eligible business that has paid sales tax levied under RCW 82.08.020, or use tax levied under RCW 82.12.020, for the following types of costs:
(a) Material-handling equipment and racking equipment, and labor and services given in respect to installing, repairing, cleaning, altering, or improving the equipment. For example, costs of renting material-handling and racking equipment, without an operator, qualifies for the remittance if the equipment is primarily used to handle, store, organize, convey, package, or repackage finished goods. However, the cost of renting equipment used to install material-handling and racking equipment does not qualify because the charge for the rental equipment is not a charge for labor or services and the equipment used in installation is not itself material-handling and racking equipment. Costs for maintaining material-handling and racking equipment do not qualify for the exemption.
(b) Materials incorporated in the construction of a warehouse or grain elevator, and labor and services given in respect to that construction. Thus, construction costs may include flooring, walls, HVAC, roofing, and windows. Labor costs for pouring a foundation and installing a roof for a warehouse or grain elevator also may qualify as construction costs. However, costs for soil testing, soil amendments, excavation, and earth moving activities performed before the excavation of a foundation are not qualifying construction costs.
(204) Remittance amount. The amount of the remittance or credit available to an eligible person is based on the state share of sales tax paid or state share of use tax paid (or both, see RCW 82.08.020 for the state sales and use tax rate), computed as follows:
(a) For grain elevators with bushel capacity of at least 1,000,000 but less than 2,000,000, the remittance is equal to 50 percent of the amount of state sales or use tax paid for:
(i) Qualifying materials incorporated as an ingredient or component of the grain elevator, and labor and services rendered in respect to the grain elevator's construction; and
(ii) Qualifying material-handling equipment and racking equipment, and labor and services given in respect to installing, repairing, cleaning, altering, or improving the equipment.
(b) For grain elevators with bushel capacity of 2,000,000 or more, and for warehouses and distribution centers with at least 200,000 square feet of space dedicated exclusively to a qualifying activity, the remittance is equal to:
(i) 100 percent of the amount of state sales and use tax paid for qualifying materials incorporated as an ingredient or component of the structure, and labor and services rendered in respect to the structure's construction; and
(ii) 50 percent of the amount of state sales and use tax paid for qualifying material-handling equipment and racking equipment, and labor and services given in respect to installing, repairing, cleaning, altering, or improving the equipment.
Part 3. Application for Tax Remittance.
(301) General application information. The department determines eligibility for the exemption remittance in this section based on information provided by the buyer and through audit and other administrative records.
(a) An application and required documentation for a tax exemption remittance must be submitted quarterly.
(b) The department will send the approved exempted amount to the business by the end of the calendar quarter following the quarter the application was submitted.
(c) While not required, applicants are encouraged to submit the application and applicable documentation electronically through the MyDOR portal.
(302) Documentation needed to verify eligibility. Applicants must provide a completed Warehouse Tax Incentive Remittance application that corresponds to their qualifying activity. In addition to a completed application, supporting documentation is also required.
(a) Required documentation will depend on the applicant's qualifying activity and may include, but is not limited to, the following:
(i) Blueprints identifying the building location and the size of the facility;
(ii) Building permits associated with the foundation and the structure;
(iii) Proof of invoice and sales tax payments (copies of checks, bank statements for ACH payments, certification of use/deferred sales tax paid);
(iv) Completed electronic spreadsheet detailing purchase invoices and payments;
(v) For lessors, a copy of the lease agreement stating that the economic benefit of the remittance is passed to the tenant in the form of reduced rent; and
(vi) Any other items requested by the department to substantiate the applicant's claim for the remittance.
(b) Applicants are encouraged to file substantiation documents at the time of filing the application. However, once an application is filed, the taxpayer must provide sufficient substantiation to support the claim for remittance before the department can determine whether the claim is valid. The department will notify the taxpayer if additional substantiation is required. The taxpayer must provide the necessary substantiation within 90 days after the notice is sent, unless the documentation is under the control of a third party not affiliated with or under the control of the taxpayer. If the documentation is under the control of an unaffiliated third party, the taxpayer will have 180 days to provide the documentation.
[Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 24-21-099, s 458-20-18201, filed 10/17/24, effective 11/17/24.]


PDF458-20-183

Recreational services and activities.

(1) Introduction. This rule explains the tax reporting instructions for persons who provide the services and activities described in RCW 82.04.050(15). This rule refers to these services and activities as "recreational services and activities." This rule does not address charges for:
(a) Operating an "athletic or fitness facility" (refer to RCW 82.04.050(3) for information about the taxability of operating an athletic or fitness facility); or
(b) Day camps offered by a nonprofit organization or a state or local government entity that provides youth not older than age eighteen, or that are focused on providing individuals with disabilities or mental illness, the opportunity to participate in a variety of supervised activities.
(2) Other rules that may apply. Readers may want to refer to other rules for additional information, including:
(a) WAC 458-20-118 Sale or rental of real estate, license to use real estate.
(b) WAC 458-20-166 Hotels, motels, boarding houses, rooming houses, resorts, hostels, trailer camps, and similar lodging businesses.
(c) WAC 458-20-167 Educational institutions, school districts, student organizations, and private schools.
(d) WAC 458-20-187 Tax responsibility of vending machine owners and operators.
(e) WAC 458-20-189 Sales to and by the state of Washington and municipal corporations including, counties, cities, towns, school districts, and fire districts.
(f) WAC 458-20-211 Leases or rentals of tangible personal property, bailments.
(g) WAC 458-20-244 Food and food ingredients.
(3) Examples. This rule includes examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(4) Taxability of recreational services and activities.
(a) Charges, however labeled, to consumers for engaging or participating in the recreational services and activities listed in subsection (6) of this rule are retail sales subject to retailing business and occupation (B&O) tax and retail sales tax. Unless otherwise specified in this rule or in RCW 82.04.050, charges to engage or participate in a recreational service or activity include the furnishing of any related equipment and charges for instructional lessons in the service or activity.
(b) When there is a sale of two or more distinct and identifiable products that includes a charge for a product subject to retail sales tax and a charge for a product not subject to retail sales tax, then retail sales tax applies to the entire selling price, unless prices are separately identified by product on binding sales or other supporting sale-related documentation made available to the customer. For additional information about bundled transactions, see RCW 82.08.190 and 82.08.195.
(c) Separate charges for the sale or rental of tangible personal property, including equipment, gear, and supplies used to engage or participate in recreational services and activities are subject to retailing B&O and retail sales tax. Refer to WAC 458-20-211 for more information about these charges.
(d) A person who provides recreational services and activities must pay retail sales or use tax on the purchase or rental of tangible personal property the person uses as a consumer to provide such services and activities, including equipment and supplies. Retail sales or use tax need not be paid if a person purchases tangible personal property for resale without intervening use. For additional information on sales for resale, refer to WAC 458-20-102 Reseller permits.
(5) Exclusions and exemptions.
(a) Educational institutions. Charges made by an educational institution, as defined in RCW 82.04.170, to its students and staff for recreational services and activities listed in subsection (6) of this rule, are not retail sales and therefore are not subject to retailing B&O and retail sales tax. However, charges made by an educational institution to its alumni or to other members of the public for these same services and activities are retail sales subject to retailing B&O and retail sales tax.
(b) Nonprofit youth organizations. RCW 82.08.0291 exempts the sale of recreational services and activities by a nonprofit youth organization to its members from retail sales tax, but does not exempt the sale of these services and activities from retailing B&O tax. For purposes of this rule, a nonprofit youth organization is a nonprofit organization engaged in character building of youth that qualifies for an exemption from property tax under RCW 84.36.030(3).
(c) Fairs, carnivals, and festivals. Charges for admission to, and rides or attractions at, fairs, carnivals, and festivals are not retail sales and therefore not subject to retailing B&O and retail sales tax. For purposes of this rule, fairs, carnivals, and festivals are events that do not exceed twenty-one consecutive days and a majority of the amusement rides, if any, are not affixed to real property.
(d) Diver training. Charges made by a vocational school for commercial diver training that is licensed by the workforce training and education coordinating board under chapter 28C.10 RCW, are not retail sales and therefore not subject to retailing B&O and retail sales tax.
(6) Retail recreational services and activities. Gross income received from providing the following exclusive list of recreational services and activities is subject to retailing B&O tax and retail sales tax:
(a) Air sports. Charges for ballooning, hang gliding, indoor or outdoor sky diving, paragliding, parasailing, and similar activities.
(b) Amusement park, theme park, and water park facilities. Charges for admission to an amusement park, theme park, or water park, and locker or cabana rentals at such facilities. For purposes of this rule, an amusement park or theme park is a location that provides permanently affixed amusement rides, games, and other entertainment, but does not include parks or zoos where the primary purpose is the exhibition of wildlife, or fairs, carnivals, and festivals as described in subsection (5)(c) of this rule. Separate charges for rides, attractions, or other entertainment that are in addition to the admission charge are not retail sales under this subsection.
Example 1. Adventure Land is an amusement park that has an admission charge of ten dollars per person per day. The admission charge grants guest access to most of the park's rides and attractions. In addition, Adventure Land has a wooden roller coaster that guests must pay a separate charge of two dollars per person to ride. The charge for admission is subject to retailing B&O tax and retail sales tax. The charge for the wooden roller coaster is subject to service and other activities B&O tax.
(c) Bowling. Charges for:
(i) Bowling;
(ii) Rental of bowling shoes;
(iii) Bowling lessons; and
(iv) The opportunity to participate in competitive bowling events or tournaments when a participant pays a fee to the bowling facility operator. This includes amounts paid by event organizers to the bowling facility operator if the amounts vary based on the number of participants.
Example 2. A high school is sponsoring and organizing a bowling tournament that will be held at Bowling Alley Z to raise money for new band uniforms. To enter the tournament, participants pay a fee of twenty dollars per person to the local high school. The local high school contracts with Bowling Alley Z to use its facilities for five hundred dollars regardless of the number of participants. The fee does not vary based on the number of participants. On the day of the tournament, the high school submits full payment to Bowling Alley Z. If participants need to rent bowling shoes, they pay Bowling Alley Z directly on the day of the tournament. The amount the high school pays to Bowling Alley Z is subject to service and other activities B&O tax because the high school is paying Bowling Alley Z on behalf of the participants and the fee is not based on the number of participants. Any fee to rent bowling shoes is subject to retailing B&O tax and retail sales tax.
(d) Climbing activities. Charges for climbing on artificial climbing structures, whether indoors or outdoors.
(e) Day trips for sightseeing purposes. Charges for sightseeing trips, whether for educational, instructional, or recreational purposes, that last less than twenty-four hours. Examples of day trips for sightseeing purposes include wine tours, scenic tours, culinary tours, educational or nature-related tours, or cultural tours. For information on multiday sightseeing tours, refer to WAC 458-20-258 Travel agents and tour operators.
(f) Fishing. Charges to fish, access to private fishing areas, and charges for chartered or guided fishing tours.
(g) Golf. Charges for golfing activities where golf balls or golf clubs are used including charges for:
(i) Playing golf or miniature golf;
(ii) Golfing lessons, if the charge for the lesson is not stated separately from other golf facility charges;
(iii) Hitting golf balls at a driving range;
(iv) Using a golf simulator;
(v) Renting a golf cart;
(vi) Players to use their own golf cart; and
(vii) Players to participate in competitive golf events or tournaments where the participant pays a fee to the golf facility operator. This includes amounts paid by event organizers to the golf facility operator if the amounts vary based on the number of participants.
Example 3. A charity is sponsoring and organizing a golf tournament to raise funds to renovate a neighborhood playground. To participate, players must pay fifty dollars per person to the golf course facility on the day of the tournament. This charge does not include the rental of a golf cart, which some participants elect to rent for twenty dollars per golf cart. The amounts paid to the golf course facility by the participants are subject to retailing B&O tax and retail sales tax. Amounts paid to rent a golf cart are also subject to retailing B&O and retail sales tax.
Example 4. A local golf course offers footgolf, a sport that combines components of soccer and golf using a soccer ball, every Tuesday and charges ten dollars per person to play one round. Amounts paid by participants to play footgolf are subject to the service and other activities B&O tax because footgolf is not considered a golfing activity, as described in (g) of this subsection, in which golf balls or golf clubs are used.
(h) Horseback riding. Charges for individual or group rides, guided or unguided, offered to the public if the seller furnishes the horse to the rider and the primary focus of the ride is not instructional.
(i) Hunting. Charges for guided hunting and hunting at game farms and shooting preserves.
(j) Motorized activities. Charges for go-karting, bumper cars, snowmobiles, all-terrain vehicles, and other motorized activities where the seller provides both the vehicle and the premises where the buyer will operate the vehicle. If the seller provides the vehicle, but not the premises to operate the vehicle, then the charge is considered a rental of tangible personal property and is subject to retailing B&O and retail sales tax.
Example 5. For an hourly fee, City D racetrack provides customers the opportunity to use its racetrack to ride all-terrain vehicles and dirt bikes. Customers are required to provide their own all-terrain vehicles and dirt bikes to ride on the racetrack. Because City D only provides the premises on which customers ride their vehicles and bikes, the hourly fee to use the racetrack is subject to service and other activities B&O tax.
(k) Playground activities. Charges for indoor or outdoor playground activities such as: Inflatable bounce structures and other inflatables, mazes, trampolines, slides, ball pits, games of tag, including laser tag and soft-dart tag, and human gyroscope rides, regardless of whether the activities occur at the seller's place of business.
Example 6. Kidz Learning for Life is an enrichment and physical development center for children under eight years old. The center offers physical coordination classes for infants and toddlers, and dance, music, and art classes for older children. The center also provides an outdoor trampoline for children ages four to eight years old. Parents are required to stay at the center during classes, and depending on the class, may be required to participate with their child. Parents can either pay a monthly membership charge that allows for unlimited classes or may pay on a per class basis. Both charges are subject to the service and other activities B&O tax because the types of classes offered by Kidz Learning for Life are not considered playground activities for the purposes of (k) of this subsection.
Example 7. Fun Zone Extreme is an indoor playground facility that offers multiple unstructured play activities for children seventeen and under. Some of the activities include laser tag, inflatable bounce structures, ball pits, and climbing structures, such as a rock wall. To participate in all of the activities Fun Zone Extreme offers, customers pay an admission fee based on their age and the fee allows the participant unlimited use of the facility for the entire day. The admission fee charged to customers is subject to retailing B&O and retail sales tax because the activities at Fun Zone Extreme are considered playground activities for the purposes of (k) of this subsection.
Example 8. Each autumn, a local farmer opens his property to the public to use for various family-related activities. The property is open to visitors, free of charge, from September 15th through October 31st. Activities available on the property include a corn maze, inflatable bounce structures for children, and a petting zoo. Although general admission is free, the owner charges a fee of five dollars per person to go through the corn maze. The fee charged to customers to use the corn maze is subject to retailing B&O and retail sales tax.
(l) Shooting sports and activities. Charges to the public to engage in shooting sports and activities, such as target shooting, skeet, sporting clays, "5" stand, and archery.
(m) Skating. Charges to the public to participate in skating, including ice skating, roller skating, and inline skating.
(n) Snow sports and activities (nonmotorized). Charges to the public for the use of land or facilities to engage in the following nonmotorized snow sports and activities: Downhill and cross-country skiing, snowboarding, ski jumping, sledding, snow tubing, snowshoeing, and similar snow sports and activities. This includes charges for the use of ski lifts and tows for snow sports and activities and daily or season passes for access to trails or other areas where nonmotorized snow sports and activities are conducted.
The snow sports and activities listed in (n) of this subsection may occur at an outdoor facility in natural or artificial snow, or at an indoor facility with no snow or artificial snow.
Example 9. During the summer months, Flurry Mountain ski lodge allows the public access to its land for hiking. Flurry Mountain charges a daily fee to hike on the land and a fee to use the ski lift to obtain access to elevated hiking areas. Because the fees for hiking and using the ski lift are not considered snow sports and activities, both fees are subject to service and other activities B&O tax.
(o) Swimming. Charges for recreational or fitness swimming that is open to the public, such as open swim, lap swim, and special events like kids night out and pool parties during open swim time, and pool parties for private events, such as birthdays, family gatherings, and employee outings. Charges for swimming lessons or participating in swim meets or swim competitions are not retail sales unless provided by an athletic or fitness facility as defined in RCW 82.04.050.
Example 10. Swim Center, Inc. is an aquatics center that provides swimming lessons and water fitness classes. All swimming lessons and water fitness classes are subject to separate monthly fees. Swim Center, Inc. is not considered an "athletic or fitness facility" as that term is defined in RCW 82.04.050. Accordingly, charges for swimming lessons are subject to service and other activities B&O tax. However, fees charged for water fitness classes are subject to retailing B&O and retail sales tax.
(p) Table games. Charges to play air hockey, billiards, pool, foosball, shuffleboard, ping-pong, and similar games.
(q) Water sports and activities. Charges for scuba diving, snorkeling, river rafting, surfing, kiteboarding, flyboarding, water slides, water trampolines, water pillows, water rollers, and similar water sports and activities such as canoeing and kayaking.
Example 11. Main Street Marina charges separately for kayak and canoe rentals and private lessons on how to operate the watercraft. The charge to rent a kayak or canoe is considered the rental of tangible personal property and is subject to retailing B&O and retail sales tax. Charges for kayaking and canoeing lessons are also subject to retailing B&O and retail sales tax.
(r) Miscellaneous recreational services and activities. Charges for bungee jumping, zip lining, activities involving riding inside a ball, such as zorbing or water walking, paintball activities, airsoft activities, batting cage activities, and darts, both electronic and nonelectronic.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-11-126, § 458-20-183, filed 5/23/18, effective 6/23/18. Statutory Authority: RCW 82.32.300. WSR 95-22-100, § 458-20-183, filed 11/1/95, effective 12/2/95; WSR 84-12-046 (Order ET 84-2), § 458-20-183, filed 6/1/84. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-183, filed 6/27/78; Order ET 70-3, § 458-20-183 (Rule 183), filed 5/29/70, effective 7/1/70.]


PDF458-20-185

Tax on tobacco products.

(1) Introduction. This rule explains the tax liabilities of persons engaged in business as retailers or distributors of tobacco products other than cigarettes. The tax on tobacco products (also called "other tobacco products tax," "tobacco tax," or "OTP tax") is in addition to all other taxes owed, such as retailing or wholesaling business and occupation tax, sales tax, and litter tax. See WAC 458-20-186 for tax liabilities associated with taxes that apply exclusively to cigarettes.
(2) Organization of rule. The information provided in this rule is divided into five parts:
(a) Part I provides definitions and explains the tax liabilities of persons engaged in the business of selling or distributing tobacco products (excluding cigarettes) in this state.
(b) Part II explains wholesale and retail tobacco products vendor licensing requirements and responsibilities.
(c) Part III explains the requirements and responsibilities for persons transporting tobacco products in Washington.
(d) Part IV explains the recordkeeping requirements and enforcement of the tobacco tax.
(e) Part V describes the credits for tax paid and the procedures that must be followed to qualify for credit.
Part I - Tax on Tobacco Products (excluding Cigarettes)
(101) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Actual price" means the total amount of consideration for which tobacco products are sold, valued in money, whether received in money or otherwise, including any charges by the seller necessary to complete the sale such as charges for delivery, freight, transportation, or handling.
(b) "Affiliated" means related in any way by virtue of any form or amount of common ownership, control, operation, or management.
(c) "Board" means the liquor and cannabis board.
(d) "Business" means any trade, occupation, activity, or enterprise engaged in for the purpose of selling or distributing tobacco products in this state.
(e) "Cigar" means a roll for smoking that is of any size or shape and that is made wholly or in part of tobacco, irrespective of whether the tobacco is pure or flavored, adulterated or mixed with any other ingredient, if the roll has a wrapper made wholly or in greater part of tobacco. "Cigar" does not include a cigarette.
(f) "Cigarette" has the same meaning as in RCW 82.24.010.
(g) "Department" means the department of revenue.
(h) "Distributor" means:
(i) Any person engaged in the business of selling tobacco products in this state who brings, or causes to be brought, into this state from without the state any tobacco products for sale;
(ii) Any person who makes, manufactures, fabricates, or stores tobacco products in this state for sale in this state;
(iii) Any person engaged in the business of selling tobacco products from outside this state who ships or transports tobacco products to retailers in this state, to be sold by those retailers;
(iv) Any person engaged in the business of selling tobacco products in this state who handles for sale any tobacco products that are within this state but upon which tax has not been imposed. RCW 82.26.010 (8). (For example, Sunshine Tobacco Shop ("Sunshine") buys cigars from an out-of-state manufacturer for resale to consumers in this state. The cigars are shipped to Sunshine via common carrier. In this instance, Sunshine is a distributor, must have both a tobacco distributor license and a tobacco products retailer license, and must pay the tobacco products tax on the products it brings into the state. However, if Sunshine bought its merchandise exclusively from in-state distributors that have paid the tobacco products tax on that merchandise, Sunshine would not be considered a distributor, and would need only a tobacco products retailer license.)
(i) "Indian," "Indian country," and "Indian tribe" have the same meaning as defined in chapter 82.24 RCW and WAC 458-20-192.
(j) "Indian distributor" means a federally recognized Indian tribe or tribal entity that would otherwise meet the definition of distributor under RCW 82.26.010, if federally recognized Indian tribes and tribal entities were not excluded from the definition of "person" in RCW 82.26.010.
(k) "Indian retailer" means a federally recognized Indian tribe or tribal entity that would otherwise meet the definition of retailer under RCW 82.26.010, if federally recognized Indian tribes and tribal entities were not excluded from the definition of "person" in RCW 82.26.010.
(l) "Indian tribal organization" means a federally recognized Indian tribe, or tribal entity, and includes an Indian distributor or retailer that is owned by an Indian who is an enrolled tribal member conducting business under tribal license or similar tribal approval within Indian country.
(m) "Little cigar" means a cigar that has a cellulose acetate integrated filter.
(n) "Manufacture" means the production, assembly, or creation of new tobacco products. For the purposes of this rule, "manufacture" does not necessarily have the same meaning as provided in RCW 82.04.120.
(o) "Manufacturer" means a person who manufactures and sells tobacco products.
(p) "Manufacturer's representative" means a person hired by a manufacturer to sell or distribute the manufacturer's tobacco products, and includes employees and independent contractors.
(q) "Moist snuff" means tobacco that is finely cut, ground, or powdered; is not for smoking; and is intended to be placed in the oral, but not the nasal, cavity.
(r) "Person" means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, the state and its departments and institutions, political subdivision of the state of Washington, corporation, limited liability company, association, society, any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise. The term excludes any person immune from state taxation, including the United States or its instrumentalities, and federally recognized Indian tribes and enrolled tribal members, conducting business within Indian country. For purposes of RCW 82.26.200(1), in the case of sales from distributors to retailers, as discussed in subsection (205) of this rule, "person" also includes any person immune from state taxation, such as the United States or its instrumentalities, and federally recognized Indian tribes and enrolled tribal members, conducting business within Indian country.
(s) "Place of business" means any place where tobacco products are sold or where tobacco products are manufactured, stored, or kept for the purpose of sale, including any vessel, vehicle, airplane, train, or vending machine.
(t) "Retailer" means any person engaged in the business of selling tobacco products to ultimate consumers.
(u) "Retail outlet" means each place of business from which tobacco products are sold to consumers.
(v) "Sale" means:
(i) Any transfer, exchange, or barter, in any manner or by any means whatsoever, for a consideration, and includes and means all sales made by any person.
(ii) The term "sale" includes a gift by a person engaged in the business of selling tobacco products, for advertising, promoting, or as a means of evading the provisions of chapter 82.26 RCW.
(w) "Store," "stores," or "storing" means the holding of tobacco products for later sale or delivery inside or outside this state. For example:
(i) Wilderness Enterprises ships products from out-of-state to its Kent warehouse. All products are intended for future sale to Alaska. Wilderness Enterprises is a distributor that stores tobacco products in this state. Wilderness Enterprises is liable for tobacco products tax on the products stored in this state. (However, see subsection (501)(a) of this rule for credits that may be available to Wilderness Enterprises for out-of-state sales.)
(ii) Cooper Enterprises brings tobacco products into this state for sale. It rents storage space from a third party, Easy Storage. Cooper Enterprises (the distributor), not Easy Storage, is responsible for the tax and reporting requirements on the stored tobacco products.
(x) "Taxable sales price" means:
(i) In the case of a taxpayer that is not affiliated with the manufacturer, distributor, or other person from whom the taxpayer purchased tobacco products, the actual price for which the taxpayer purchased the tobacco products. For purposes of this subsection, "person" includes both persons as defined in (r) of this subsection and any person immune from state taxation, including the United States or its instrumentalities, and federally recognized Indian tribes and enrolled tribal members, conducting business within Indian country;
(ii) In the case of a taxpayer that purchases tobacco products from an affiliated manufacturer, affiliated distributor, or other affiliated person, and that sells those tobacco products to unaffiliated distributors, unaffiliated retailers, or ultimate consumers, the actual price for which that taxpayer sells those tobacco products to unaffiliated distributors, unaffiliated retailers, or ultimate consumers. For purposes of this subsection, "person" includes both persons as defined in (r) of this subsection and any person immune from state taxation, including the United States or its instrumentalities, and federally recognized Indian tribes and enrolled tribal members, conducting business within Indian country;
(iii) In the case of a taxpayer that sells tobacco products only to affiliated distributors or affiliated retailers, the price, determined as nearly as possible according to the actual price for which other distributors sell similar tobacco products of like quality and character to unaffiliated distributors, unaffiliated retailers, or ultimate consumers;
(iv) In the case of a taxpayer that is a manufacturer selling tobacco products directly to ultimate consumers, the actual price for which the taxpayer sells those tobacco products to ultimate consumers;
(v) In the case of a taxpayer that has acquired tobacco products under a sale as defined in (v)(ii) of this subsection, the price, determined as nearly as possible according to the actual price for which the taxpayer or other distributors sell the same tobacco products or similar tobacco products of like quality and character to unaffiliated distributors, unaffiliated retailers, or ultimate consumers; or
(vi) In any case where (x)(i) through (v) of this subsection do not apply, the price, determined as nearly as possible according to the actual price for which the taxpayer or other distributors sell the same tobacco products or similar tobacco products of like quality and character to unaffiliated distributors, unaffiliated retailers, or ultimate consumers.
(y) "Taxpayer" means a person liable for the tax imposed by chapter 82.26 RCW.
(z) "Tobacco products" means cigars, cheroots, stogies, periques, granulated, plug cut, crimp cut, ready rubbed, and other smoking tobacco, snuff, snuff flour, cavendish, plug and twist tobacco, fine-cut and other chewing tobaccos, shorts, refuse scraps, clippings, cuttings and sweepings of tobacco, and other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or smoking in a pipe or otherwise, or both for chewing and smoking, and any other product, regardless of form, that contains tobacco and is intended for human consumption or placement in the oral or nasal cavity or absorption into the human body by any other means, but does not include cigarettes as defined in RCW 82.24.010.
(aa) "Unaffiliated distributor" means a distributor that is not affiliated with the manufacturer, distributor, or other person from whom the distributor has purchased tobacco products.
(bb) "Unaffiliated retailer" means a retailer that is not affiliated with the manufacturer, distributor, or other person from whom the retailer has purchased tobacco products.
(102) Imposition of tax. The tobacco tax is imposed upon the sale, handling, or distribution of all tobacco products in this state. Taxes are imposed at the time the distributor (a) brings, or causes to be brought, into this state from without the state tobacco products for sale; (b) makes, manufactures, fabricates, or stores tobacco products in this state for sale in this state; (c) ships or transports tobacco products to retailers in this state, to be sold by those retailers; or (d) handles for sale any tobacco products that are within this state but upon which tax has not been imposed. RCW 82.26.020(2). The distributor who first possesses the tobacco product for sale in this state is the distributor liable for the tax. RCW 82.26.030.
Examples. The following examples, while not exhaustive, illustrate some of the circumstances in which the tax is imposed. These examples should be used only as a general guide. The status of each situation must be determined after a review of all of the facts and circumstances.
(a) BET Distributors sells and ships tobacco products from Kentucky via common carrier to Surprise Enterprises in Washington. The tax is due from Surprise Enterprises, a licensed distributor, because it is the first possessor in Washington that holds the product for sale. However, BET Distributors must give the board notice of its intent to ship tobacco products into this state.
(b) BET Distributors sells and ships tobacco products in its own trucks from Kentucky to Jamie's Enterprises, a licensed distributor in Washington. The tax is due from BET Distributors, because it is the first possessor in Washington that holds the product for sale.
(c) Garden State Cigars is located in New Jersey. It ships its products to Washington retailers via common carrier. The retailers must be licensed as distributors and are liable for the tax. However, Garden State Cigars must give the board notice of its intent to ship tobacco products into this state.
(d) An Indian retailer located in Indian Country in Washington State sells tobacco products to Washington retailers who pick up the products in Indian Country and take it back to their retail outlets. The Washington retailers must be licensed as distributors and are liable for the tax. The Indian retailer is not required to hold a state tobacco products retailer or distributor license. State-licensed distributors making retail sales to Indian retailers may claim a credit against the tax under RCW 82.26.110.
(103) Rates. The rate of the Washington state tobacco tax depends upon the tobacco product sold (cigars, other tobacco products, moist snuff, or little cigars) and is found in RCW 82.26.020.
(104) Promotions. Tobacco products sold, provided at a reduced cost, or given away for advertising or any other purpose are taxed in the same manner as if they were sold, used, consumed, handled, possessed, or distributed in this state. RCW 82.26.010 (18)(b).
Part II - Wholesale and Retail Tobacco Products Vendor Licensing Requirements and Responsibilities
(201) License required. No person may engage in the retail or wholesale distribution of tobacco products in this state without a license, except for any person immune from state taxation, including federally recognized Indian tribes and enrolled tribal members, conducting business within Indian country, and the United States or its instrumentalities.
(202) Tobacco distributor license. Prior to selling or distributing tobacco products from a stock of goods in Washington or to retailers in Washington, each distributor must first obtain a tobacco distributor license from the department through its business licensing service.
(a) Background check. Each distributor must undergo a criminal background check by the board before a license will be issued. RCW 82.26.150(3). See chapter 314-33 WAC for board standards. Failure to provide information sufficient to complete the background check may result in denial of the license.
(b) Application. Application for a license or renewal of a license is made on forms supplied by the department and must be accompanied by the annual license fee as provided in chapter 82.26 RCW. A tobacco distributor license is valid for one year from the date it is issued. The annual license fee is waived if the licensee has applied for or already has a cigarette wholesaler license.
(c) Multiple locations. If the distributor sells, intends to sell, or stores tobacco products at more than one place of business, whether temporary or permanent, a separate license with a license fee as provided in chapter 82.26 RCW is required for each additional place of business. Each license must be exhibited in the place of business for which it is issued.
(203) Duties and responsibilities of licensed distributors.
(a) Sales restricted. Distributors selling tobacco products in this state may sell tobacco products only to Washington retailers or distributors who have a current tobacco license, to other licensed distributors, the federal government or its instrumentalities, or to Indian tribal organizations.
(b) Manufacturer's representatives. Manufacturers selling tobacco products through manufacturer's representatives must provide the board a current list of the names and addresses of all such representatives and must ensure that the list provided to the board is kept current. RCW 82.26.210.
(204) Tobacco products retailer license. Prior to the retail sale or distribution of tobacco products, each retailer must first be issued a tobacco products retailer license from the department through its business licensing service.
(a) Background check. Each retailer must undergo a criminal background check by the board before a license will be issued. RCW 82.26.150(3). See chapter 314-33 WAC for board standards. Failure to provide information sufficient to complete the background check may result in denial of the license.
(b) Application. Application for a license or renewal of a license is made on forms supplied by the department and must be accompanied by the annual license fee as provided in chapter 82.26 RCW. A tobacco products retailer license is valid for one year from the date it is issued. The annual license fee is waived if the licensee has already applied for or already has a cigarette retailer license at the same business location.
(c) Multiple locations. If the retailer sells tobacco products at more than one place of business, whether temporary or permanent, a separate license with a license fee as provided in chapter 82.26 RCW is required for each additional place of business. Each license must be exhibited in the place of business for which it is issued.
(205) Duties and responsibilities of retailers. A retailer that obtains tobacco products from an unlicensed distributor or any other person that is not licensed under chapter 82.26 RCW must be licensed both as a retailer and a distributor and is liable for the tax imposed under RCW 82.26.020 with respect to the tobacco products acquired from the unlicensed person that are held for sale, handling, or distribution in this state. For example, if a retailer buys tobacco products from an Indian retailer or an out-of-state wholesaler who does not have a tobacco distributor license, the retailer must obtain a distributor license and pay the tobacco tax due. An Indian retailer in Indian country is not required to hold a state tobacco products retailer or distributor license.
(206) Licensing enforcement. The board is responsible for enforcing the licensing of tobacco products. See chapters 314-33 and 314-34 WAC for the board's enforcement provisions on tobacco products.
Part III -Transporting Tobacco Products in Washington
(301) Transportation of tobacco products restricted.
(a) Other than as provided in (b) of this subsection, only licensed distributors or retailers in their own vehicles, or manufacturer's representatives authorized to sell or distribute tobacco products in this state, can transport tobacco products in this state. Individuals transporting the product must have a copy of a valid retailer's or distributor's license in their possession and evidence that they are representatives of the licensees. Individuals transporting tobacco products for sale must also have in their possession invoices or delivery tickets for the tobacco products that show the name and address of the consignor or seller, the name and address of the consignee or purchaser, and the quantity and brands of the tobacco products being transported. It is the duty of the distributor, retailer, or manufacturer responsible for the delivery or transportation of the tobacco products to ensure that all drivers, agents, representatives, or employees have the delivery tickets or invoices in their possession for all such shipments.
(b) All other persons must give notice to the board in advance of transporting or causing tobacco products to be transported in this state for sale. This includes those transporting tobacco products in this state via common carrier. For example: Peg's Primo Cigars (PPC), a small out-of-state distributor, sells tobacco products to retailers in Washington. PPC ships the products via common carrier. Before placing the product in shipment to Washington, PPC must give notice to the board of the pending shipment. The notice must include the name and address of the consignor or seller, the name and address of the consignee or purchaser, the quantity and brands of the tobacco products being transported, and the shipment date.
Part IV - Recordkeeping and Enforcement
(401) Books and records. An accurate set of records showing all transactions related to the purchase, sale, or distribution of tobacco products must be retained. RCW 82.26.060, 82.26.070 and 82.26.080. All records must be preserved for five years from the date of the transaction.
(a) Distributors. Distributors must keep at each place of business complete and accurate records for that place of business. The records to be kept by distributors include itemized invoices of tobacco products held, purchased, manufactured, brought in or caused to be brought in from without the state or shipped or transported to retailers in this state, and of all sales of tobacco products. The itemized invoice for each purchase or sale must be legible and must show the seller's name and address, the purchaser's name and address, the date of sale, and all prices and discounts. Itemized invoices must be preserved for five years from the date of sale.
(b) Retailers. Retailers must secure itemized invoices of all tobacco products purchased. The itemized invoice for each purchase must be legible and must show the seller's name and address, the purchaser's name and address, the date of sale, and all prices and discounts. Itemized invoices must be preserved for five years from the date of sale. Retailers are responsible for the tax on any tobacco products for which they do not have invoices.
(402) Reports and returns. The department may require any person dealing in tobacco products in this state to complete and return forms, as furnished by the department, setting forth sales, inventory, shipments, and other data required by the department to maintain control over trade in tobacco.
(a) Tax returns. The tax is reported on the combined excise tax return that must be filed according to the reporting frequency assigned by the department. Detailed instructions for preparation of these returns may be obtained from the department.
(b) Reports.
(i) Retailers and distributors of tobacco products may be required to file a report with the department in compliance with the provisions of the National Uniform Tobacco Settlement when purchasing tobacco products (e.g., "roll your own tobacco") from certain manufacturers. See WAC 458-20-264 and chapter 70.157 RCW.
(ii) A person who sells, transfers, or ships for profit smokeless tobacco (as such term is defined in 15 U.S.C. Sec. 375) in interstate commerce, whereby such smokeless tobacco is shipped into Washington, or who advertises or offers such smokeless tobacco for sale, transfer, or shipment in this state, must file a report as required under 15 U.S.C. Sec. 376. This report is due no later than the tenth day of each calendar month and must include a memorandum or invoice covering all transactions and shipments of smokeless tobacco made into Washington during the previous calendar month.
(c) Access to premises and records. Retailers and distributors must allow department personnel free access to their premises to inspect the tobacco products on the premises and to examine the books and records for the business. For further details, see subsection (405) of this section.
(403) Criminal provisions. Chapter 82.26 RCW prohibits certain activities with respect to tobacco products. Persons handling tobacco within this state must refer to these statutes.
(404) Search, seizure, and forfeiture. Any tobacco products in the possession of a person selling tobacco in this state without a license or transporting tobacco products without the proper invoices or delivery tickets may be seized without a warrant by any agent of the department, agent of the board, or law enforcement officer of this state. In addition, all conveyances, including aircraft, vehicles, or vessels used to transport the illegal tobacco product may be seized and forfeited.
(405) Enforcement. Pursuant to RCW 82.26.121 and 66.44.010, enforcement officers of the board may enforce all provisions of the law with respect to the tax on tobacco products. Retailers and distributors must allow department personnel and enforcement officers of the board free access to their premises to inspect the tobacco products on the premises and to examine the books and records of the business. If a retailer fails to allow free access, or hinders, or interferes with department personnel and/or enforcement officers of the board, that retailer's registration certificate issued under RCW 82.32.030 is subject to revocation. Additionally, any licenses issued under chapter 82.26 or 82.24 RCW are subject to suspension or revocation by the department or board.
(406) Penalties. Penalties and interest may be assessed in accordance with chapter 82.32 RCW for nonpayment of tobacco tax.
Part V - Credits
(501) Credits.
(a) Interstate and foreign sales. A credit is available to distributors for tobacco products sold to retailers and wholesalers outside the state for resale. This credit may be taken only for the amount of tobacco products tax reported and previously paid on such products. RCW 82.26.110. No credit may be taken for a sale of tobacco products from a stock of goods in this state to a consumer outside the state.
(b) Returned or destroyed goods. A credit may be taken for tax previously paid when tobacco products are destroyed or returned to the manufacturer. Credits claimed against tax owed or as a refund of tax paid, must be supported by documentation.
(c) Sales to the United States. A credit is available to distributors for tobacco products sold to the United States or any of its agencies or instrumentalities.
(d) Sales to Indian tribal organizations. A credit is available to distributors for tobacco products sold to any Indian tribal organization.
(e) Documentation. Credits claimed against tax owed or as a refund of tax paid, must be supported by documentation. The department provides two documents to assist taxpayers in determining the amount of credits available – The Tobacco Products Tax Credit Worksheet and Claim for Credit of Tobacco Product Tax. See the department's website (dor.wa.gov) for more information.
[Statutory Authority: RCW 82.24.550, 82.32.300 and 82.01.060. WSR 20-24-068, § 458-20-185, filed 11/24/20, effective 12/25/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.24.550(2), and 82.26.220(2). WSR 15-01-107, § 458-20-185, filed 12/18/14, effective 1/18/15. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-10-032, § 458-20-185, filed 4/26/10, effective 5/27/10; WSR 07-04-119, § 458-20-185, filed 2/7/07, effective 3/10/07; WSR 03-12-058, § 458-20-185, filed 6/2/03, effective 7/3/03. Statutory Authority: RCW 82.32.300. WSR 94-10-061, § 458-20-185, filed 5/3/94, effective 6/3/94; WSR 90-04-038, § 458-20-185, filed 1/31/90, effective 3/3/90; WSR 83-07-032 (Order ET 83-15), § 458-20-185, filed 3/15/83; Order ET 71-1, § 458-20-185, filed 7/22/71; Order ET 70-3, § 458-20-185 (Rule 185), filed 5/29/70, effective 7/1/70.]


PDF458-20-186

Tax on cigarettes.

(1) Introduction. This rule explains the tax liabilities of persons who sell, use, consume, handle, possess, or distribute cigarettes in Washington. The tax on cigarettes (also called the "cigarette tax") is in addition to all other taxes owed, such as retailing or wholesaling business and occupation tax, retail sales tax, use tax, and litter tax. See WAC 458-20-185 for tax liabilities associated with taxes that apply to tobacco products other than cigarettes.
(2) Organization of rule. The information provided in this rule is divided into eight parts:
(a) Part I explains the tax liabilities of persons who sell, use, consume, handle, possess, or distribute cigarettes in this state.
(b) Part II explains wholesale and retail cigarette vendor licensing requirements and responsibilities.
(c) Part III explains stamping requirements, cigarette tax rates, and refunds.
(d) Part IV describes the roll-your-own cigarette provisions.
(e) Part V describes the exemptions from the tax and the procedures that must be followed to qualify for exemption.
(f) Part VI explains the requirements and responsibilities for persons transporting cigarettes in Washington.
(g) Part VII explains the enforcement and administration of the cigarette tax.
(h) Part VIII explains requirements and responsibilities related to making sales or purchases of cigarettes in Indian country.
Part I - Tax on Cigarettes
(101) In general. Except as otherwise provided in chapter 82.24 RCW and this rule, the Washington state cigarette tax is due and payable by the first person who sells, uses, consumes, handles, possesses, or distributes the cigarettes in this state.
(102) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Board" means the liquor and cannabis board.
(b) "Business" includes all activities engaged in with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly, including any trade, occupation, activity, or enterprise engaged in for the purpose of selling or distributing cigarettes in this state.
(c) "Cigarette" means any roll for smoking made wholly or in part of tobacco, irrespective of size or shape and irrespective of the tobacco being flavored, adulterated, or mixed with any other ingredient, where such roll has a wrapper or cover made of paper or any material, except where such wrapper is wholly or in the greater part made of natural leaf tobacco in its natural state. Cigarette includes a roll-your-own cigarette.
(d) "Cigarette paper" means any paper or any other material except tobacco, prepared for use as a cigarette wrapper.
(e) "Cigarette tube" means cigarette paper made into a hollow cylinder for use in making cigarettes.
(f) "Commercial cigarette-making machine" means a machine that is operated in a retail establishment and that is capable of being loaded with loose tobacco, cigarette paper or tubes, and any other components related to the production of roll-your-own cigarettes, including filters.
(g) "Department" means the department of revenue.
(h) "Governmental entity" means:
(i) The United States;
(ii) The state of Washington (state) including, its departments and institutions, as distinct from its corporate agencies or instrumentalities; and
(iii) Any municipal corporation or political subdivision of the state of Washington.
(i) "Indian tribal organization" means a federally recognized Indian tribe, or tribal entity, and includes an Indian wholesaler or retailer that is owned by an Indian who is an enrolled tribal member conducting business under tribal license or similar tribal approval within Indian country. For purposes of this rule, the terms "Indian," "Indian country," and "Indian tribe" have the same meaning as defined in WAC 458-20-192.
(j) "Manufacture" means the production, assembly, or creation of new cigarettes. For the purposes of this rule, "manufacture" does not necessarily have the same meaning as provided in RCW 82.04.120.
(k) "Manufacturer" means a person who manufactures and sells cigarettes.
(l) "Municipal corporation or political subdivision of the state of Washington" means any county, city, town, school district, fire protection district, or other authority identified as a municipal corporation or political subdivision of the state of Washington by statute and that qualifies for the property tax exemption provided by Article VII of the Washington state Constitution.
(m) "Person" means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, political subdivision of the state of Washington, corporation, limited liability company, association, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise and the United States or any instrumentality thereof.
(n) "Place of business" means any location where business is transacted with, or sales are made to, customers. The term includes, but is not limited to, any vending machine and any vehicle, truck, vessel or the like at which sales are made.
(o) "Possession" means both:
(i) Physical possession by the purchaser; and
(ii) When cigarettes are being transported to or held for the purchaser or his or her designee by a person other than the purchaser, constructive possession by the purchaser or his or her designee, which constructive possession is deemed to occur at the location of the cigarettes being so transported or held.
(p) "Retailer" means every person, other than a wholesaler, who purchases, sells, offers for sale or distributes any one or more of the articles taxed herein, irrespective of quantity or amount, or the number of sales, and all persons operating under a retailer's registration certificate.
(q) "Roll-your-own cigarettes" means cigarettes produced by a commercial cigarette-making machine.
(r) "Sale" means any transfer of the ownership of, title to, or possession of property for a valuable consideration.
(s) "Stamp" means any stamp authorized by the state of Washington, including the stamp or stamps by use of which the cigarette tax is paid or identification is made of those cigarettes with respect to which no tax is imposed.
(t) "United States" means:
(i) The federal government, including the executive, legislative, and judicial branches, its departments, and federal entities exempt from state or local taxation by reason of specific federal statutory exemption.
The mere fact that an entity is a federal entity, such as an instrumentality of the federal government or a federal corporation, does not mean that the entity is immune from tax. The taxability of a federal entity depends on the benefits and immunities conferred upon it by Congress. Thus, to determine the current taxable status of federal entities, the relevant portion of the federal law should be examined.
(ii) "United States" does not include entities associated with, but not a part of the United States, such as the National Guard (an instrumentality of the state of Washington). Nor does it include entities contracting with the United States government to administer its programs.
(u) "Wholesaler" means every person who purchases, sells, or distributes cigarettes to retailers for the purpose of resale only.
(103) Imposition of tax. The cigarette tax is imposed on the first person to sell, use, consume, handle, possess, or distribute cigarettes in Washington. Please refer to subsection (302) of this rule for an explanation of the measure and rate of the tax.
(a) Payment. Payment of the cigarette tax is made through the purchase of stamps from banks authorized by the department to sell the stamps. Please refer to subsection (301) of this rule for an explanation of stamping requirements.
(b) Possession of cigarettes in Washington state.
(i) Every person (A) in possession of unstamped cigarettes in this state, and (B) not specifically exempt by law, is liable for payment of the cigarette tax as provided in chapter 82.24 RCW and this rule.
(ii) Active duty or retired military personnel, and their dependents, may purchase cigarettes for their own consumption on military reservations without paying the state tax (see Part V). However, such persons are not permitted to give or resell those cigarettes to others.
(iii) Possession of unstamped and untaxed cigarettes, and possession of counterfeit cigarettes, are criminal offenses in this state. See Part VII.
Part II -Wholesale and Retail Cigarette Vendor Licensing Requirements and Responsibilities
(201) License required. No person, other than a governmental entity or an Indian tribal organization, may engage in the retail or wholesale distribution of cigarettes in this state without a license. Failure to obtain the required license prior to selling cigarettes at wholesale or retail is a criminal act. RCW 82.24.500.
(202) Cigarette wholesaler license. Prior to the sale or distribution of cigarettes at wholesale, each wholesaler must first obtain a cigarette wholesaler license from the department through its business licensing service.
(a) Background check. Each wholesaler must undergo a criminal background check by the board before a license will be issued. RCW 82.24.510. See chapter 314-33 WAC for board standards. Failure to provide information sufficient to complete the background check may result in denial of the license by the department.
(b) Application. Application for a license or renewal of a license is made on forms supplied by the department and must be accompanied by the annual license fee as provided in chapter 82.24 RCW. A cigarette wholesaler license is valid for one year from the date it is issued.
(c) Multiple locations. If the wholesaler sells, stores, or intends to sell, cigarettes at more than one place of business, whether temporary or permanent, a separate license with a license fee as provided in chapter 82.24 RCW is required for each additional place of business. Each license must be exhibited in the place of business for which it is issued.
(d) Bond required. Each licensed wholesaler must file a bond with the department in an amount determined by the department, but not less than five thousand dollars. The bond must be executed by the wholesaler as principal, and by a corporation approved by the department and authorized to engage in business as a surety company in this state, as surety. The bond must run concurrently with the cigarette wholesaler license.
(203) Duties and responsibilities of licensed wholesalers.
(a) Stamps. Except as provided in Parts IV and VIII of this rule, only licensed wholesalers may purchase or obtain cigarette stamps. Wholesalers are prohibited by law from selling or providing stamps to any other wholesaler or person.
(b) Numbering. Each roll of stamps, or group of sheets, has a separate serial number. The department keeps records of which wholesaler purchases each roll or group of sheets. Wholesalers and retailers of roll-your-own cigarettes are prohibited from possessing stamps other than those specifically issued to them.
(c) Sales restricted. Wholesalers selling cigarettes in this state may sell:
(i) Stamped or unstamped cigarettes to other Washington licensed cigarette wholesalers;
(ii) State tax stamped cigarettes only to Washington retailers who have a current cigarette retailer license or to an Indian tribal organization;
(iii) Tribal tax stamped cigarettes to Indian tribal organizations if the Indian tribal organization is subject to a cigarette compact between the state of Washington and the Indian tribe; or
(iv) Tax-exempt stamped cigarettes to an Indian tribal organization if the Indian tribe does not have a cigarette compact and is subject to the cigarette allocation per WAC 458-20-192.
(d) Unstamped cigarettes. Except as provided in Parts IV, V, and VIII of this rule, no person other than a licensed wholesaler may possess unstamped cigarettes in this state. Cigarettes are "unstamped" if they do not have a "stamp" as the term is defined in subsection (102)(s). Licensed wholesalers may possess unstamped cigarettes in this state only in the following circumstances:
(i) Licensed wholesalers may possess unstamped cigarettes for up to seventy-two hours after receipt; however, the cigarettes must be stamped on or before sale or transfer to any other party other than another licensed wholesaler. Licensed wholesalers may possess unstamped cigarettes for more than seventy-two hours after receipt if they receive prior written permission from the department to do so.
(ii) Licensed wholesalers may set aside, without stamping, that portion of their stock reasonably necessary for conducting sales to persons outside this state or to instrumentalities of the federal government, so long as the licensed wholesalers have furnished a surety bond in a sum equal to eighty percent of the amount of tax that would be affixed to the cigarettes that are set aside for the conduct of such business without affixing the stamps. All unstamped stock must be kept separate and apart from stamped stock.
(e) Transfers. Wholesalers in possession of unstamped cigarettes under subsection (204)(d) of this rule that are transferred by the wholesaler to another facility within this state must be transferred in compliance with RCW 82.24.250.
(204) Cigarette retailer license. Prior to the retail sale or distribution of cigarettes, each retailer must first be issued a cigarette retailer license from the department through its business licensing service. A license is required for each location at which cigarettes are sold at retail. Each license must be exhibited at the place of business for which it is issued.
(a) Background check. Each retailer must undergo a criminal background check by the board before a license will be issued. RCW 82.24.510. See chapter 314-33 WAC for board standards. Failure to provide information sufficient to complete the background check may result in denial of the license by the department.
(b) Application. Applications for a license or renewal of a license are made on forms supplied by the department and must be accompanied by the annual license fee as provided in chapter 82.24 RCW. A retail cigarette license is valid for one year from the date it is issued.
(c) Multiple locations. A separate license with a license fee as provided in chapter 82.24 RCW is required for each additional place of business at which the retailer operates. Each license must be exhibited in the place of business for which it is issued.
(d) Cigarette vending machine license. Retailers who have received a cigarette retailer license and operate cigarette vending machines must obtain a cigarette vending machine license from the department and are required to pay an additional annual fee as set forth in chapter 82.24 RCW for each vending machine.
(e) Commercial cigarette making machine license. Retailers who have received a cigarette retailer license and tobacco products retailer license (see WAC 458-20-185) and operate commercial cigarette making machines must obtain a commercial cigarette making machine license from the department and are required to pay an additional annual fee as set forth in chapter 82.24 RCW for each location with a machine. Each license must be exhibited in the place of business for which it is issued.
Persons operating a commercial cigarette making machine are also subject to federal licensing requirements as a cigarette manufacturer. Please contact the Alcohol and Tobacco Tax and Trade Bureau of the United States Department of the Treasury.
(205) Duties and responsibilities of retailers.
(a) No retailer in this state may possess unstamped cigarettes unless he or she is also a licensed wholesaler.
(b) Retailers may obtain cigarettes only from cigarette wholesalers licensed by this state.
(206) Additional requirements for manufacturers, wholesalers, and retailers. Persons making wholesale or retail sales of cigarettes or manufacturing cigarettes must comply with all the provisions of chapters 70.155 and 70.158 RCW.
(207) Licensing enforcement. The board has the licensing enforcement responsibilities for cigarettes. See chapters 314-33 and 314-34 WAC for rules related to the board's enforcement of cigarette licensing.
Part III - Stamping, Rates, and Refunds
(301) Cigarette stamps.
(a) Stamps indicating payment of the cigarette tax must be affixed prior to any sale, use, consumption, handling, possession, or distribution of all cigarettes other than those specifically exempted as explained in Part V of this rule. The stamp must be affixed securely and applied one time (not to be reused) to the smallest container or package (such as a pack of cigarettes rather than a carton of cigarettes), unless the department, in its sole discretion, determines that it is impractical to do so. Stamps must be of the type authorized by the department and affixed in such a manner that they cannot be removed from the package or container without being mutilated or destroyed. Further, the stamps must be affixed in such manner as to permit the department to readily ascertain by inspection whether or not such tax has been paid. RCW 82.24.030(1). To that end, any package that is missing more than fifty percent of the stamp will be considered unstamped and untaxed.
(b) Licensed wholesalers may purchase state-approved cigarette stamps from authorized banks. Payment for stamps must be made at the time of purchase unless the wholesaler has prior approval of the department to defer payment and furnishes a surety bond equal to the proposed monthly credit limit. Payments under a deferred plan are due within thirty days following purchase. Licensed wholesalers are compensated for affixing the stamps at the rate of $6.00 per thousand stamps affixed (the "stamping allowance").
(302) Rates.
(a) The Washington state cigarette tax is imposed on a per cigarette basis. The rate of the tax is a combination of statutory rates found in chapter 82.24 RCW.
(b) When the rate of tax increases, the first person who sells, uses, consumes, handles, possesses, or distributes previously taxed cigarettes after the rate increase is liable for the additional tax.
(303) Refunds. Any person may request a refund of the face value of the stamps when the tax is not applicable and the stamps are returned to the department.
(a) Forms. The claim for refund must be filed on a form provided by the department. Documentation supporting the claim must be provided at the time the claim for refund is made as specified on the form. The department has the following forms for cigarette tax refund claims:
(i) Cigarette Tax Claim for Refund form. The form is for wholesalers who have returned stamped cigarettes to the manufacturer or are returning damaged or unused stamps to the department. An affidavit or certificate from the manufacturer for stamped cigarettes returned to the manufacturer for destruction or by an agent of the department verifying the voiding of stamps and authorizing the refund must accompany the claim for refund.
(ii) Tribal Member Claim for Refund form. This refund form is for Indian tribal members who purchase state stamped cigarettes as consumers within their own Indian country.
(b) Refunds may be claimed for stamped cigarettes if the stamps are:
(i) Damaged, or unfit for sale, and as a result are destroyed or returned to the manufacturer or distributor; or
(ii) Improperly or partially affixed through burns, jams, double stamps, stamped on carton flaps, or improperly removed from the stamp roll.
Refunds for stamped cigarettes will not include the stamping allowance.
Part IV - Roll-Your-Own Cigarettes
(401) Retailers.
(a) Licenses required. Only retailers licensed to sell cigarettes in Washington may provide consumers with access to a commercial cigarette making machine to make roll-your-own cigarettes. Retailers must also be licensed to sell tobacco products in Washington in order to sell the tobacco to make roll-your-own cigarettes.
(b) Stamped containers. A retailer may not allow consumers to use a commercial cigarette making machine unless the retailer provides the consumer with a box or similar container to transport the roll-your-own cigarettes affixed with cigarette stamps, and the consumer transports the cigarettes from the retailer only in such box or similar container. A retailer must provide cigarette tubes to a consumer in one or more twenty unit denominations. For purposes of this rule, a "similar container" to a box is any package used to transport roll-your-own cigarettes.
(402) Stamps. Retailers of roll-your-own cigarettes must purchase and affix roll-your-own cigarette tax stamps for the cigarettes produced through the cigarette making machine. Retailers must contact the department's taxpayer account administration division to purchase the stamps. Stamps affixed must be for an amount equaling the cigarette tax due. Each cigarette tube or paper provided to the consumer is deemed a cigarette for purposes of imposing and collecting the cigarette tax. Stamps must be of the type authorized by the department and affixed in the manner provided for wholesalers in subsection (301)(a) of this rule. Retailers purchasing stamps for roll-your-own cigarettes are compensated for affixing the stamps with the stamping allowance provided under subsection (301)(b) of this rule, as well as an additional amount of five cents per cigarette to offset the cost of the tobacco products tax under chapter 82.26 RCW and WAC 458-20-185. See RCW 82.24.030(6) for additional rules relating to the affixing of stamps for roll-your-own cigarettes.
Part V - Exemptions
(501) In general. There are limited exemptions from the cigarette tax provided by law. This part discusses exemptions and the procedures that must be followed to qualify for an exemption for certain government sales and sales in interstate commerce. For exemptions for sales in Indian country, please see Part VIII of this rule.
(502) Government sales. The cigarette tax does not apply to the sale of cigarettes to:
(a) The United States Army, Navy, Air Force, Marine Corps, or Coast Guard exchanges and commissaries and Navy or Coast Guard ships' stores;
(b) The United States Veteran's Administration; or
(c) Any person authorized to purchase from the federal instrumentalities named in (a) or (b) above, if the cigarettes are purchased from the instrumentality for personal consumption.
(503) Interstate commerce. The cigarette tax does not apply to cigarettes sold to persons licensed as cigarette wholesalers in other states when, as a condition of the sale, the seller either delivers the cigarettes to the buyer at a point outside this state, or delivers the same to a common carrier with the shipment consigned by the seller to the buyer at a location outside this state.
Part VI - Transporting Cigarettes in Washington
(601) Transportation of cigarettes restricted. No person other than a licensed wholesaler may transport unstamped cigarettes in this state except as specifically set forth in RCW 82.24.250 and this rule, or as may be allowed under a cigarette compact under RCW 43.06.450 through 43.06.466. Licensed wholesalers transporting unstamped cigarettes in this state must do so only in their own vehicles unless they have given prior notice to the board of their intent to transport unstamped cigarettes in a vehicle belonging to another person.
(602) Notice required. Persons other than licensed wholesalers using their own vehicles intending to transport unstamped cigarettes in this state must first give notice to the board of their intent to do so, except as provided under RCW 82.24.250(5), or other applicable law.
(603) Transportation of unstamped cigarettes. All persons transporting unstamped cigarettes must have in their actual possession invoices or delivery tickets for such cigarettes. The invoices or delivery tickets must show the true name and address of the consignor or seller, the true name and address of the consignee or purchaser, and the quantity and brands of the cigarettes transported. It is the duty of the person responsible for the delivery or transport of the cigarettes to ensure that all drivers, agents, or employees have the delivery tickets or invoices in their actual possession for all such shipments.
(604) Purchase or consignment. If the unstamped cigarettes transported pursuant to subsection (601), (602), or (603) of this rule are consigned to or purchased by any person in this state, that purchaser or consignee must be a person who is authorized by chapter 82.24 RCW to possess unstamped cigarettes in this state. As provided in RCW 82.24.250, the following persons are "authorized by chapter 82.24 RCW to possess unstamped cigarettes in this state":
(a) A wholesaler, licensed under Washington state law;
(b) The United States or an agency thereof;
(c) Any person, including an Indian tribal organization, who, after notice has been given to the board as provided in subsection (602) of this rule, brings or causes to be brought in the state unstamped cigarettes, if within seventy-two hours after receipt of the cigarettes the person has caused stamps to be affixed in accordance with subsection (301) of this rule;
(d) Any purchaser or consignee of unstamped cigarettes, including an Indian tribal organization, who has given notice to the board in advance of receiving unstamped cigarettes and who within seventy-two hours after receipt of the cigarettes has caused the stamps to be affixed in accordance with subsection (301) of this rule.
(605) Compliance required. No person may possess or transport cigarettes in this state unless the cigarettes have been properly stamped or that person has fully complied with the requirements of RCW 82.24.250 and this rule. Failure to comply with the requirements of RCW 82.24.250 is a criminal act. Cigarettes in the possession of persons who have failed to comply are deemed contraband and are subject to seizure and forfeiture under RCW 82.24.130.
Part VII - Enforcement and Administration
(701) Books and records. An accurate set of records showing all transactions related to the purchase, sale, or distribution of cigarettes must be retained. RCW 82.24.090. These records may be combined with those required in connection with the tobacco products tax (see WAC 458-20-185), if there is a segregation therein of the amounts involved. All records must be preserved for five years from the date of the transaction.
(702) Reports and returns. The department may require any person dealing with cigarettes in this state to complete and return forms, as furnished by the department, setting forth sales, inventory, and other data required by the department to maintain control over trade in cigarettes.
(a) Manufacturers and wholesalers selling stamped, unstamped, or untaxed cigarettes must submit a complete record of sales of cigarettes in this state monthly. This report is due no later than the fifteenth day of the calendar month and must include all transactions occurring in the previous month.
(b) Persons making sales of tax-exempt cigarettes to Indian tribes or Indian retailers pursuant to WAC 458-20-192 (9)(a) must transmit a copy of the invoice for each such sale to the taxpayer account administration division of the department prior to shipment.
(c) Wholesalers selling stamped cigarettes manufactured by nonparticipating manufacturers as defined in WAC 458-20-264 must report all such sales to the taxpayer account administration division no later than the twenty-fifth day of the calendar month and must include all transactions occurring in the previous month. See WAC 458-20-264, National Uniform Tobacco Settlement, for more details on this report.
(d) A person who sells, transfers, or ships for profit cigarettes (as the term "cigarette" is defined in 15 U.S.C. Sec. 375) in interstate commerce, whereby such cigarettes are shipped into Washington, or who advertises or offers such cigarettes for sale, transfer, or shipment in this state, must file a report as required under 15 U.S.C. Sec. 376. This report is due no later than the 10th day of each calendar month and must include a memorandum or invoice covering all shipments of cigarettes made into Washington during the previous calendar month.
(e) Washington consumers who purchase cigarettes outside Washington state, or from some other source without paying Washington taxes, must pay both the cigarette tax and the use tax directly to the department of revenue within seventy-two hours of first possessing them in this state using a "Tax Declaration for Cigarettes" form, which may be obtained from the department.
(703) Criminal provisions. Chapter 82.24 RCW prohibits certain activities with respect to cigarettes. Persons handling cigarettes within this state must refer to these statutes. The prohibited activities include, but are not limited to, the following:
(a) Transportation, possession, or receiving 10,000 or fewer cigarettes. Transportation, possession or receiving 10,000 or fewer unstamped cigarettes is prohibited unless the notice requirements set forth in RCW 82.24.250 have been met; failure to meet those notice requirements is a gross misdemeanor. RCW 82.24.110 (1)(n) and (o).
(b) Transportation, possession, or receiving more than 10,000 cigarettes. Transportation, possession, or receiving more than 10,000 unstamped cigarettes is prohibited unless the notice requirements set forth in RCW 82.24.250 have been met; failure to meet those notice requirements is a felony. RCW 82.24.110(2).
(c) Forgery or counterfeiting of stamps. Alteration, fabrication, forgery, and counterfeiting of stamps are felonies. RCW 82.24.100.
(d) Counterfeit cigarettes. The manufacture, sale, or possession of counterfeit cigarettes in this state is a felony. RCW 82.24.570.
(704) Search, seizure, and forfeiture. Any collection agent of the department, enforcement officer of the board, or law enforcement officer of this state may search for, seize, and subsequently dispose of unstamped cigarette packages and containers, counterfeit cigarettes, conveyances of all kinds (including aircraft, vehicles, and vessels) used for the transportation of unstamped and/or counterfeit cigarettes, and vending machines used for the sale of unstamped and/or counterfeit cigarettes. See RCW 82.24.130, et seq., for provisions relating to search, seizure, and forfeiture of property, possible redemption of property, and for treatment of such property in the absence of redemption.
(705) Penalties. RCW 82.24.120 provides a penalty for failure to affix the cigarette stamps or to cause the stamps to be affixed as required, or to pay any tax due under chapter 82.24 RCW. In addition to the tax deemed due, a penalty equal to the greater of $10.00 per package of unstamped cigarettes or $250.00 will be assessed. Interest is also assessed on the amount of the tax at the rate as computed under RCW 82.32.050(2) from the date the tax became due until the date of payment. The department may, in its sole discretion, cancel all or part of the penalty for good cause.
Part VIII - Sales in Indian Country
(801) Definitions. The definitions of "Indian," "Indian country," and "Indian tribe" in WAC 458-20-192 apply to this rule.
(802) Cigarette compacts. The state cigarette tax does not apply to cigarettes taxed by an Indian tribe in accordance with a cigarette compact under RCW 43.06.450 through 43.06.466. Cigarette wholesalers making sales in conformance with such compact will be required to obtain and affix a unique tribal stamp prior to sale. For additional information, wholesalers should contact the Indian tribe in question and the department.
(803) Sales to Indians in Indian country. The state cigarette tax does not apply to cigarettes sold in Indian country to tribal members of the particular tribe where the cigarettes are purchased for personal consumption. Sales of cigarettes to nonmembers are subject to the tax. Licensed wholesalers may sell exempt stamped cigarettes to tribal retailers in accordance with the requirements of WAC 458-20-192 and the instructions of the department. For reporting such sales, see subsection (702)(b) of this rule.
(804) Refunds. Indians who purchase, in their own Indian country, cigarettes to which state stamps have been affixed may apply for a refund under subsection (303) of this rule.
(805) Licenses. Indians and Indian tribes engaged in business in Indian country are not required to obtain a cigarette wholesaler or state-issued retailer license in order to purchase cigarettes from state-licensed wholesalers.
(806) Preemption. Application of the state cigarette tax may be preempted by tribal, federal, or state law, depending on the circumstance. For additional information, please consult WAC 458-20-192.
[Statutory Authority: RCW 82.24.550, 82.32.300 and 82.01.060. WSR 20-24-068, § 458-20-186, filed 11/24/20, effective 12/25/20; WSR 20-11-006, § 458-20-186, filed 5/8/20, effective 6/8/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.24.550(2), and 82.26.220(2). WSR 15-01-107, § 458-20-186, filed 12/18/14, effective 1/18/15. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-10-033, § 458-20-186, filed 4/26/10, effective 5/27/10; WSR 07-04-119, § 458-20-186, filed 2/7/07, effective 3/10/07. Statutory Authority: RCW 82.24.235, 82.32.300, and 82.01.060(1). WSR 05-02-035, § 458-20-186, filed 12/30/04, effective 1/30/05. Statutory Authority: RCW 82.32.300. WSR 94-10-062, § 458-20-186, filed 5/3/94, effective 6/3/94; WSR 90-24-036, § 458-20-186, filed 11/30/90, effective 1/1/91; WSR 90-04-039, § 458-20-186, filed 1/31/90, effective 3/3/90; WSR 87-19-007 (Order ET 87-5), § 458-20-186, filed 9/8/87; WSR 83-07-032 (Order ET 83-15), § 458-20-186, filed 3/15/83; Order ET 75-1, § 458-20-186, filed 5/2/75; Order ET 73-2, § 458-20-186, filed 11/9/73; Order ET 71-1, § 458-20-186, filed 7/22/71; Order ET 70-3, § 458-20-186 (Rule 186), filed 5/29/70, effective 7/1/70.]


PDF458-20-187

Tax responsibility of vending machine owners and operators.

(1) Introduction. This rule explains the taxability of income from the sale, lease, and operation of vending machines. It does not apply to vending machines used in the conduct of a public utility business, such as public pay telephones.
(2) Other rules that may apply. Readers may want to refer to other rules for additional information, including those in the following list:
(a) WAC 458-20-102 Reseller permits.
(b) WAC 458-20-108 Selling price—Credit card service fees, foreign currency, discounts, patronage dividends.
(c) WAC 458-20-127 Newspapers, magazines, and periodicals.
(d) WAC 458-20-131 Gambling activities.
(e) WAC 458-20-15503 Digital products.
(f) WAC 458-20-165 Laundry, dry cleaning, linen and uniform supply, and self-service and coin-operated laundry services.
(g) WAC 458-20-178 Use tax and the use of tangible personal property.
(h) WAC 458-20-183 Amusement, recreation, and physical fitness services.
(i) WAC 458-20-185 Tax on tobacco products.
(j) WAC 458-20-186 Tax on cigarettes.
(k) WAC 458-20-243 Litter tax.
(l) WAC 458-20-244 Food and food ingredients.
(3) What are vending machines? Vending machines are machines that through the insertion of coins or other forms of payment will provide one of the following functions either directly or under the operation of the patron:
(a) Vending machines that return tangible personal property. Tangible personal property returned from vending machines include, but is not limited to, photographs, toiletries, cigarettes, beverages, food, candy, and tangible media such as a DVD or CD.
(b) Vending machines that provide a service.
(i) Vending machines that provide a retail service include machines that install, repair, clean, alter, imprint, improve tangible personal property, or provide any other service listed as a retail sale under RCW 82.04.050. Examples include, but are not limited to, vending machines that provide bowling ball polishing, perform car washes, allow the operation of vacuum equipment, and dispense air or water. Also included are vending machines that provide locker rentals found in amusement park, theme park, and water park facilities, as provided in RCW 82.04.050, and vending machines that accept self-payment for automobile parking.
(ii) Vending machines that provide a nonretail service include, but are not limited to, weight scales, coin cashing machines, and luggage locker rentals at any facility other than an amusement park, theme park, or water park; and self-service and coin-operated laundry services. For information about self-service and coin-operated laundry services, see WAC 458-20-165.
(c) Vending machines that offer a game to be played.
(i) Vending machines that offer retail games to be played, such as those listed in RCW 82.04.050, including air hockey, billiards, pool, foosball, darts, shuffleboard, ping pong, and similar games.
(ii) Vending machines that offer nonretail games to be played include, but are not limited to, pinball and arcade games.
(4) Taxability of income from vending machines.
(a) Retailing and retail sales tax. Persons operating vending machines listed in subsection (3)(a), (b)(i), and (c)(i) of this rule are making a retail sale and must report and pay tax under the retailing business and occupation (B&O) tax classification on the gross receipts from those machines. In addition, the retail sales tax applies to sales through vending machines listed in subsection (3)(a), (b)(i), and (c)(i) of this rule and operators of such machines are liable for the collection and payment of the tax.
(i) Retail sales tax separately stated. Retail sales tax does not need to be stated separately from the selling price or collected separately from the buyer when sales are through vending machines. See RCW 82.08.050. The operator may deduct the tax from the total amount received in the machine to arrive at the net amount that becomes the measure of the retailing B&O and retail sales tax.
(ii) Exemption for food and food ingredients. Retail sales and use tax exemptions for food and food ingredients do not apply to sales of food and food ingredients dispensed from vending machines. For information on how to calculate tax on food and food ingredient sales see WAC 458-20-244.
(b) Service and other activities. Persons operating vending machines listed in subsection (3)(b)(ii) and (c)(ii) of this rule must report and pay tax under the service and other activities B&O tax classification on the gross receipts from those machines.
(c) License to use real property. When vending machines are placed at a location owned or operated by a person other than the owner of the machines, under any arrangement for compensation to the location operator, the location operator has granted the owner of the machines a license to use real property. The location operator is responsible for remitting tax on its gross receipts under the service and other activities B&O tax classification.
(d) Sales and leases of machines. Sales or leases of vending machines to persons who will operate them are sales at retail subject to the retailing B&O and retail sales tax.
(e) Use or deferred sales tax. The use or deferred sales tax applies to all tangible personal property used by persons making sales through vending machines, if the retail sales tax has not been paid, except inventory items resold through such machines.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-17-066, § 458-20-187, filed 8/16/16, effective 9/16/16. Statutory Authority: RCW 82.32.300. WSR 86-18-022 (Order ET 86-15), § 458-20-187, filed 8/26/86. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-187, filed 6/27/78; Order ET 73-1, § 458-20-187, filed 11/2/73; Order ET 71-1, § 458-20-187, filed 7/22/71; Order ET 70-3, § 458-20-187 (Rule 187), filed 5/29/70, effective 7/1/70.]


PDF458-20-18801

Medical substances, devices, and supplies for humans—Drugs prescribed for human use—Medically prescribed oxygen—Prosthetic devices—Mobility enhancing equipment—Durable medical equipment.

PART 1 - INTRODUCTION
(101) Introduction. This rule provides tax-reporting information for persons making sales of medical products. It also provides information about the retail sales tax and use tax exemptions available for the sale and use of certain medical products for humans.
(102) How is this rule organized? This rule is divided into five parts as follows:
(a) Part 1 - Introduction. Part 1 provides information relating to the purpose of the rule, how the rule is organized, and provides a listing of additional rules that may be helpful to the reader in determining taxability related to medical products.
(b) Part 2 - Medical products. Part 2 of this rule identifies what "medical products" include for purposes of this rule. Medical products is not a statutory term, but instead, is a term used simply to collectively describe the medical items addressed by this rule.
(c) Part 3 - Applicable taxes. Part 3 of this rule provides information on the taxes that apply to the sale, use, purchase, or manufacture of medical products.
(d) Part 4 - Common exemptions. Part 4 of this rule provides information on common retail sales tax and use tax exemptions related to medical products.
(e) Part 5 - Bundled transactions. Part 5 of this rule addresses the treatment of bundled transactions involving medical products.
(103) How are examples included in this rule to be used? This rule contains examples, which identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(104) What are some other department of revenue rules that address medical or health related providers that might apply? The department of revenue (department) has adopted other rules addressing the taxability of various activities related to the providing of health care. Readers may want to refer to the following rules for additional information:
(a) WAC 458-20-150, Optometrists, ophthalmologists, and opticians;
(b) WAC 458-20-151, Dentists, audiologists, and other health care providers—Dental laboratories and dental technicians;
(c) WAC 458-20-168, Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.
PART 2 - MEDICAL PRODUCTS
(201) What are medical products for purposes of this rule? Medical products include durable medical equipment, drugs, mobility enhancing equipment, over-the-counter drugs, and prosthetic devices as defined by Washington statute. Medical products also include other tangible personal property used for medical purposes, not covered by one of the statutory definitions. The remainder of Part 2 of this rule describes these medical products.
(202) What is durable medical equipment? Durable medical equipment is equipment, including repair and replacement parts for durable medical equipment that:
(a) Can withstand repeated use;
(b) Is primarily and customarily used to serve a medical purpose;
(c) Generally is not useful to a person in the absence of illness or injury; and
(d) Is not worn in or on the body. See RCW 82.08.0283. Also, see subsection (206)(b) of this rule for an explanation of what is considered "worn in or on the body."
Table 1 provides a nonexclusive list of durable medical equipment product examples.
Table 1
Durable Medical Equipment Examples
•
Anesthesia machine and ventilator
•
Apnea monitors
•
Atomizers (medical - Reusable)
•
Beds, bags, trays, bedpans, commodes, pads, pillows, crash carts, lamps, bulbs, and tables (medical)
•
Blood parameter monitor, pulse oximetry equipment, and blood gas analyzer
•
Bone growth stimulator (not worn on the body)
•
Bovie (cauterization)
•
Cardiopulmonary bypass machine
•
Cofflator
•
Continuous passive motion devices
•
Continuous positive airway pressure (CPAP & BI-PAP) machine (not worn on the body)
•
Diagnostic equipment - Audiology, cardiology, mammography, radiology
•
Electronic speech aids (not worn on the body)
•
Endoscopes
•
Enteral feeding bags, tubing, and connectors
•
Feeding plugs
•
Glucose meters
•
Instruments -  Reusable, e.g., clamps, drills, forceps, retractors, scalpels, reamers, scissors
•
Intravenous (IV) stands and poles
•
Kidney dialysis devices
•
Lasers
•
Lithotripters
•
Nebulizers
•
Respiratory humidifier
•
Reusable needles or reusable staplers
•
Sling scales
•
Stapler (must be empty as staples are not durable medical equipment)
•
Stethoscopes, stirrups, and stretchers (medical)
•
Suction regulators
•
TENS units (not worn on the body)
•
Tourniquets
•
Ultrasound probes, transducers, and mini dopplers
•
Whirlpools (medical)
•
X-ray equipment
(203)(a) What is a drug? A "drug" is a compound, substance, or preparation, and any component of a compound, substance, or preparation, other than food and food ingredients, dietary supplements, alcoholic beverages, or cannabis, useable cannabis, or cannabis-infused products:
(i) Recognized in the official United States pharmacopoeia, official homeopathic pharmacopoeia of the United States, or official national formulary, or any supplement to any of them; or
(ii) Intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease; or
(iii) Intended to affect the structure or any function of the body. See RCW 82.08.0281.
Table 2 provides a nonexclusive list of drug product examples.
Table 2
Drug Examples
•
Dermal fillers - Injectable
•
Dialysis dialysate solution
•
Federal prescription (RX) drugs, including biologicals
•
Gases - Medical grade (nitrous oxide, oxygen, carbon dioxide, helium)
•
Implanted radioactive isotopes
•
Insulin
•
Parenteral nutrition formulas - By prescription
•
Prescription medicated cotton swabs and gauze wraps
•
Sterile water - 1cc, 5cc, 10cc vials, sterile normal saline (.9%) - 1cc, 5cc, 10cc vials - Solutions for adding to mixtures and irrigation
•
Vaccines
(b) Substances that are necessary to the performance of durable medical equipment are not drugs. A compound, substance, or preparation that is necessary for durable medical equipment to perform its function is not a drug, even when it otherwise meets the definition of drug in this subsection.
(c) Examples of compounds, substances, preparations that are necessary in order for the durable medical equipment to perform its function.
Example 1. A Coulter Blood Cell Counter uses an electrolytic solution to perform its function. The solution is entirely contained within the device and does not physically interact with the patient's tissue (blood) apart from the device. The device cannot perform its function without the electrolytic solution. The solution is an integral part of the Coulter Blood Cell Counter and is not a drug even though the device is used to diagnose disease and the test it performs is conducted pursuant to a prescription.
Example 2. A cryoablation device uses extremely cold, thermally conductive solution inside a hollow probe or needle to freeze and remove diseased or malfunctioning cells within a patient's body. The solution is entirely contained within the device and does not physically interact with the patient's tissue apart from the device. The device cannot perform its function without the solution. The solution is an integral part of the device and is not a drug even though the device is used in the cure, mitigation, and treatment of disease as part of a prescribed procedure.
Example 3. A specialized medical laser uses certain gases (e.g., argon, helium) to determine the wavelength of the light emitted. This allows the laser to identify specific cells or substance types. The gas is entirely contained within the laser and does not physically interact with the patient's tissue apart from the device. The device cannot perform its function without the gas. The gas is an integral part of the device and is not a drug even though the gas is consumed and the laser is used in the cure, mitigation, and treatment of disease as part of a prescribed procedure.
(204) What is mobility enhancing equipment? Mobility enhancing equipment is equipment, including repair and replacement parts for mobility enhancing equipment that:
(a) Is primarily and customarily used to provide or increase the ability to move from one place to another and is appropriate for use either in a home or a motor vehicle;
(b) Is not generally used by persons with normal mobility; and
(c) Does not include any motor vehicle or equipment on a motor vehicle normally provided by a motor vehicle manufacturer. See RCW 82.08.0283.
Table 3 provides a nonexclusive list of mobility enhancing equipment products.
Table 3
Mobility Enhancing Equipment Examples
•
Bath aids - Raised toilet seat, tub and shower stools
•
Bed pull-up T
•
Canes
•
Car seats (mobility enhancing)
•
Crutches
•
Handrails and grab bars to assist in rising from commode, tub, or shower
•
Lift chairs and replacement parts
•
Lifts (hydraulic or electric) used to raise or transfer patients from bed to chair, commode, or bath
•
Replacement parts for mobility enhancing equipment, e.g., batteries for electric wheelchairs
•
Scooters and transporters
•
Swivel seats enabling the disabled to rotate in order to rise from a chair
•
Transfer belts to assist in the transfer of patients
•
Walkers
•
Wheelchairs
•
Wheelchairs adapted for specific uses or functions, e.g., all terrain wheelchairs
(205) Over-the-counter drugs. An over-the-counter drug is a drug that contains a label that identifies the product as a drug required by 21 C.F.R. Sec. 201.66, as amended or renumbered on January 1, 2003. The label includes:
(a) A "drug facts" panel; or
(b) A statement of the "active ingredient(s)" with a list of those ingredients contained in the compound, substance, or preparation. See RCW 82.08.0281.
Table 4 provides a nonexclusive list of over-the-counter drug products.
Table 4
Over-the-Counter Drug Examples
•
Antihistamines
•
Anti-inflammatory
•
Analgesic
•
Contact lenses solution
•
Eternal nutrition formulas with drug facts box
•
Hydrogen peroxide
•
Medicated cotton swabs and gauze wraps (nonlegend)
•
Paviodine iodine
•
Rubbing alcohol
(206)(a) What is a prosthetic device? A prosthetic device is a replacement, corrective, or supportive device, including repair and replacement parts for a prosthetic device, worn on or in the body to:
(i) Artificially replace a missing portion of the body;
(ii) Prevent or correct a physical deformity or malfunction; or
(iii) Support a weak or deformed portion of the body. See RCW 82.08.0283.
Table 5 provides a nonexclusive list of prosthetic device products.
Table 5
Prosthetic Device Examples
•
Abdominal belts, binders, and supports
•
Acetabular cups
•
Ankle brace
•
Antiembolism stocking
•
Artificial eyes, heart valves, larynx, limbs
•
Back braces
•
Bone cement and wax
•
Bone pins, plates, nails, screws
•
Breast implants and external prosthesis
•
Cervical collars
•
Cochlear implant
•
Continuous positive airway pressure (CPAP) machines which are specifically designed to be wholly worn on the body and portable
•
Corrective eye glasses and contact lenses
•
Dental prostheses including, but not limited to, full and partial dentures, crowns, inlays, fillings, braces, and retainers
•
Drainage devices for single patient use because they serve the same drainage functions as the body's natural systems
•
Ear, nose, and throat implants
•
Eye glass frames and lenses
•
Foley catheter
•
Gastric bands and intragastric balloons
•
Hand and feet implants
•
Head halters
•
Hearing aids
•
Implanted pacemakers
•
Insulin pumps
•
Knee immobilizers
•
Mastectomy surgical bras
•
Maxillofacial devices implanted
•
Membrane implants (neutron, spinal, joint)
•
Ocular implants
•
Orthobiologics implants
•
Orthopedic shoes, shoe lifts, inserts, arch supports, heel protectors
•
Pressure garments - Edema gloves
•
Pressure garments - Mast pants, burn garments
•
Salem sump with anti-reflux valve
•
Shoulder and elbow implants
•
Skin implants - Synthetic
•
Slings, braces, collars, casts, splints, embolism stockings, arch pads, pelvic traction belts, traction pulley clamp assemblies and cords
•
Slings - Medical
•
Specialized orthotic shoes, post-operation shoes, cast shoes, diabetic shoes and inserts, and other similar apparatus
•
Speech aids (electronic) worn on the body
•
Sphincters - Medical
•
Splints and splint materials
•
Stent implants through endoscopy
•
Stents (biliary, coronary and urinary)
•
Stockings - Compression
•
Sutures, staples, and skin glue for closing wounds
•
Tendon implants
•
TENS units worn on the body
•
Testicular and penile implants
•
Trachea tubes
•
Trusses
(b) When is a device not worn on or in the body? For the purpose of this exemption, "worn on the body" means the entire device is something a person puts on or has on their person, to be carried with and habitually becomes part of the person as a whole, much in the sense that a person wears clothing or other personal items. Such devices are designed to be wholly worn on the body and portable. A device is not "worn on or in the body" simply because part of it is attached to the body in some way for a period of time. These devices cannot be partially floor-standing, plugged into an outlet, or moved by virtue of dragging, wheels, or with the assistance of a separate device (e.g., a cart or intravenous stand).
(c) Examples of items that are not prosthetic devices worn on or in the body. The following are examples of items not considered prosthetic devices worn on or in the body.
Example 4. Continuous positive airway pressure (CPAP) machines are commonly used by patients with sleep apnea disorders to facilitate normal breathing. Patients using a CPAP machine are normally hooked up to the machine via tubing and individually tailored masks. Even though the mask is normally "worn" for significant periods of time each night, the mask by itself cannot accomplish the intended purpose. The machine performing the function is not worn on the body as a complete system. Neither the mask separately, nor the machine as a whole system, is a prosthetic device.
Example 5. Heart-lung machines generally replace the function of the heart and lungs during surgery, as well as regulating body temperature and providing an avenue of introduction for anesthetics or other medications directly into a patient's bloodstream. While a heart-lung machine is attached to the patient, it is commonly a floor-standing or wheeled unit and is not a prosthetic device.
PART 3 - APPLICABLE TAXES
(301) What basic tax information do I need to be aware of when selling, purchasing, using, or manufacturing medical products? This subsection provides general tax-reporting information for persons who sell, purchase, use, or manufacture, medical products.
(302) How are medical products taxed? In general, sales of medical products are taxable. Sales of medical products to consumers such as doctors, hospitals, or patients are subject to retailing business and occupation (B&O) tax and the retail sales tax. These taxes apply to the sale of medical products as follows:
(a) Retail sales tax. Retail sales tax applies to the sale of medical products to a consumer unless a specific exemption applies. RCW 82.04.050 and 82.08.020. Specific exemptions are discussed in Part 4 of this rule.
(b) Retailing B&O tax. There is no general B&O tax exemption for sales of medical products. Even if a sale of a medical product is exempt from retail sales tax, the gross proceeds from the sale of the medical product to a consumer is subject to the retailing B&O tax.
(c) Wholesaling B&O tax. Sales to persons who resell the medical products (e.g., pharmacies) are subject to the wholesaling B&O tax. Persons making wholesale sales should refer to WAC 458-20-102 for information regarding their responsibility to obtain a reseller permit.
(d) Manufacturing B&O tax. Persons who manufacture products including medical products, in this state are subject to the manufacturing B&O tax upon the value of these products. Manufacturers selling the products at retail or wholesale in this state are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases, the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) classifications of the B&O tax, and claim a Multiple Activities Tax Credit (MATC). Refer to WAC 458-20-19301 for a more detailed explanation of the MATC.
Persons who manufacture molds or other products that they use in a manufacturing process are subject to the manufacturing B&O tax upon the value of the product manufactured. (See also WAC 458-20-112 and 458-20-134 regarding "value of products" and "commercial or industrial use," respectively.) Such persons also incur a use tax liability with respect to their use of the molds or products, unless a specific exemption applies. For example, RCW 82.12.02565 provides a use tax exemption for the use of certain molds in a manufacturing operation. Refer to WAC 458-20-13601 for additional information regarding the manufacturers machinery and equipment sales tax and use tax exemptions.
(e) Use tax or deferred retail sales tax. Purchases of medical products at retail are subject to retail sales tax unless a specific exemption exists in the law. If the seller does not collect retail sales tax, a buyer who is not reselling the products must pay the retail sales tax (commonly referred to as the "deferred retail sales tax") or use tax directly to the department, unless the specific items purchased are exempt under the law. For additional information on use tax see WAC 458-20-178.
(303) Retail sales tax should be paid by the consumer based on the principal use of the product. Some medical products can be put to both an exempt and taxable use. At the time of purchase a buyer may not know exactly how the item or items will be used. In such cases, retail sales tax must be paid to the seller at the time of purchase when the buyer expects to principally (i.e., more than 50 percent of the time) put the item to a taxable use in the normal course of business. However, if the buyer expects to principally put the item to use in an exempt manner, the buyer may provide the seller with an appropriately completed exemption certificate that lists the retail sales tax exempt item or types of items included in the purchase, such as a Streamlined Sales Tax Agreement Certificate of Exemption (SSUTA exemption certificate), or the seller may capture the relevant data elements that would otherwise be captured in a completed SSUTA exemption certificate, or otherwise meet the requirements of RCW 82.08.050(7). See subsection (304) of this rule for more information on exemption certificates and other department approved documentation. When a seller receives an appropriately completed exemption certificate or other approved documentation, that seller is relieved of the responsibility to collect the retail sales tax for those specific items or types of items identified on the certificate and sold in that transaction.
(a) Items put to taxable use where tax was not paid. If the buyer does not pay sales tax on an item, and later puts that item to use in a manner that is not exempt of sales tax, the buyer must pay deferred sales or use tax to the department. The deferred sales tax liability should be reported by the buyer on the use tax lines of the excise tax return (including both state and local portions of the tax). The tax should be reported based on the location and sales tax rate which is in effect where the buyer took possession of the item.
(b) Items put to exempt use where tax was paid. If the buyer does not give an exemption certificate or other approved documentation to the seller indicating a certain item is exempt of retail sales tax, or the seller does not capture the relevant data elements required under SSUTA or otherwise meet the requirements of RCW 82.08.050(7), the seller must collect the tax at the time of purchase on that item. If the buyer later puts that item to first use in an exempt manner, the buyer may take a deduction on the excise tax return equal to the value of the item. This deduction should be claimed in the deduction column of the retail sales tax line, and should be identified as a "taxable amount for tax paid at source" deduction on the deduction detail worksheet. When completing the local sales tax section of the tax return, the value of the item must be credited using the seller's tax location code (assuming the buyer took possession of the item at the seller's location) and computed at the local sales tax rate paid to the seller.
(c) Examples.
Example 6. Purchase of items which are principally exempt. ABC Medical Center (ABC) purchases a case of sterile silicon tubing. One case contains 20 units of sterile tubing in individually sealed sterile packaging. The tubing purchased by ABC is either used to deliver medically prescribed oxygen from tanks to a patient (an exempt use), or used by ABC's laboratory to conduct certain tests (not an exempt use). At the time of purchase, ABC does not know how many of the 20 packages in the case will be used for oxygen tank systems versus how many will be drawn out of inventory by the lab. However, according to ABC's inventory records from past periods, the tubing will principally be used as part of the medically prescribed oxygen systems. ABC provides the seller of the tubing with a properly completed exemption certificate (in this case, the "Sales Tax Exemption Certificate for Health Care Providers") or other approved documentation. The seller is not required to collect retail sales tax on the case of sterile tubing. As ABC puts the tubing to use, it must keep track of when a package of tubing is used by the laboratory. Deferred sales tax is due and should be reported on and remitted with the excise tax return for the period in which ABC used the tubing.
Example 7. Purchase of items which are principally taxable. Assume the same items and situation as in Example 6, except that for this example, according to ABC's inventory records from past periods, the tubing will be principally used for retail sales taxable purposes in the laboratory. ABC cannot provide an exemption certificate or other approved documentation for purchase of the tubing and must pay retail sales tax to the seller. As ABC puts the tubing to use, it may keep track of when a package of tubing is put to exempt use with a medically prescribed oxygen system. ABC may then take on its excise tax return a tax paid at source deduction for the value of the package used.
(304) Sellers must obtain required exemption documentation or information on any retail sales exempted from the retail sales tax. Unless otherwise provided in this rule, sellers making retail sales to medical practitioners, nursing homes, and hospitals must obtain an exemption certificate approved by the department, such as a SSUTA exemption certificate, capture the relevant data elements required in completing a SSUTA exemption certificate, or otherwise meet the requirements of RCW 82.08.050(7) to document any tax-exempt sales of the products discussed in this rule when those businesses are the consumers. Information about exemption certificates may be obtained by:
(a) Using the department's website at dor.wa.gov/;
(b) Reference to RCW 82.08.050(7); or
(c) Calling the department's telephone information center at 1- 360-705-6705.
PART 4 - COMMON RETAIL SALES TAX AND USE TAX EXEMPTIONS
(401) What common retail sales tax and use tax exemptions apply to the sale of medical products? This part of the rule provides a non-exhaustive list of retail sales tax and use tax exemptions available with respect to various medical products.
(402) Sales of medical products pursuant to a prescription. Most retail sales tax exemptions available for sales of medical products require that the item is purchased under authority of a prescription.
(a) What is a prescription? A "prescription" is an order, formula, or recipe issued in any form of oral, written, electronic, or other means of transmission by a duly licensed practitioner authorized by the laws of this state to prescribe. See RCW 82.08.0281. The specific requirements for a prescription may differ depending on the item exempted and the RCW chapter under which the person issuing the prescription is licensed. Close attention must be paid to the details given for each specific exemption explained in the following subsections of this rule.
(b) No automatic exemption. A prescription does not automatically qualify a sale of a medical product for a sales tax or use tax exemption. Unless a specific exemption exists in statute for the sale or use of the item in question the item is not exempt, even with a prescription. For example, if a physician prescribes a regimen of exercise at the local fitness club, the mere issuance of the prescription does not qualify the sales of that service for a retail sales tax exemption because no such exemption exists in statute.
(c) When medical procedures are prescribed. When a medical procedure is prescribed by a duly licensed practitioner authorized to prescribe the same, that overall prescription fulfills the prescription requirement (if any) for each eligible exempt item used in the procedure. For example, an orthopedic surgeon conducts joint replacement surgery for a patient's diseased joint. As part of that surgical procedure, prescription drugs and other eligible exempt items are used. The surgeon does not specifically issue a separate written prescription for each eligible exempt item. The surgeon's order for the surgical procedure and the oral directions provided by the surgeon during the procedure fulfill any prescription requirement for each eligible item used in an exempt manner during that procedure.
(d) Dispensed pursuant to a prescription. The purchase of drugs to be dispensed in the diagnosis, cure, mitigation, treatment, or prevention of disease or to affect the structure or any function of the body, by hospitals or other persons licensed to prescribe such drugs, are considered dispensed pursuant to a prescription and therefore exempt, providing the buyer gives the seller an exemption certificate or other approved documentation as discussed in Part 3 of this rule.
(403) Sales tax and use tax exemptions available with respect to various medical products.
(a) Sales to a free hospital are exempt from sales tax and use tax. RCW 82.08.02795 and 82.12.02745 provide retail sales tax and use tax exemptions for items sold to and used by a "free hospital" when those items are reasonably necessary for the operation of, and provision of health care by a free hospital. For the purpose of these exemptions, "free hospital" is a hospital that does not charge patients for health care provided by the hospital.
(b) Sales of drugs for human use can be exempt from retail sales tax and use tax when sold under the authority of a prescription. RCW 82.08.0281 and 82.12.0275 provide retail sales tax and use tax exemptions for drugs for human use dispensed or to be dispensed to patients, pursuant to a prescription. These exemptions apply to the distribution of "sample" prescription drugs provided free of charge to duly licensed practitioners authorized by the laws of this state to prescribe. For the exemptions to apply, the drug involved must be intended to interact with a specific patient through direct contact with that patient, whether applied internally or externally to the patient's body, or as part of a test conducted on a tissue sample taken from that patient. A seller is not required to collect sales tax when it obtains a properly completed exemption certificate indicating prescription drugs, intended for human use sold to medical practitioners, nursing homes, and hospitals, will be put to an exempt use under the authority of a prescription, captures the data elements described in subsection (304) of this rule, or otherwise meets the requirements of RCW 82.08.050(7). Otherwise, the retail sales tax must be collected. See Part 3 of this rule for information about exemption certificates and other approved documentation.
(c) Sales of disposable devices used to deliver prescription drugs for human use. RCW 82.08.935 and 82.12.935 provide retail sales tax and use tax exemptions for disposable devices used to deliver drugs for human use, pursuant to a prescription.
(i) What are disposable devices used to deliver drugs? "Disposable devices used to deliver drugs" include single-use items such as a single-use syringe, intravenous (IV) tubing, and IV catheters. A stand or device that holds the tubing or catheter is not a disposable device used to deliver drugs.
(ii) Example 8. Disposable devices. A nursing home purchases single-use syringes, tubing used to deliver drugs, and stands used to hold the IV fluid containers. If the nursing home provides the seller with a completed "Sales Tax Exemption Certificate for Health Care Providers," or other approved documentation, retail sales tax does not apply to the purchase of single-use syringes and tubing. However, retail sales tax applies to the IV stands because the stands are "durable medical equipment," not disposable or single-use, and no specific exemption for them exists in the law. For information about durable medical equipment, see Part 2 of this rule.
(d) Sales of "over-the-counter" drugs with a prescription are exempt from retail sales tax and use tax. RCW 82.08.940 and 82.12.940 provide retail sales tax and use tax exemptions for over-the-counter drugs sold for human use, pursuant to a prescription. See subsection (205) of this rule for the definition of over-the-counter drug.
(i) Example 9. A patient's medical practitioner prescribes over-the-counter pain relief medication. The patient takes the prescription to a pharmacy. The sale of the over-the-counter drug is exempt from retail sales tax. In contrast, if the patient's medical practitioner simply recommends that the patient use an over-the-counter pain relief medication, without completing a prescription for the medication, the sale of the over-the-counter drug is subject to retail sales tax.
(ii) Example 10. A hospital makes bulk purchases of various over-the-counter drugs to dispense to patients pursuant to a doctor's prescription. The hospital's purchases of such drugs are exempt from retail sales tax providing the hospital gives the seller an exemption certificate or other approved documentation as discussed in Part 3 of this rule.
(iii) Example 11. An employer purchases drug test kits from a local drug store and administers them to current and prospective employees as a condition of employment. The employer's purchase of the drug tests is subject to retail sales tax because the tests are not prescribed by a licensed physician for the employees or prospective employees.
(e) Dietary supplements (also known as nutrition products) with a prescription are exempt from retail sales and use taxes. Sales of dietary supplements not covered by either of the retail sales tax or use tax exemptions for "food and food ingredients" are generally subject to retail sales tax or use tax. See RCW 82.08.0293 and 82.12.0293. However, RCW 82.08.925 and 82.12.925 provide specific retail sales tax and use tax exemptions for sales of "dietary supplements" for human use, pursuant to a prescription. A "dietary supplement" is any product, other than tobacco, intended to supplement the diet, and that satisfies all three of the criteria listed in (e)(i) through (iii) of this subsection.
(i) Contains one or more of the following dietary ingredients:
(A) A vitamin;
(B) A mineral;
(C) An herb or other botanical;
(D) An amino acid;
(E) A dietary substance for use by humans to supplement the diet by increasing the total dietary intake; or
(F) A concentrate, metabolite, constituent, extract, or combination of any ingredient described in this subsection.
(ii) Is intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid form, or if not intended for ingestion in such form, is not represented as conventional food and is not represented for use as a sole item of a meal or of the diet; and
(iii) Is required to be labeled as a dietary supplement, identifiable by the "supplement facts" box found on the label as required pursuant to 21 C.F.R. Sec. 101.36, as amended or renumbered as of January 1, 2003. See RCW 82.08.0293.
(f) Licensed naturopaths have their own retail sales tax and use tax exemptions available. The sale or use of medicines of mineral, animal, and botanical origin which are prescribed, administered, dispensed, or used by a licensed naturopath in the treatment of a human patient are exempt from retail sales and use taxes. See RCW 82.08.0283 and 82.12.0277.
"Naturopathic medicines" are vitamins, minerals, botanical medicines, homeopathic medicines, hormones, and those legend drugs and controlled substances consistent with naturopathic medical practice in accordance with rules established by the secretary of health. Controlled substances are limited to codeine and testosterone products that are contained in Schedules III, IV, and V in chapter 69.50 RCW. See RCW 18.36A.020.
(g) Drugs and devices used for family planning may be exempt. RCW 82.08.0281 and 82.12.0275 provide sales tax and use tax exemptions for drugs and devices sold or used under certain conditions for family planning purposes. Family planning purposes include promoting, inhibiting, preventing, and determining of conception. This includes all single-patient use items, whether ingested, attached, or applied to persons for family planning purposes. Persons making tax-exempt sales of these drugs and devices to medical practitioners, clinics, or hospitals must obtain an exemption certificate, capture the data elements described in subsection (304) of this rule, or otherwise meet the requirements of RCW 82.08.050(7) to substantiate the exempt nature of any sale, as discussed in Part 3 of this rule.
The purchase, sale, or use qualifies for exemption when either one of the following conditions exists:
• The drug or device is supplied by a family planning clinic that is under contract with the Washington state department of health to provide family planning services; or
• The family planning items are or will be dispensed to patients, pursuant to a prescription. Persons dispensing these items are required to obtain and maintain files of prescriptions to document the exempt nature of such sales.
(h) Medically prescribed oxygen is exempt from retail sales tax and use tax. RCW 82.08.0283 provides a retail sales tax exemption for sales of medically prescribed oxygen for an individual prescribed by a person licensed under chapter 18.57 RCW (Osteopathy—Osteopathic medicine and surgery) or chapter 18.71 RCW (Physicians) for use in the medical treatment of that individual. A comparable use tax exemption is provided in RCW 82.12.0277. Persons making tax-exempt sales of these items must obtain an exemption certificate, capture the data elements described in subsection (304) of this rule, or otherwise meet the requirements of RCW 82.08.050(7) to substantiate the exempt nature of any sale as discussed in Part 3 of this rule.
(i) What is medically prescribed oxygen? The exemption for "medically prescribed oxygen" is not limited to gaseous or liquid oxygen (chemical designation O2). Medically prescribed oxygen is defined by RCW 82.08.0283 to include, among other things, oxygen concentrator systems, oxygen enricher systems, liquid oxygen systems, and gaseous, bottled oxygen systems. The primary use of the equipment must be for the generation or storage of medically prescribed oxygen (O2). These systems include regulators, cannulae, masks, and similar items used to deliver the oxygen to the individual from the tax-exempt oxygen generation or storage device.
(ii) Accessories may not be exempt. Exempt medical oxygen systems are sometimes connected to the patient through taxable systems. The exemption for medically prescribed oxygen only applies to items up to the point the exempt oxygen system is connected to the taxable system. From that point of connection forward to the patient, masks, tubing, or other similar items remain part of the taxable system and are subject to retail sales tax.
(iii) Examples.
(A) Example 12. A physician prescribes oxygen for a patient. The patient rents an oxygen concentrator system and a separate cart to transport the system. The prescribed oxygen concentrator system can be rented exempt of sales tax. However, the exemption for "medically prescribed oxygen" does not include a separate cart used to transport a tax-exempt system. For information about durable medical equipment, see Part 2 of this rule. If the oxygen concentrator system and cart are rented for one nonitemized price the rental may be a bundled transaction. See Part 5 of this rule for information on how tax applies to a bundled transaction.
(B) Example 13. A physician prescribes a "continuous positive airway pressure (CPAP)" system for a patient diagnosed with a sleep apnea disorder. The CPAP system primarily supplies room air, under pressure, to keep the patient's airway passages open and thereby prevent obstruction of airflow in and out of the lungs. As a result, the sale of the CPAP system is subject to retail sales tax because it is not a system that satisfies the statutory definition of "medically prescribed oxygen." Note: Certain CPAP systems, when designed to be entirely worn on the body, can qualify for exemption from retail sales tax as prosthetic devices. See Part 2 of this rule for more information.
(C) Example 14. Assume the same facts for a CPAP system as provided in the previous example (h)(i)(B) of this subsection. In addition, the physician prescribes an oxygen trickle by which medical oxygen is provided to the patient from an oxygen tank through a tube attached to the mask of the CPAP system. The addition of an oxygen trickle does not change the purpose or taxability of any part of the CPAP system. The CPAP system does not generate or store oxygen and is not eligible for the exemption provided for medically prescribed oxygen. The oxygen, oxygen tank, and any tubing used to convey the oxygen is covered by the exemption for medically prescribed oxygen, but only up to the point that it attaches to the taxable CPAP system.
(i) Insulin has its own specific exemption from retail sales tax and use tax - No prescription is required. RCW 82.08.985 and 82.12.985 provide specific sales tax and use tax exemptions for insulin for human use. A prescription is not required for the sale of insulin to be exempt from tax.
(j) Sales of laboratory reagents and other diagnostic substances may be exempt from retail sales and use taxes, under the right circumstances. The definition of drug includes compounds, substances, or preparations (e.g., laboratory reagents and other diagnostic substances) used for the diagnosis of disease. Thus, sales of laboratory reagents and other diagnostic substances are not subject to retail sales tax when prescribed for an individual by a duly licensed practitioner and used to diagnose, cure, mitigate, treat, or prevent disease in humans. RCW 82.08.0281. A comparable use tax exemption is provided in RCW 82.12.0275. Laboratory reagents and diagnostic substances must physically interact with a specific patient's specimen to qualify for exemption. Persons making tax-exempt sales of these items must obtain an exemption certificate, capture the data elements described in subsection (304) of this rule, or otherwise meet the requirements of RCW 82.08.050(7) to substantiate the exempt nature of any sale as discussed in Part 3 of this rule.
(i) What are laboratory reagents and other diagnostic substances? "Laboratory reagents and other diagnostic substances" are substances employed to produce a chemical reaction in order to detect, measure, or produce, other substances. To be a diagnostic substance, the application of the substance to a patient's specimen must result in identification of the characteristics of a particular disease.
(ii) Laboratory reagents, other diagnostic substances or prepared media when sold in a container. Reagents, diagnostic substances, and prepared media often come prepared in a container (test tube, vial, cylinder, Petri dish, etc.) ready for use. It makes no difference to the taxability of the substance if it is sold with or without a container. The function of the substance determines its taxability. The term "prepared media" includes transport media if the resulting culture grown on the medium is used in performing diagnostic tests for specific patients.
(iii) Laboratory reagents and other diagnostic substances. This subsection provides examples of laboratory reagents and other diagnostic substances that may qualify for sales and use tax exemptions under RCW 82.08.0281 and 82.12.0275, provided all requirements for the exemptions are met. The following items are reagents or other diagnostic substances:
(A) Stains, dyes, and decolorizers that react with and cause a change in a cellular tissue. The substances are used to stain the cell tissues in a manner that will mark or highlight certain portions of cells;
(B) Decalcifying solution, dehydrating solution, and clearing agents that chemically react with the patient's specimen; and
(C) Test strips impregnated with a reagent which, when applied to a patient's specimen, test for indicators of a disease.
(iv) What substances are not reagents? Some substances are used solely for purposes of preparing specimens for examination and diagnosis or to facilitate examination of a specimen. Such substances do not themselves produce a chemical reaction resulting in the detection, measurement, or production of another substance. They merely facilitate or enable specimen testing and are not exempt under RCW 82.08.0281 or 82.12.0275. The following lists examples of substances and items which are not reagents:
(A) Paraffin that is extracted from a tissue specimen without having chemically altered the cells;
(B) Gelatin that is extracted out of the specimen before staining and leaves the cell structures unaffected;
(C) Electrodes;
(D) Tissue cassettes;
(E) Freezing medium;
(F) Liquid agar when used to gel patient specimens;
(G) Test tubes or cylinders that do not contain a reagent;
(H) Plain slides and cover slips that are not coated with a reagent;
(I) Mounting medium to adhere the cover slip to the slide; and
(J) Acids and other solutions when used for cleaning purposes.
(v) What about reagents and diagnostic substances that can be used in more than one way (multiple use substances)? Some reagents or other diagnostic substances have multiple uses, some of which may qualify for a sales or use tax exemption. Such substances are exempt only to the extent they are used as part of a test prescribed to diagnose disease in humans. For example, alcohol can be used either as a reagent (e.g., to react with a cellular tissue) or to clean counters, furniture, etc. Alcohol used as a cleaning agent is subject to retail sales or use tax. See Part 3 of this rule for guidance on when to apply retail sales tax to products with multiple uses, with both retail sales taxable and exempt uses being possible.
(k) Sales of controls, calibrators, and standards used with laboratory test equipment are not exempt from retail sales and use taxes. The sales tax and use tax exemptions provided by RCW 82.08.0281 and 82.12.0275 do not apply to drugs (compounds, substances, or preparations) used as a control, calibrator or standard in conjunction with the test of patient specimens in a medical laboratory.
(i) What are controls? A "control" is a material, solution, lyophilized (freeze-dried) preparation or pool of collected serum designed to be used in the process of quality control. Controls do not physically interact with a specific patient's specimen. The concentrations of the substances of interest in the control are known within limits determined during its preparation or before routine use. Controls are generally used with each test of patient specimens to validate the accuracy of that particular test.
(ii) What are calibrators? A "calibrator" is a material, solution, or lyophilized (freeze-dried) preparation designed to be used in calibration of medical laboratory machines. The values or concentrations of substances of interest in the calibration material are known within limits determined during its preparation or before use. Calibrators are generally used at specified intervals such as every eight hours, at midnight, or at shift changes, in accordance with the machine manufacturer's requirements or the requirements of administering agencies to verify the accuracy of the machine.
Calibrators are subject to retail sales tax or use tax because they are used to diagnose problems with machines and they do not physically interact with a patient's specimen to diagnose disease.
(iii) What are standards? A "standard" is a reference material of fixed and known chemical composition capable of being prepared in an essentially pure form. Standard also includes any certified reference material generally accepted or officially recognized as the unique standard used to test and calibrate medical lab equipment. Standards are often used in the original setup of medical lab equipment.
A standard is subject to retail sales tax and use tax because it is used to test and calibrate equipment and does not physically interact with a patient's specimen.
(l) Sales of human blood, tissue, organs, or body parts may be exempt from retail sales and use taxes - No prescription or exemption certificate is required. RCW 82.08.02806 provides a retail sales tax exemption for human blood, tissue, organs, bodies or body parts when used for medical research and quality control testing purposes. RCW 82.12.02748 provides a comparable use tax exemption.
(i) Definitions of human blood, tissue, organs, or body parts. For the purposes of this exemption the following definitions apply:
(A) "Blood" means human whole blood, plasma, blood derivatives, and related products (e.g., bone marrow).
(B) "Tissue" includes human musculoskeletal tissue, musculoskeletal tissue derivatives, ligament tissue, skin tissue, heart valve tissue, human bone, and human eye tissue.
(C) "Organs" or "body parts" means a part of a human body having a special function.
(ii) Materials consisting of both human and animal components. Materials consisting of both human and animal components are not "human blood, tissue, organs, or body parts" and do not qualify for this exemption.
(iii) Sales of spermatozoa. These retail sales tax and use tax exemptions do not apply to sales or purchases of spermatozoa (male reproductive cell).
(m)(i) Durable medical and mobility enhancing equipment - Retail sales tax or use tax applies in most cases. Retail sales tax or use tax applies to the sale or use of durable medical equipment and mobility enhancing equipment, unless a specific exemption applies. See subsections (202) and (204) of this rule for the definition of durable medical and mobility enhancing equipment.
(ii)(A) Mobility enhancing equipment - Complex needs patient exemption. Beginning on August 1, 2023, retail sales tax and use tax does not apply to the sale or use of mobility enhancing equipment when that equipment is purchased for or used by a complex needs patient. To qualify for this exemption the mobility enhancing equipment must meet the user's specific and unique medical, physical, or functional needs and capacities for basic activities when medically necessary to prevent hospitalization or institutionalization of the complex needs patient.
(B) For the purposes of this subsection (403)(m)(ii), "complex needs patient" means an individual with a diagnosis or medical condition that results in significant physical or functional needs and capacities.
(C) This exemption includes repair service and replacement parts for mobility enhancing equipment.
(D) To claim this exemption, the buyer must provide the seller with a retail sales tax exemption certificate. The seller must retain a copy of the certificate for the seller's files. Information about exemption certificates may be obtained by:
(I) Using the department's website at dor.wa.gov;
(II) Reference to RCW 82.08.050(7); or
(III) Calling the department's telephone information center at 1- 360-705-6705.
(n) Sales of prosthetic devices may be exempt of retail sales and use taxes. RCW 82.08.0283 provides a retail sales tax exemption for sales of prosthetic devices prescribed, fitted, or furnished for an individual by a person licensed under the laws of this state to prescribe, fit, or furnish prosthetic devices. The exemption includes repair and replacement parts, as well as labor and services rendered in respect to repairing, cleaning, altering, or improving prosthetic devices. RCW 82.12.0277 provides a corresponding use tax exemption. Persons making tax-exempt sales of these prosthetic devices to medical practitioners, nursing homes, and hospitals, must obtain an exemption certificate, capture the data elements described in subsection (304) of this rule, or otherwise meet the requirements of RCW 82.08.050(7) to substantiate the exempt nature of any sale as described in Part 3 of this rule. See subsection (206) of this rule for the definition of prosthetic device.
(o) Kidney dialysis devices are exempt of retail sales and use taxes with a prescription. RCW 82.08.945 provides a retail sales tax exemption for sales of kidney dialysis devices for human use pursuant to a prescription. The exemption also includes repair and replacement parts, as well as labor and services rendered in respect to repairing, cleaning, altering, or improving kidney dialysis devices. RCW 82.12.945 provides a comparable use tax exemption. For the purpose of this exemption, a "kidney dialysis device" is a device which physically performs the dialyzing or separating process on blood. Kidney dialysis device does not include other equipment or tools used in conjunction with a kidney dialysis device.
Example 15. A kidney dialysis device is wired to a dedicated backup generator that exists only to service the dialysis device when the main source of power is interrupted or is unavailable. Under those conditions the dialysis process cannot be performed without the use of the generator to power the dialysis device. Even so, the generator does not perform the actual dialysis process on the patient's blood and is not a kidney dialysis device.
(p) Nebulizers are exempt of retail sales and use taxes with a prescription. RCW 82.08.803 and 82.12.803 provide sales tax and use tax exemptions in the form of a refund for the sale or use of a nebulizer for human use pursuant to a prescription. A nebulizer is "a device, and not a building fixture, that converts a liquid medication into a mist so that it can be inhaled." The exemptions include repair and replacement parts, as well as labor and services rendered in respect to repairing, cleaning, altering, or improving a nebulizer.
Under these exemptions, sellers must collect the tax on sales subject to these exemptions. To obtain a refund of tax paid, buyers must apply for a refund directly from the department by submitting a completed refund application form to the department and including the original sales receipt. Any buyer submitting an application for refund should refer to WAC 458-20-229 or use the department's website at dor.wa.gov/content/ContactUs.
(q) Ostomic items are exempt of retail sales and use taxes - No prescription is required. RCW 82.08.804 and 82.12.804 provide specific sales tax and use tax exemptions for ostomic items for colostomy, ileostomy, or urostomy patients. "Ostomic items" are disposable medical supplies used by colostomy, ileostomy, and urostomy patients and include bags, belts to hold up bags, tapes, tubes, adhesives, deodorants, soaps, jellies, creams, germicides, and related supplies. "Ostomic items" do not include undergarments, pads and shields to protect undergarments, sponges, or rubber sheets. A prescription is not required for the sale of ostomic items to be exempt from tax.
PART 5 - BUNDLED TRANSACTIONS
(501) What is a bundled transaction? A "bundled transaction" is the retail sale of two or more products, except real property and services to real property, where:
• The products are otherwise distinct and identifiable; and
• The products are sold for one nonitemized price.
A bundled transaction does not include the sale of any products in which the sales price varies, or is negotiable, based on the selection by the buyer of the products included in the transaction.
(a) How are bundled transactions generally taxed for retail sales tax purposes? A transaction is generally considered a bundled transaction subject to retail sales tax if more than 10 percent of the purchase price or sales price is attributable to retail sales taxable products. RCW 82.08.190 and 82.08.195.
(b) Exception. A transaction which otherwise meets the definition of a "bundled transaction" is not a bundled transaction when both of the following are true:
(i) The transaction includes food and food ingredients, drugs, durable medical equipment, mobility enhancing equipment, over-the-counter drugs, prosthetic devices, or medical supplies; and
(ii) The seller's purchase price or sales price of the taxable tangible personal property is 50 percent or less of the total purchase price or sales price of the bundled tangible personal property. Sellers may not use a combination of the purchase price and sales price of the tangible personal property when making the 50 percent determination for a transaction.
(502) How are kits (or trays) used for medical procedures taxed if they contain a combination of individually taxable and nontaxable items? Medical procedure kits are often purchased as a plastic-wrapped package that includes the various items needed to perform a particular medical procedure. A procedure kit can combine items that are either subject to retail sales tax or exempt from retail sales tax if sold separate from a kit or tray, as individual items. However, when a kit involves a bundled transaction sold for one nonitemized price, the sale of the entire kit is either subject to retail sales tax or exempt. This subsection explains how to determine whether a particular medical procedure kit is subject to or exempt from retail sales tax. Persons making a tax-exempt sale of a kit must obtain an exemption certificate from the buyer that lists the general item types within the kit that are exempt as discussed in Part 3 of this rule, capture the data elements described in subsection (304) of this rule, or otherwise meet the requirements of RCW 82.08.050(7). If a particular item within a kit is only exempt pursuant to a prescription, the item (or the procedure in which the item is used) must be prescribed by a duly licensed practitioner authorized by the laws of this state to prescribe the same.
Example 16. A glucose testing kit is prescribed for a human patient. The kit includes a glucose meter, five sample test reagent strips, and a lancet. The glucose meter is durable medical equipment, has a purchase price of $40.00, and is subject to retail sales tax when sold separately. (See Part 2 of this rule for more information concerning durable medical equipment.) The lancet is a single-use tool not covered by any exemption, has a purchase price of $40.00, and is subject to retail sales tax when sold separately. In this case, the test reagent strips qualify as disposable drug delivery devices, have a purchase price of $20.00, and are exempt from retail sales tax when sold separately pursuant to a prescription. The total purchase price of the kit is $100.00.
To determine if the full purchase price of the kit is subject to retail sales tax, the purchase (or sales) price of the taxable components should be compared to the total purchase (or sales) price of the kit. If the taxable components exceed 50 percent of the price, the entire kit is subject to retail sales tax. In this case, the purchase price for both the glucose meter and lancet ($40.00 + $40.00 = $80.00) are more than 50 percent of the total kit purchase price of $100.00. Therefore, retail sales tax is due on the sale of the kit. But if the taxable components were 50 percent or less of the total kit purchase price, sales tax would not be due on the kit.
[Statutory Authority: RCW 82.01.060, 82.08.814, and 82.12.814. WSR 24-03-133, § 458-20-18801, filed 1/23/24, effective 2/23/24. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 22-19-025, § 458-20-18801, filed 9/13/22, effective 10/14/22; WSR 14-18-019, § 458-20-18801, filed 8/25/14, effective 9/25/14. Statutory Authority: RCW 82.32.300. WSR 92-05-065, § 458-20-18801, filed 2/18/92, effective 3/20/92; WSR 87-05-042 (Order 87-1), § 458-20-18801, filed 2/18/87; WSR 83-07-032 (Order ET 83-15), § 458-20-18801, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-18801 (Rule 188), filed 6/27/78; Order 74-2, § 458-20-188 (codified as WAC 458-20-18801), filed 6/24/74.]


PDF458-20-189

Sales to and by the state of Washington and municipal corporations, including counties, cities, towns, school districts, and fire districts.

(1) Introduction. This rule discusses the business and occupation (B&O), retail sales, use, and public utility tax applications to sales made to and by the state of Washington and municipal corporations including, but not limited to, counties, cities, towns, school districts, fire districts, and other special districts.
(a) Other rules that may apply. Readers may also want to refer to other rules for additional information, including the following:
(i) WAC 458-20-106 Casual or isolated sales—Business reorganizations.
(ii) WAC 458-20-118 Sale or rental of real estate, license to use real estate.
(iii) WAC 458-20-167 Educational institutions, school districts, student organizations, and private schools.
(iv) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.
(v) WAC 458-20-179 Public utility tax.
(vi) WAC 458-20-180 Motor carriers.
(vii) WAC 458-20-201 Interdepartmental charges.
(viii) WAC 458-20-250 Solid waste collection tax.
(ix) WAC 458-20-251 Sewerage collection and other related activities.
(b) Examples. This rule includes examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Enterprise activity" means an activity financed and operated in a manner similar to a private business enterprise. The term includes those activities which are generally in competition with private business enterprises and which are over fifty percent funded by user fees. The term does not include activities which are exclusively governmental.
(b) "Municipal corporations" means counties, cities, towns, school districts, fire districts, and other special districts including, but not limited to, park and recreation districts, water and sewer districts, and library districts of the state of Washington.
(c) "Public service business" means any business subject to control by the state, or having the powers of eminent domain, or any business declared by the legislature to be of a public service nature, irrespective of whether the business has the powers of eminent domain or the state exercises its control over the business. It includes, but is not limited to, water distribution, light and power, public transportation, and sewer collection.
(d) "Subject to control by the state," as used in (c) of this subsection, means control by the utilities and transportation commission or any other state department required by law to regulate a business of a public service nature as to rates charged or services rendered.
(e) "User fee" as used in this rule, means a charge imposed on individuals or entities to access facilities, receive services, or participate in activities.
(3) Application of the business and occupation tax.
(a) Sales to the state of Washington and municipal corporations. Sellers are subject to the B&O tax on sales to the state of Washington, its departments and institutions, or to municipal corporations.
(b) Sales by the state of Washington. The state of Washington and its departments and institutions are not subject to the provisions of the B&O tax under RCW 82.04.030.
(c) Sales by municipal corporations.
(i) Governmental activities. Municipal corporations are not subject to the B&O tax on amounts received from activities that are exclusively governmental under RCW 82.04.419. Income from activities that are exclusively governmental include, but are not limited to, license and permit fees; inspection fees; fees for copies of public records, reports, and studies; pet adoption and license fees; processing fees for fingerprinting and environmental impact statements; and fees for on-street metered parking and on-street parking permits. Income received from taxes, fines, penalties, and interest imposed on exclusively governmental activities is also exempt from the B&O tax.
(ii) Interdepartmental charges. Charges between departments of a particular municipal corporation are interdepartmental charges and are not subject to the B&O tax.
(iii) Grant income. Municipal corporations are exempt from the B&O tax on grants received from the state of Washington, or the United States government under RCW 82.04.418.
(iv) Public service business activities. Municipal corporations engaging in public service business activities should refer to the rules mentioned in subsection (1)(a) of this rule to determine their B&O tax liability.
(v) Enterprise activities. Municipal corporations receiving income, however designated, from any enterprise activity for which a specific charge is made are subject to the B&O tax.
(A) When determining whether an activity is an enterprise activity, user fees received from the activity must be measured against total costs attributable to providing the activity, including direct and indirect overhead. This review should be performed at the budget level for all activities included in the budget, and on the fiscal or calendar year basis used by the entity in maintaining its books of account.
Example 1. A city determines that its community center, which is operated under a single budget, generated two hundred fifty thousand dollars in user fees for the fiscal year. The total cost to operate the facility was four hundred thousand dollars, which includes direct operating costs, direct and indirect overhead, asset depreciation, and interest payments for the retirement of bonds issued to fund the facility's construction. The principal payments for the retirement of the bonds are not included because these costs are a part of the asset depreciation costs. The facility's operation is an enterprise activity because it is more than fifty percent ($250,000/$400,000 = 63%) funded by user fees.
(B) An enterprise activity that is operated as part of a governmental or nonenterprise activity is subject to the B&O tax.
Example 2. A city owns a large community center and three smaller neighborhood centers. The community center operates with its own budget, and the three neighborhood centers operate under a single separate budget. The community center and the neighborhood centers are operated as a part of the overall parks and recreation department, which is not more than fifty percent funded by user fees.
Each budget must be independently reviewed to determine whether these facilities are operated as enterprise activities. The operation of the community center is an enterprise activity only if the user fees account for more than fifty percent of the community center's operating budget. The total user fees generated by the three neighborhood centers are compared to the total costs of operating the three centers to determine whether they, as a whole, are an enterprise activity. Had each neighborhood center operated under individual budgets, the user fees generated by each neighborhood center would be compared to the costs of operating that center.
(4) Business and occupation tax classifications for enterprise activities.
(a) Municipal corporations engaging in enterprise activities are subject to the B&O tax as follows:
(i) Service and other activities tax. Amounts received from, but not limited to, event admission fees for concerts and exhibits, admission charges to a zoo or wildlife park, fees charged for the use of lockers at a facility not considered an "athletic or fitness facility" as defined in RCW 82.04.050, charges for moorage (less than thirty days), and the granting of a license to use real property are subject to the service and other activities B&O tax under RCW 82.04.290(2).
(ii) Extracting tax. The extracting of natural products for sale or for commercial use is subject to the extracting B&O tax under RCW 82.04.230. The measure of tax is the value of products. (See WAC 458-20-135 on extracting.) Counties and cities are not, however, subject to the extracting B&O tax on the cost of labor and services performed in the mining, sorting, crushing, screening, washing, hauling, and stockpiling of sand, gravel, or rock taken from a pit or quarry owned by or leased to the county or city when these products are either stockpiled for placement or are placed on a street, road, place, or highway of the county or city by the county or city itself. In addition, the extracting B&O tax does not apply to the cost of or charges for such labor and services if the sand, gravel, or rock is sold by the county or city to another county or city at actual cost for placement on a publicly owned street, road, place, or highway under RCW 82.04.415.
(iii) Manufacturing tax. The manufacturing of products for sale or for commercial use is subject to the manufacturing B&O tax under RCW 82.04.240. The measure of tax is the value of products. (See WAC 458-20-136 on manufacturing.) The manufacturing B&O tax does not apply to the value of materials printed by counties, cities, towns, school districts, educational districts, or library or library district facilities solely for their own use under RCW 82.04.600.
(iv) Wholesaling tax. The wholesaling B&O tax applies to the gross proceeds received from sales or rentals of tangible personal property to persons who resell the same without intervening use under RCW 82.04.270. The wholesaling tax does not, however, apply to casual sales. Sellers must obtain a reseller permit from their customer to document the wholesale nature of any sale as provided in WAC 458-20-102 (Reseller permits).
(v) Retailing tax. Amounts received from, but not limited to, user fees for off-street parking and garages, charges for the sale or rental of tangible personal property to consumers, fees for providing recreational services and activities, charges for operating an athletic or fitness facility, and other retail services and activities as provided in RCW 82.04.050, are taxable under the retailing B&O tax under RCW 82.04.250. The retailing B&O tax does not, however, apply to casual sales.
(b) Persons selling products that they have extracted or manufactured must report, unless exempt by law, under both the "production" (extracting and/or manufacturing) and "selling" (wholesaling or retailing) classifications of the B&O tax, and claim a tax credit under the multiple activities tax credit system. See WAC 458-20-19301 on multiple activities tax credits.
(5) Application of the retail sales tax.
(a) Sales to the state of Washington and municipal corporations. The retail sales tax applies to retail sales made to the state of Washington, including its departments and institutions, and to municipal corporations unless a specific exemption applies.
(b) Sales by the state of Washington and municipal corporations. The state of Washington, including its departments and institutions, and all municipal corporations must collect retail sales tax on all retail sales of tangible personal property or retail services unless a specific exemption applies. Retail sales tax must be collected and remitted even if the sale is exempt from the retailing B&O tax.
Example 3. A city police department must collect retail sales tax on casual sales of unclaimed property to consumers, even though this activity is not subject to the B&O tax because these sales are considered casual sales.
Example 4. A city owns and operates a zoo. One budget is maintained for the care and maintenance of the wildlife and facilities, and a separate budget is maintained for the gift shop and concessions. The wildlife and facilities budget is less than fifty percent funded by admission fees, while the gift shop and concessions budget is almost entirely funded by the proceeds from sales. The admission fees are not subject to the B&O tax, but the income from the gift shop and concession sales are subject to the retailing B&O tax and the city must collect retail sales tax. In this example, had the entire zoo been operated under a single budget and less than fifty percent of the budget was funded by user fees, then no part of the zoo would be considered an enterprise activity. If the zoo is not an enterprise activity, then B&O tax would not apply to the admission fees, the gift shop sales, or the concession sales. However, retail sales tax must still be collected on the gift shop and concession sales.
(c) Sales between the state of Washington and a municipal corporation. Sales between a department or institution of the state and a municipal corporation are retail sales and are subject to the retail sales tax.
Example 5. State Agency sells office equipment to County. State Agency is making a retail sale and must collect and remit retail sales tax upon the amount charged, even though the B&O tax does not apply to this sale. The amount of retail sales tax must be separately itemized on the sales invoice under RCW 82.08.050. State Agency may claim a tax paid at source deduction for any retail sales or use tax previously paid on the purchase of the office equipment provided there was no intervening use of the office equipment by State Agency. If intervening use occurred, State Agency may not claim the tax paid at source deduction, as described in WAC 458-20-102 (Reseller permits), for any retail sales or use tax it previously paid when purchasing the office equipment.
(d) Sales between municipal corporations. Sales between municipal corporations are retail sales subject to the retail sales tax.
(e) Sales between departments or institutions of the state of Washington. Departments or institutions of the state of Washington are not considered sellers when making sales to other departments or institutions of the state because the state is considered to be a single entity under RCW 82.08.010(2). Therefore, the "selling" department or institution is not required to collect the retail sales tax on these sales.
All departments or institutions of the state of Washington are, however, considered "consumers" under RCW 82.08.010(3). A department or institution of the state purchasing tangible personal property from another department or institution is required to remit to the department of revenue the retail sales or use tax upon that purchase, unless it can document that the "selling" institution previously paid retail sales or use tax on that item.
(6) Retail sales tax exemptions. The retail sales tax does not apply to the following:
(a) Sales to city or county housing authorities created under the provisions of the Washington housing authorities law, chapter 35.82 RCW. However, prime contractors and subcontractors working for city or county housing authorities should refer to WAC 458-20-17001 (Government contracting—Construction, installations, or improvements to government real property) to determine their tax liability.
(b) Charges to the state of Washington and municipal corporations for that portion of the selling price of contracts for watershed protection or flood control which is reimbursed by the United States government according to the provisions of the Watershed Protection and Flood Prevention Act, Public Law 566, as amended, under RCW 82.08.0271.
(c) Sales of an entire or complete integral section of operating property of a publicly or privately owned public utility to the state of Washington or to a municipal corporation for use in conducting any public service business, except a tugboat business, under RCW 82.08.0256.
(d) Sales of or charges made for labor and services in the mining, sorting, crushing, screening, washing, hauling, and stockpiling of sand, gravel, or rock taken from a pit or quarry owned or leased to a county or city, when the materials are either stockpiled in the pit or quarry, placed on the public road by the county or city itself, or sold at cost to another county or city for use on public roads under RCW 82.08.0275.
(e) Sales to one municipal corporation by another municipal corporation directly or indirectly arising out of, or resulting from, the annexation, merger, or incorporation of any part of the territory of one municipal corporation by another under RCW 82.08.0278.
(f) Sales to one municipal corporation by another municipal corporation according to the terms of a contractual consolidation under which the taxpayers that originally paid a sales or use tax continue to benefit from the use of the personal property.
(g) Sales to the state of Washington or a municipal corporation of ferry vessels and component parts thereof, and charges for labor and services in respect to construction or improvement of such vessels under RCW 82.08.0285.
(h) Sales to the United States. Sales to federal employees, however, are subject to the retail sales tax even if the federal employee will be reimbursed for the cost by the federal government. (See WAC 458-20-190 on sales to the United States.)
(i) Charges for physical fitness classes, such as aerobics classes, provided by local governments under RCW 82.08.0291. For more information on charges for physical fitness classes provided by local governments, refer to the department's website at dor.wa.gov.
(7) Application of the use tax.
(a) The state of Washington, including its departments and institutions, and municipal corporations are required to pay the use tax directly to the department of revenue if the retail sales tax was not paid on the value of the item or service at the time of purchase. Refer to WAC 458-20-178 (Use tax and the use of tangible personal property) for more information.
(b) Purchases of cigarette stamps, vehicle license plates, license plate tabs, disability decals, or other items to evidence payment of a license, tax, or fee are purchases for consumption by the state or municipal corporation and subject to the retail sales or use tax.
(c) If the state of Washington or its departments and institutions purchase tangible personal property or retail services to resell to any other department or institution of the state of Washington, or to consume as an ingredient or component part in manufacturing or producing for use, a new article for resale to any other department or institution of the state of Washington, the transaction is a retail purchase and subject to retail sales or use tax.
(d) The state of Washington or a municipal corporation that produces or manufactures products for commercial or industrial use are required to remit use tax upon the value of those products under RCW 82.12.020, unless a specific use tax exemption applies. This value must correspond as nearly as possible to the gross proceeds from retail sales of similar products. (See WAC 458-20-112 and 458-20-134 on value of products and commercial or industrial use, respectively.)
Example 6. A municipal corporation that operates a print shop and produces forms or other documents for its own use must remit use tax upon the value of those products, even though a B&O tax exemption is provided by RCW 82.04.600. The value of the products subject to use tax may be reduced by any retail sales tax previously paid on materials, such as paper or ink, which are incorporated into the manufactured product.
(i) Counties and cities are not subject to use tax on the cost of labor and services in the mining, sorting, crushing, screening, washing, hauling, and stockpiling of sand, gravel, and rock taken from a pit or quarry owned or leased to a county or city when the materials are for use on public roads under RCW 82.12.0269.
(ii) If a department or institution of the state of Washington manufactures or produces tangible personal property for use or resale to any other department or institution of the state, use tax must be remitted on the value of that article even though the state is not subject to the B&O tax.
Example 7. State Agency manufactures office furniture to resell to other departments or institutions of the state of Washington. State Agency sometimes uses office furniture it has manufactured for its own offices. Use tax is due on the office furniture sold to the other departments or institutions, and on the office furniture State Agency puts to its own use. The taxable value of the office furniture sold to the other departments or institutions is the selling price. The taxable value for the office furniture State Agency puts to its own use is the selling price at which State Agency sells comparable furniture to other departments or institutions. When computing and remitting use tax upon the value of manufactured furniture, State Agency may reduce the value by any retail sales or use taxes it previously remitted on materials incorporated into that furniture. A department or institution purchasing office furniture from State Agency must remit use tax on the value of that furniture, unless it can document that State Agency paid use tax upon the appropriate value of the furniture. (See also subsection (5)(e) of this rule.)
(e) A use tax exemption applies to the use by the state or local governments of donated personal property under RCW 82.12.02595. The donor, however, remains liable for the retail sales or use tax on the donated property.
(f) A use tax exemption applies to the use of personal property of one municipal corporation by another municipal corporation directly or indirectly arising out of, or resulting from, the annexation, merger, or incorporation of any part of the territory of one municipal corporation by another.
(g) A use tax exemption applies to the use of the personal property of one municipal corporation by another municipal corporation according to the terms of a contractual consolidation under which the taxpayers that originally paid a sales or use tax continue to benefit from the use of the personal property.
(8) Application of the public utility tax.
(a) Persons receiving income subject to the public utility tax may not claim a deduction for amounts received as compensation for services rendered to the state of Washington, its departments and institutions, or to municipal corporations thereof.
(b) The public utility tax does not apply to income received bythe state of Washington or its departments and institutions from providing public utility services.
(c) Municipal corporations operating public service businesses should refer to the rules mentioned in subsection (1)(a) of this rule to determine their public utility tax liability.
[Statutory Authority: RCW 82.32.200 and 82.01.060(2). WSR 20-04-023, § 458-20-189, filed 1/27/20, effective 2/27/20. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-08-076, § 458-20-189, filed 4/3/17, effective 5/4/17. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-189, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 95-24-104, § 458-20-189, filed 12/6/95, effective 1/6/96; WSR 86-18-069 (Order 86-16), § 458-20-189, filed 9/3/86; WSR 85-22-041 (Order 85-6), § 458-20-189, filed 11/1/85; WSR 85-04-016 (Order 85-1), § 458-20-189, filed 1/29/85; WSR 83-07-033 (Order ET 83-16), § 458-20-189, filed 3/15/83; Order ET 70-3, § 458-20-189 (Rule 189), filed 5/29/70, effective 7/1/70.]


PDF458-20-190

Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments.

(1) Introduction. Federal law prohibits states from directly imposing taxes on the United States. Persons doing business with the United States, however, are subject to the taxes imposed by the state of Washington, unless specifically exempt. This rule explains the tax reporting responsibilities of persons making sales to the United States and to foreign governments. The rule also explains the tax reporting responsibilities of persons engaging in business activities within federal reservations and cleaning up radioactive waste and other by-products of weapons production for the United States.
(a) Other rules that may be relevant.
(i) WAC 458-20-17001 Government contracting—Construction, installations, or improvements to government real property.
(ii) WAC 458-20-171 Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic.
(iii) WAC 458-20-178 Use tax and the use of tangible personal property.
(iv) WAC 458-20-186 Tax on cigarettes.
(b) Examples. This rule provides examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) "United States" defined.
(a) For the purposes of this rule, the term "United States" means the federal government, including the executive, legislative, and judicial branches, its departments, and federal entities exempt from state or local taxation by specific federal statutory exemption.
The mere fact that an entity is a federal entity, such as an instrumentality or a federal corporation, does not mean that the entity is immune from tax. The taxability of a federal entity and whether the entity is required to collect and remit retail sales/use tax depends on the benefits and immunities conferred on it by Congress. Thus, to determine the current taxable status of federal entities, the relevant portion of the federal law should be examined.
(b) "United States" does not include entities associated with but not a part of the United States, such as the National Guard (an instrumentality of the state of Washington). Nor does it include entities contracting with the United States government to administer its programs.
(3) Prohibition against taxing the United States. The state of Washington is prohibited from imposing taxes directly on the United States.
(a) This prohibition applies to taxes imposed for the privilege of engaging in business such as business and occupation (B&O) (chapter 82.04 RCW) and public utility (chapter 82.16 RCW) taxes.
It also applies to taxes imposed on a buyer or user of goods or services including, but not limited to, the:
(i) State and local retail sales and car rental taxes (chapters 82.08 and 82.14 RCW);
(ii) State and local use tax (chapters 82.12 and 82.14 RCW);
(iii) Solid waste collection tax (chapter 82.18 RCW); and
(iv) Local government taxes such as the special hotel/motel (chapter 67.28 RCW) and convention and trade center (chapter 67.40 RCW) taxes.
(b) The state is also prohibited from requiring the United States to collect taxes imposed on the buyer (e.g., the retail sales tax) as an agent for the state. However, buyers must pay use tax on retail purchases from the United States, unless specifically exempt by law.
(c) In addition, federal law exempts certain nongovernmental entities from state taxes (for which Congress has given specific federal statutory tax exemptions). These specific federal statutory exemptions may not be absolute and may be limited to specific activities of an entity.
(d) The American Red Cross is an instrumentality of the United States. As a federal corporation providing aid and relief, it is exempt from retail sales, use, and B&O taxes under state law. RCW 82.08.0258, 82.12.0259, and 82.04.380.
The Red Cross provides some victims of natural disasters assistance by check, voucher, and/or direct deposits to the individuals' personal bank accounts. Assistance may also be provided with "client assistance cards" that may be used by the recipients at locations where bankcards are accepted or at automated teller machines (ATM). The retail sales tax treatment of purchases made using these payment methods is:
(i) Electronic funds transfers and checks. Purchases made by an individual using funds that have been transferred into the individual's bank account or received in the form of a check are subject to retail sales tax in the same manner as any other purchase made by that individual, unless specifically exempt by law.
(ii) Vouchers. A voucher is a certificate issued by the Red Cross to an individual that may be exchanged for a specific good or service. As the goods and services will be paid for directly by the Red Cross, the sales are not subject to retail sales tax. A vendor who accepts a voucher will send it and/or other proof of sale to the Red Cross, which will then send a check to the vendor to pay for the purchase.
(iii) Client assistance cards. Sales to individuals who use client assistance cards issued by the Red Cross, or who pay with cash withdrawn from an ATM using the card, are subject to retail sales tax, unless otherwise exempt from tax. These sales are not direct sales to the federal government or one of its instrumentalities.
(e) The Federal Emergency Management Administration (FEMA) is an agency of the federal government. As a federal corporation providing aid and relief, it is exempt from retail sales, use, and B&O taxes under state law. RCW 82.08.0258, 82.12.0259, and 82.04.380.
FEMA provides some victims of natural disasters assistance by check, voucher, and/or direct deposits to the individuals' personal bank accounts. Assistance may also be provided with emergency debit cards that can be used by the recipients at locations where bankcards are accepted or at ATMs. The retail sales tax treatment of purchases made using these payment methods is:
(i) Electronic funds transfer and checks. Sales are subject to retail sales tax as described in (d)(i) of this subsection.
(ii) Vouchers. Sales are not subject to retail sales tax. As with the Red Cross, the goods and services will be paid for directly by FEMA. See (d)(ii) of this subsection.
(iii) Emergency debit cards. As with the Red Cross, "client assistance cards" purchases made with these cards, or with cash withdrawn from an ATM using these cards, are subject to retail sales tax. See (d)(iii) of this subsection.
(4) Persons doing business with the United States. Persons selling goods or services to the United States are subject to taxes imposed on the seller, such as the B&O and public utility taxes, unless a specific tax exemption applies. Persons receiving income from contracting with the United States government to administer its programs, either in whole or in part, are also subject to tax, unless a specific tax exemption applies.
(a) Certain invoiced amounts not included in gross income. Persons who contract with the United States may, for federal accounting purposes, be contractually required to invoice goods or services provided to the United States by third parties. The purpose of the invoices is to match the expenditures with the appropriate category of congressional funding. Amounts received under such invoices should be excluded from the person's gross income when reporting on the excise tax return if all of the following conditions are met with respect to the goods or services:
(i) The third party directly invoices the United States;
(ii) The United States directly pays the third party; and
(iii) The person has no liability, either primarily or secondarily, for making payment to the third party or for remitting payment to the third party.
(b) Tax obligation with respect to the use of tangible personal property. Persons performing services for the United States are also subject to the retail sales or use tax on property they use or consume when performing services for the United States, unless specifically exempt.
(i) Manufacturing articles for commercial or industrial use. In the case of products manufactured or produced by the person using the products as a consumer, the measure of the use tax is generally the value of the products as explained in WAC 458-20-112. If the articles manufactured or produced by the user are used in the manufacture or production of products sold or to be sold to the department of defense of the United States, the value of articles used is the value of the ingredients of such articles. The manufacturing B&O tax also applies to the value of articles manufactured for commercial or industrial use.
(ii) Use of government provided property. When articles or goods used are acquired by bailment, the measure of the use tax to the bailee is the reasonable rental with the value to be determined as nearly as possible according to the rental price at the place of use of similar products of like quality and character. For more information on leases or rentals of tangible personal property see WAC 458-20-211. Thus, if a person has a contract to provide services for the United States and uses government supplied tangible personal property to perform the services, the person must pay use tax on the fair market rental value of the government supplied tangible personal property.
Persons who incorporate government provided articles into construction projects or improvements made to real property of or for the United States should refer to WAC 458-20-17001 for more specific tax-reporting information.
(c) Exemption for certain machinery and equipment. Manufacturers or processors for hire may be eligible for the retail sales or use tax exemption provided by RCW 82.08.02565 and 82.12.02565 on machinery and equipment used directly in a manufacturing or research and development operation. For information on the sales and use tax exemptions see WAC 458-20-13601.
(5) Documenting exempt sales to the United States. Only sales made directly to the United States are exempt from retail sales tax or other tax imposed on the buyer. To be entitled to the exemption, the purchase must be paid for using a qualified U.S. government credit card, a check from the United States payable to the seller, a United States voucher, or by electronic funds transfer made by the United States.
Sales to employees or representatives of the United States are subject to tax, even though the United States may reimburse the employee or representative for all or a part of the expense. Purchases by any other person, whether with federal funds or through a reimbursement arrangement, are subject to tax unless specifically exempt by law.
(a) Documenting tax-exempt sales. Sellers must document the tax-exempt nature of sales made to the United States by keeping a copy of the United States credit card receipt, a copy of the check from the United States, a copy of the federal government voucher, or a copy of documentation clearly indicating payment was made by the United States through electronic funds transfer. For information on how to determine whether purchases made with a U.S. government credit card are exempt from retail sales tax, refer to the department's website at dor.wa.gov.
(b) Payment made by government contracted credit card. Various United States government contracted credit cards are used to make payment for purchases of goods and services by or for the United States government. Sole responsibility for payment of these purchases may rest with the United States government or with the employee. The United States government's system of issuing government contracted credit cards is subject to change. For specific information about determining when payment is the direct responsibility of the United States government or the employee, contact the department's taxpayer services division at:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
or call the department's telephone information center at 360-705-6705 or visit the department's website at dor.wa.gov.
(6) Doing business on federal reservations. The state of Washington has jurisdiction and authority to levy and collect taxes from persons residing within, or with respect to business transactions conducted on, federal reservations. 4 U.S.C. §§ 105-110. The term "federal reservation," as used in this rule, means any land or premises within the exterior boundaries of the state of Washington that are held or acquired by and for the use of the United States, its departments, institutions or entities. This means that a concessionaire operating within a federal reservation under a grant or permit issued by the United States or by a department or entity of the United States is taxable to the same extent as any private operator engaging in a similar business outside a federal reservation and without specific authority from the United States.
(a) Sales tax collection requirements. Persons making retail sales to members of the armed forces or others residing within or conducting business on federal reservations are required to collect and remit retail sales tax from the buyer.
(b) Cigarette tax stamps. Washington cigarette tax stamps must generally be affixed to all cigarettes sold to persons residing within or conducting business on federal reservations. However, such stamps need not be affixed to cigarettes sold to the United States or any of its entities including voluntary organizations of military personnel authorized by the Secretary of Defense or the Secretary of the Navy or by the United States or any of its entities to authorized purchasers, for use on such reservation. For additional information on cigarette stamps, rates, and refunds see WAC 458-20-186.
(7) Sales made to authorized purchasers of the United States. As explained in subsection (3)(b) of this rule, while sales by the United States are exempt of retail sales tax the purchaser is generally responsible for remitting use tax directly to the department. Federal law prohibits the imposition of use tax on tangible personal property sold to authorized purchasers by the United States, its entities, or voluntary unincorporated organization of armed forces personnel. 4 U.S.C. § 107(a).
(a) Who is an "authorized purchaser"? A person is an "authorized purchaser" only with respect to purchases he or she is permitted to make from commissaries, ships' stores, or voluntary unincorporated organizations of personnel of any branch of the armed forces of the United States, under regulations promulgated by the departmental secretary having jurisdiction over such branch. 4 U.S.C. § 107(b).
(b) What is a "voluntary unincorporated organization"? "Voluntary unincorporated organizations" are those organizations comprised of armed forces personnel operated under regulations promulgated by the departmental secretary having jurisdiction over such branch. Examples of voluntary unincorporated organizations are post flying clubs, officers or noncommissioned officers open messes, and recreation associations.
(8) Purchases by persons using federal funds. Retail sales or use tax applies to retail purchases made by any buyer, other than the United States, including the state of Washington and all of its political subdivisions, irrespective of whether or not the buyer uses or is reimbursed with federal funds, unless the purchase is specifically exempt by law.
(9) Cleaning up radioactive waste and other by-products of weapons production and nuclear research and development. RCW 82.04.263 provides a preferential tax rate for the gross income derived from cleaning up for the United States, or its instrumentalities, radioactive waste and other by-products of weapons production and nuclear research and development. This tax rate applies whether the person performing these activities is a general contractor or subcontractor.
(a) What activities are entitled to the preferential tax rate? Only those activities that meet the definition of "cleaning up radioactive waste and other by-products of weapons production and nuclear research and development" are entitled to the preferential tax rate. The statute defines "cleaning up radioactive waste and other by-products of weapons production and nuclear research and development" to mean:
(i) The handling, storing, treating, immobilizing, stabilizing, or disposing of radioactive waste, radioactive tank waste and capsules, nonradioactive hazardous solid and liquid wastes, or spent nuclear fuel;
(ii) Conditioning of spent nuclear fuel;
(iii) Removing contamination in soils and groundwater;
(iv) Decontaminating and decommissioning of facilities; and
(v) Services supporting the performance of cleanup. A service supports the performance of cleanup if it:
(A) Is within the scope of work under a clean-up contract with the United Stated Department of Energy; or
(B) Assists in the accomplishment of a requirement of a clean-up project undertaken by the United States Department of Energy under a subcontract entered into with the prime contractor or another subcontractor in furtherance of a clean-up contract between the United States Department of Energy and a prime contractor.
(b) When does a service not assist in the accomplishment of a requirement of a clean-up project? Subject to specific exceptions provided by law, a service does not assist in the accomplishment of a clean-up project when the same services are routinely provided to businesses not engaged in clean-up activities.
The following exceptions are always deemed to contribute to the accomplishment of a requirement of a clean-up project undertaken by the United States Department of Energy:
• Information technology and computer support services;
• Services rendered in respect to infrastructure; and
• Security, safety, and health services.
(c) Guideline examples. The following examples are to be used as a guideline when determining whether a service is "routinely provided to businesses not engaged in clean-up activities."
(i) Accounting services. The classification does not apply to general accounting services but does apply to performance audits performed for persons cleaning up radioactive waste.
(ii) Legal services. The classification does not apply to general legal services but does apply to those legal services that assist in the accomplishment of a requirement of a clean-up project undertaken by the United States Department of Energy. Thus, legal services provided to contest any local, state, or federal tax liability or to defend a company against worker's compensation claim arising from a worksite injury do not qualify for the classification. However, legal services related to the resolution of contractual dispute between the parties to a clean-up contract between the United States Department of Energy and a prime contractor do qualify.
(iii) General office janitorial. General office janitorial services do not qualify for the radioactive waste clean-up classification, but the specialized cleaning of equipment exposed to radioactive waste does qualify.
(d) Clean-up examples.
(i) Company C is a land excavation contractor that contracts with Prime Contractor to dig trenches where waste will be reburied after processing. Company C's contract for digging trenches qualifies for the preferential tax rate under RCW 82.04.263 because the activity of digging trenches is one of the physical acts of cleaning up.
(ii) Company D contracts with Company C from the previous example to provide payroll and accounting services. Company D's activity does not qualify for the preferential tax rate under RCW 82.04.263 because the activity of general accounting is not an activity involving the physical act of cleaning up, nor is it a service supporting the performance of cleanup as defined in (a)(v) of this subsection.
(iii) Company E is an environmental engineering company that contracts with Prime Contractor to develop a plan on how best to decontaminate the soil at a tank farm and will monitor the cleanup/decontamination as it progresses. Company E's activities qualify for the preferential tax rate under RCW 82.04.263 because the activities are services supporting the performance of cleanup.
(iv) Company F is a security company that contracts with Prime Contractor to provide overall security to the federal reservation, including providing security at clean-up sites. Security services at clean-up sites are services that support the performance of cleanup.
(e) Taxability of tangible personal property used or consumed in cleaning up radioactive waste and other by-products of weapons production and nuclear research and development. Persons cleaning up radioactive waste and other by-products of weapons production and nuclear research and development for the United States, or its instrumentalities, are consumers of any property they use or consume when performing these services. RCW 82.04.190. Therefore, tangible personal property used or consumed in the cleanup is subject to retail sales or use tax. If the seller does not collect retail sales tax on a retail sale, the buyer is required to pay the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department, unless specifically exempt by law. The "excise tax return" does not have a separate line for reporting deferred sales tax. Consequently, deferred sales tax liability should be reported on the use tax line of the buyer's excise tax return. For detailed information on the use tax, see WAC 458-20-178.
(10) Sales to foreign governments or foreign diplomats. Purchases by foreign governments are not subject to retail sales tax. Documentation, such as purchase orders and receipts, must be maintained by the seller to verify the exempt nature of the sale. Purchases by foreign diplomats are generally not subject to retail sales tax if a valid Diplomatic Tax Exemption Card issued by the United States Department of State is used. For specific information concerning the taxability of sales of goods and services to foreign missions and diplomats, contact the department's taxpayer services division at:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
or call the department's telephone information center at 360-705-6705 or visit the department's website at dor.wa.gov.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-190, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-16-003, § 458-20-190, filed 7/20/16, effective 8/20/16; WSR 10-10-030, § 458-20-190, filed 4/26/10, effective 5/27/10. Statutory Authority: RCW 82.32.300, 82.01.060(1), and 34.05.230. WSR 05-03-002, § 458-20-190, filed 1/5/05, effective 2/5/05. Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-190, filed 3/15/83; Order ET 75-1, § 458-20-190, filed 5/2/75; Order ET 70-3, § 458-20-190 (Rule 190), filed 5/29/70, effective 7/1/70.]


PDF458-20-192

Indians—Indian country.

(1) Introduction.
(a) Under federal law the state may not tax Indians or Indian tribes in Indian country. In some instances the state's authority to impose tax on a nonmember doing business in Indian country with an Indian or an Indian tribe is also preempted by federal law. This rule only addresses those taxes administered by the department of revenue (department).
(b) The rules of construction used in analyzing the application of tax laws to Indians and nonmembers doing business with Indians are:
(i) Treaties are to be construed in the sense in which they would naturally have been understood by the Indians; and
(ii) Statutes are to be construed liberally in favor of the Indians, with ambiguous provisions interpreted to their benefit.
(c) This rule reflects the harmonizing of federal law, Washington state tax law, and the policies and objectives of the Centennial Accord and the Millennium Agreement. It is consistent with the mission of the department of revenue, which is to achieve equity and fairness in the application of the law.
(d) It is the department's policy and practice to work with individual tribes on a government-to-government basis to discuss and resolve areas of mutual concern.
(2) Definitions. The following definitions apply throughout this rule:
(a) "Indian" means a person on the tribal rolls of an Indian tribe. A person on the tribal rolls is also known as an "enrolled member" or a "member" or an "enrolled person" or an "enrollee" or a "tribal member."
(b) "Indian country" has the same meaning as given in 18 U.S.C. 1151 and means:
(i) All land within the limits of any Indian reservation under the jurisdiction of the United States government, notwithstanding the issuance of any patent, and, including rights of way running through the reservation;
(ii) All dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a state; and
(iii) All Indian allotments, the Indian titles to which have not been extinguished, including rights of way running through the same.
(c) "Indian tribe" means an Indian nation, tribe, band, community, or other entity recognized as an "Indian tribe" by the United States Department of the Interior. The phrase "federally recognized Indian tribe" and the term "tribe" have the same meaning as "Indian tribe."
(d) "Indian reservation" means all lands, notwithstanding the issuance of any patent, within the exterior boundaries of areas set aside by the United States for the use and occupancy of Indian tribes by treaty, law, or executive order and that are areas currently recognized as "Indian reservations" by the United States Department of the Interior. The term includes lands within the exterior boundaries of the reservation owned by non-Indians as well as land owned by Indians and Indian tribes and it includes any land that has been designated "reservation" by federal act.
(e) "Nonmember" means a person not on the tribal rolls of the Indian tribe.
(f) "State sales and use tax" includes local sales and use tax.
(3) Federally recognized Indian tribes. As of the effective date of this rule there are twenty-eight federally recognized Indian tribes in the state of Washington. You may contact the governor's office of Indian affairs for an up-to-date list of federally recognized Indian tribes in the state of Washington at its website, www.goia.wa.gov or at:
Governor's Office of Indian Affairs
531 15th Ave. S.E.
P.O. Box 40909
Olympia, WA 98504-0909
(4) Recordkeeping. Taxpayers are required to maintain appropriate records on the tax exempt status of transactions. For example, in the case of the refuse collection tax, the refuse collection company must substantiate the tax-exempt status of its customers. This could be done, for example, one of two ways. The tribe can provide the refuse collection company with a list of all of the tribal members living in Indian country or the individual members can provide exemption certificates to the company. A buyer's retail sales tax exemption certificate that can be used for this purpose is located on the department's website (www.dor.wa.gov/forms/other.htm) or may be obtained by contacting the department. The company must then keep the list or the certificates in its files as proof of the tax exempt status of the tribe and its members. Individual businesses may contact the department to determine how best to keep records for specific situations.
(5) Enrolled Indians in Indian country. Generally. The state may not tax Indians or Indian tribes in Indian country. For the purposes of this rule, the term "Indian" includes only those persons who are enrolled with the tribe upon whose territory the activity takes place and does not include Indians who are members of other tribes. An enrolled member's spouse is considered an "Indian" for purposes of this rule if this treatment does not conflict with tribal law. This exclusion from tax includes all taxes (e.g., B&O tax, public utility tax, retail sales tax, use tax, cigarette tax). If the incidence of the tax falls on an Indian or a tribe, the tax is not imposed if the activity takes place in Indian country or the activity is treaty fishing rights related activity (see subsection (6)(b) of this rule). "Incidence" means upon whom the tax falls. For example, the incidence of the retail sales tax is on the buyer.
(a)(i) Retail sales tax - tangible personal property - delivery threshold. Retail sales tax is not imposed on sales to Indians if the tangible personal property is delivered to the member or tribe in Indian country or if the sale takes place in Indian country. For example, if the sale to the member takes place at a store located on a reservation, the transaction is automatically exempt from sales tax and there is no reason to establish "delivery."
(ii) Retail sales tax - services. The retail sales tax is not imposed if the retail service (e.g., construction services) is performed for the member or tribe in Indian country. In the case of a retail service that is performed both on and off Indian country, only the portion of the contract that relates to work done in Indian country is excluded from tax. The work done for a tribe or Indian outside of Indian country, for example road work that extends outside of Indian country, is subject to retail sales tax.
(b) Use tax. Use tax is not imposed when tangible personal property is acquired in Indian country by an Indian or the tribe for at least partial use in Indian country. For purposes of this rule, acquisition in Indian country creates a presumption that the property is acquired for partial use in Indian country.
(c) Tax collection. Generally, sales to persons other than Indians are subject to the retail sales tax irrespective of where in this state delivery or rendition of services takes place. Sellers are required to collect and remit to the state the retail sales tax upon each taxable sale made by them to nonmembers in Indian country. A tribe and the department may enter into an agreement covering the collection of state tax by tribal members or the tribe. (See also the discussion regarding preemption of tax in subsection (7) of this rule.)
In order to substantiate the tax-exempt status of a retail sale to a person who is a tribal member, unless the purchaser is personally known to the seller as a member, the seller must require presentation of a tribal membership card or other suitable identification of the purchaser as an enrollee of the Indian tribe. A tribe and the department may enter into an agreement covering identification of enrolled members, in which case the terms of the agreement govern.
A person's tax status under the Revenue Act does not change simply because he or she is making a tax-exempt sale to a tribe or tribal member. For example, a person building a home for a nonmember/consumer is entitled to purchase subcontractor services and materials to be incorporated into the home at wholesale. See RCW 82.04.050. A person building a home for a tribal member/consumer in Indian country is similarly entitled to purchase these services and materials at wholesale. The fact that the constructing of the home for the tribal member/consumer is exempt from retail sales tax has no impact on the taxability of the purchases of materials, and the materials continue to be purchased for resale.
(d) Corporations or other entities owned by Indians. A state chartered corporation comprised solely of Indians is not subject to tax on business conducted in Indian country if all of the owners of the corporation are enrolled members of the tribe except as otherwise provided in this section. The corporation is subject to tax on business conducted outside of Indian country, subject to the exception for treaty fishery activity as explained later in this rule. Similarly, partnerships or other entities comprised solely of enrolled members of a tribe are not subject to tax on business conducted in Indian country. In the event that the composition includes a family member who is not a member of the tribe, for instance a business comprised of a mother who is a member of the Chehalis Tribe and her son who is a member of the Squaxin Island Tribe, together doing business on the Chehalis reservation, the business will be considered as satisfying the "comprised solely" criteria if at least half of the owners are enrolled members of the tribe.
(6) Indians outside Indian country.
(a) Generally. Except for treaty fishery activity, Indians conducting business outside of Indian country are generally subject to tax (e.g., the B&O, the public utility tax, retail sales tax). Indians or Indian tribes who conduct business outside Indian country must register with the department as required by RCW 82.32.030. (See also WAC 458-20-101 for more registration information.)
(b) Treaty fishery - preemption. For the purpose of this rule, "treaty fishery" means the fishing and shellfish rights preserved in a tribe's treaty, a federal executive order, or an act of Congress. It includes activities such as harvesting, processing, transporting, or selling, as well as activities such as management and enforcement.
(i) Indians - B&O tax. The gross income directly derived from treaty fishing rights related activity is not subject to state tax. This exclusion from tax is limited to those businesses wholly owned and operated by Indians/tribe who have treaty fishing rights. If a business wholly owned and operated by Indians/tribe deals with both treaty and nontreaty fish, this exclusion from tax is limited to the business attributable to the treaty fish. "Wholly owned and operated" includes entities that meet the qualifications under 26 U.S.C. 7873, which requires that:
(A) Such entity is engaged in a fishing rights-related activity of such tribe;
(B) All of the equity interests in the entity are owned by qualified Indian tribes, members of such tribes, or their spouses;
(C) Except as provided in the code of federal regulations, in the case of an entity which engages to any extent in any substantial processing or transporting of fish, ninety percent or more of the annual gross receipts of the entity is derived from fishing rights-related activities of one or more qualified Indian tribes each of which owns at least ten percent of the equity interests in the entity; and
(D) Substantially all of the management functions of the entity are performed by members of qualified Indian tribes.
(ii) Indians - sales and use tax. The retail sales tax and use tax do not apply to the services or tangible personal property for use in the treaty fishery, regardless of where delivery of the item or performance of the service occurs. Gear, such as boats, motors, nets, and clothing, purchased or used by Indians in the treaty fishery is not subject to sales or use tax. Likewise, retail services in respect to property used in the treaty fishery, such as boat or engine repair, are not subject to sales tax.
(iii) Sales to nonmembers. Treaty fish and shellfish sold by members of the tribe are not subject to sales tax or use tax, regardless of where the sale takes place due to the sales and use tax exemption for food products.
(iv) Government-to-government agreement. A tribe and the department may enter into an agreement covering the treaty fishery and taxable activities of enrolled members, in which case the terms of the agreement govern.
(7) Nonmembers in Indian country - preemption of state tax. Generally, a nonenrolled person doing business in Indian country is subject to tax. Unless specifically described as preempted by this rule, the department will review transactions on a case-by-case basis to determine whether tax applies. A nonmember who is not taxable on the basis of preemption should refer to WAC 458-20-101 (tax registration) to determine whether the person must register with the department.
(a) Preemption of tax on nonmembers - gaming. Gaming by Indian tribes is regulated by the federal Indian Gaming Regulatory Act. Nonmembers who operate or manage gaming operations for Indian tribes are not subject to tax for business conducted in Indian country. This exclusion from tax applies to taxes imposed on income attributable to the business activity (e.g., the B&O tax), and to sales and use tax on the property used in Indian country to conduct the activity. Sales tax will apply if delivery of property is taken outside of Indian country.
Nonmembers who purchase tangible personal property at a gaming facility are subject to retail sales or use tax, unless:
(i) The item is preempted based on the outcome of the balancing test. For example, depending on the relative state, tribal, and federal interests, tax on food at restaurants or lounges owned and operated by the tribe or a tribal member or sales of member arts and crafts at gift shops might be preempted. See the balancing test discussion in subsection (c) below; or
(ii) The item is purchased for use in the gaming activity at the facility, such as bingo cards or daubers.
(b) Preemption of B&O and public utility tax - sales of tangible personal property or provision of services by nonmembers in Indian country. As explained in this subsection, income from sales in Indian country of tangible personal property to, and from the performance of services in Indian country for, tribes and tribal members is not subject to B&O (chapter 82.04 RCW) or public utility tax (chapters 82.16 and 54.28 RCW). The taxpayer is responsible for maintaining suitable records so that the taxpayer and the department can distinguish between taxable and nontaxable activities.
(i) Sales of tangible personal property. Income from sales of tangible personal property to the tribe or to tribal members is not subject to B&O tax if the tangible personal property is delivered to the buyer in Indian country and if:
(A) The property is located in Indian country at the time of sale; or
(B) The seller has a branch office, outlet, or place of business in Indian country that is used to receive the order or distribute the property; or
(C) The sale of the property is solicited by the seller while the seller is in Indian country.
(ii) Provision of services. Income from the performance of services in Indian country for the tribe or for tribal members is not subject to the B&O or public utility tax. Services performed outside of Indian country are subject to tax. In those instances where services are performed both on and off of Indian country, the activity is subject to state tax to the extent that services are substantially performed outside of Indian country.
(A) It will be presumed that a professional service (e.g., accounting, legal, or dental) is substantially performed outside of Indian country if twenty-five percent or more of the time taken to perform the service occurs outside of Indian country. The portion of income subject to state tax is determined by multiplying the gross receipts from the activity by the quotient of time spent outside of Indian country performing the service divided by total time spent performing the service.
For example, an accountant with an office outside of Indian country provides accounting services to a tribal member. The accountant performs some of the work at the office and some work at the business of the tribal member in Indian country. If at least twenty-five percent of the time performing the work is spent outside of Indian country, the services are substantially performed outside of Indian country and therefore a portion is subject to state tax. As explained above, the accountant must maintain suitable records to distinguish between taxable and nontaxable income in order to provide for a reasonable approximation of the amount of gross income subject to B&O tax. In this case, suitable records could be a log of the time and location of the services performed for the tribal matter by the accountant, his or her employees, and any contractors hired by the accountant.
(B) For services subject to the retailing and/or wholesaling B&O tax (e.g., building, installing, improving, or repairing structures or tangible personal property), the portion of income relative to services actually performed outside of Indian country is subject to state tax.
For example, a contractor enters into a contract with a tribe to install a sewer line that extends off reservation. Only the income attributable to the installation of the portion of the sewer line off reservation is subject to state tax.
(C) For public utility services under chapters 82.16 and 54.28 RCW it will be presumed that the service is provided where the customer receives the service.
(c) Preemption of tax on nonmembers - balancing test - value generated on the reservation. In certain instances state sales and use tax may be preempted on nonmembers who purchase goods or services from a tribe or tribal members in Indian country. The U.S. supreme court has identified a number of factors to be considered when determining whether a state tax borne by non-Indians is preempted, including: The degree of federal regulation involved, the respective governmental interests of the tribes and states (both regulatory and revenue raising), and the provision of tribal or state services to the party the state seeks to tax. See Salt River Pima-Maricopa Indian Community v. Waddell, 50 F.3d 734, (1995). This analysis is known as the "balancing test." This preemption analysis does not extend to subsequent transactions, for example if the purchaser buys for resale the tax imposed on the consumer in the subsequent sale is not preempted. However, because these balancing test determinations are so fact-based, the department will rule on these issues on a case-by-case basis. For such a ruling please contact the department at:
Department of Revenue
Executive
P.O. Box 47454
Olympia, WA 98504-7454
(d) Federalcontractors. The preemption analysis does not extend to persons who are doing work for the federal government in Indian country. For example, a nonmember doing road construction for the Bureau of Indian Affairs within an Indian reservation is subject to state tax jurisdiction.
(e) Indian housing authorities. RCW 35.82.210 provides that the property of housing authorities and the housing authorities themselves are exempt from taxes, such as state and local sales and use taxes, state and local excise taxes, state and local property taxes, and special assessments. This covers tribal housing authorities and intertribal housing authorities both on and off of Indian land. Please note that tribal housing authorities, like all other housing authorities, are exempt from tax anywhere in the state, and the delivery requirement and other geographic thresholds are not applicable.
Not all assessments are exempted under RCW 35.82.210. See Housing Authority of Sunnyside v. Sunnyside Valley Irrigation District, 112 Wn2d 262 (1989).
For the purposes of the exemption:
(i) "Intertribal housing authority" means a housing authority created by a consortium of tribal governments to operate and administer housing programs for persons of low income or senior citizens for and on behalf of such tribes.
(ii) "Tribal government" means the governing body of a federally recognized Indian tribe.
(iii) "Tribal housing authority" means the tribal government or an agency or branch of the tribal government that operates and administers housing programs for persons of low income or senior citizens.
(8) Motor vehicles, trailers, snowmobiles, etc., sold to Indians or Indian tribes. Sales tax is not imposed when a motor vehicle, trailer, snowmobile, off-road vehicle, or other such property is delivered to an Indian or the tribe in Indian country or if the sale is made in Indian country. Similarly, use tax is not imposed when such an item is acquired in Indian country by an Indian or the tribe for at least partial use in Indian country. For purposes of this rule, acquisition in Indian country creates a presumption that the property is acquired for partial use in Indian country.
(a) Registration of vehicle, trailer, etc. County auditors, subagencies appointed under RCW 46.01.140, and department of licensing vehicle licensing offices must collect use tax when Indians or Indian tribes apply for an original title transaction or transfer of title issued on a vehicle or vessel under chapters 46.09, 46.10, 46.12, or 88.02 RCW unless the tribe/Indian shows that they are not subject to tax. To substantiate that they are not subject to tax the Indian/tribe must show that they previously paid retail sales or use tax on their acquisition or use of the property, or that the property was acquired on or delivered to Indian country. The person claiming the exclusion from tax must sign a declaration of delivery to or acquisition in Indian country. A statement in substantially the following form will be sufficient to establish eligibility for the exclusion from sales and use tax.
(b) Declaration.
declaration of delivery or acquisition in indian country
The undersigned is (circle one) an enrolled member of the tribe/authorized representative of the tribe or tribal enterprise, and the property was delivered/acquired within Indian country, for at least partial use in Indian country.
name of buyer
date of delivery/acquisition
address of delivery/acquisition
(9) Miscellaneous taxes. The state imposes a number of excise taxes in addition to the most common excise taxes administered by the department (e.g., B&O, public utility, retail sales, and use taxes). The following is a brief discussion of some of these taxes.
(a) Cigarette tax. The statutory duties applicable to administration and enforcement of the cigarette tax are divided between the department and the liquor control board. Enforcement of nonvoluntary compliance is the responsibility of the liquor control board. Voluntary compliance is the responsibility of the department of revenue. See chapter 82.24 RCW for specific statutory requirements regarding purchase of cigarettes by Indians and Indian tribes. For a specific ruling regarding the taxability of and stamping requirements for cigarettes manufactured by Indians or Indian tribes in Indian country, please contact the department at:
Department of Revenue
Executive
P.O. Box 47454
Olympia, WA 98504-7454
Where sales of cigarettes are the subject of a government-to-government cooperative agreement, the provisions of that agreement supersede conflicting provisions of this subsection.
(i) Sales of cigarettes to nonmembers by Indians or Indian tribes are subject to the cigarette tax. The wholesaler is obligated to make precollection of the tax. Therefore, Indian or tribal sellers making sales to non-Indian customers must (A) purchase a stock of cigarettes with Washington state cigarette tax stamps affixed for the purpose of making such sales or (B) they may make purchases of cigarettes from licensed cigarette distributors for resale to qualified purchasers or (C) may purchase a stock of untaxed unstamped cigarettes for resale to qualified purchasers if the tribal seller gives advance notice under RCW 82.24.250 and Rule 186.
For purposes of this rule, "qualified purchaser" means an Indian purchasing for resale within Indian country to other Indians or an Indian purchasing solely for his or her use other than for resale.
(ii) Delivery or sale and delivery by any person of stamped exempt cigarettes to Indians or tribal sellers for sale to qualified purchasers may be made only in such quantity as is approved in advance by the department. Approval for delivery will be based upon evidence of a valid purchase order of a quantity reasonably related to the probable demand of qualified purchasers in the trade territory of the seller. Evidence submitted may also consist of verified record of previous sales to qualified purchasers, the probable demand as indicated by average cigarette consumption for the number of qualified purchasers within a reasonable distance of the seller's place of business, records indicating the percentage of such trade that has historically been realized by the seller, or such other statistical evidence submitted in support of the proposed transaction. In the absence of such evidence the department may restrict total deliveries of stamped exempt cigarettes to Indian country or to any Indian or tribal seller thereon to a quantity reasonably equal to the national average cigarette consumption per capita, as compiled for the most recently completed calendar or fiscal year, multiplied by the resident enrolled membership of the affected tribe.
(iii) Any delivery, or attempted delivery, of unstamped cigarettes to an Indian or tribal seller without advance notice to the department will result in the treatment of those cigarettes as contraband and subject to seizure. In addition, the person making or attempting such delivery will be held liable for payment of the cigarette tax and penalties. See chapter 82.24 RCW.
Approval for sale or delivery to Indian or tribal sellers of stamped exempt cigarettes will be denied where the department finds that such Indian or tribal sellers are or have been making sales in violation of this rule.
(iv) Delivery of stamped exempt cigarettes by a licensed distributor to Indians or Indian tribes must be by bonded carrier or the distributor's own vehicle to Indian country. Delivery of stamped exempt cigarettes outside of Indian country at the distributor's dock or place of business or any other location outside of Indian country is prohibited unless the cigarettes are accompanied by an invoice.
(b) Refuse collection tax. Indians and Indian tribes are not subject to the refuse collection tax for service provided in Indian country, regardless of whether the refuse collection company hauls the refuse off of Indian country.
(c) Leasehold excise tax. Indians and Indian tribes in Indian country are not subject to the leasehold excise tax. Leasehold interests held by nonenrolled persons are subject to tax.
(d) Fish tax. Chapter 82.27 RCW imposes a tax on the commercial possession of enhanced food fish, which includes shellfish. The tax is imposed on the fish buyer. The measure of the tax is the value of the enhanced food fish at the point of landing. A credit is allowed against the amount of tax owed for any tax previously paid on the same food fish to any legally established taxing authority, which includes Indian tribes. Transactions involving treaty fish are not subject to the fish tax, regardless of where the transaction takes place.
(e) Tobacco tax. The tobacco tax is imposed on "distributors" as that term is defined in RCW 82.26.010. Tobacco tax is not imposed on Indian persons or tribes who take delivery of the tobacco in Indian country. Effective July 1, 2002, persons who handle for sale any tobacco products that are within this state but upon which tax has not been imposed are subject to the tobacco tax. Chapter 325, Laws of 2002. Thus, persons purchasing tobacco products for resale from Indians who are exempt from the tobacco tax are subject to tobacco tax on the product. See WAC 458-20-185, Tax on tobacco products.
(f) Real estate excise tax. The real estate excise tax is imposed on the seller. A sale of land located in Indian country by a tribe or a tribal member is not subject to real estate excise tax. A sale of land located within Indian country by a nonmember to the tribe or to a tribal member is subject to real estate excise tax.
(g) Timber excise tax. Payment of the timber excise tax is the obligation of the harvester. The tribe or tribal members are not subject to the timber excise tax in Indian country. Generally, timber excise tax is due from a nonmember who harvests timber on fee land within Indian country. Timber excise tax is not due if the timber being harvested is on trust land or is owned by the tribe and located in Indian country, regardless of the identity of the harvester. There are some instances in which the timber excise tax might be preempted on non-Indians harvesting timber on fee land in Indian country due to tribal regulatory authority. For such a ruling please contact the department at:
Department of Revenue
Executive
P.O. Box 47454
Olympia, WA 98504-7454
[Statutory Authority: RCW 82.32.300. WSR 02-14-133, § 458-20-192, filed 7/2/02, effective 8/2/02; WSR 00-24-050A, § 458-20-192, filed 11/30/00, effective 1/1/01; WSR 80-17-026 (Order ET 80-3), § 458-20-192, filed 11/14/80; Order ET 76-4, § 458-20-192, filed 11/12/76; Order ET 74-5, § 458-20-192, filed 12/16/74; Order ET 70-3, § 458-20-192 (Rule 192), filed 5/29/70, effective 7/1/70.]


PDF458-20-193

Interstate sales of tangible personal property.

(1) Introduction. This rule explains the application of the business and occupation (B&O) and retail sales taxes to interstate sales of tangible personal property.
(a) The following rules may also be helpful:
(i) WAC 458-20-178 Use tax and the use of tangible personal property.
(ii) WAC 458-20-193C Imports and exports—Sales of goods from or to persons in foreign countries.
(iii) WAC 458-20-193D Transportation, communication, public utility activities, or other services in interstate or foreign commerce.
(iv) WAC 458-20-19401 Minimum nexus threshold for apportionable receipts.
(b) This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances.
(c) Tangible personal property. For purposes of this rule, the term "tangible personal property" means personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses, but does not include steam, electricity, or electrical energy. It includes prewritten computer software (as such term is defined in RCW 82.04.215) in tangible form. However, this rule does not address electronically delivered prewritten computer software or remote access software.
(2) Scope of rule. In general, Washington imposes its B&O and retail sales taxes on sales of tangible personal property if the seller has nexus with Washington and the sale occurs in Washington. This rule explains the applicable nexus and place of sale requirements with respect to sales of tangible personal property. This rule does not cover sales of intangibles or services and does not address the use tax obligation of a purchaser of goods in Washington. For information on payment responsibilities for use tax see WAC 458-20-178.
(3) Organization of rule. This rule is divided into three parts:
(a) Part I – Nexus standards for sales of tangible personal property;
(b) Part II – Sourcing sales of tangible personal property; and
(c) Part III – Drop shipment sales.
Part I – Nexus Standards for Sales of Tangible Personal Property
(101) Introduction. A seller is subject to the state's B&O tax and retail sales tax with respect to sales of tangible personal property, if that seller has nexus. Washington applies specific nexus standards and thresholds that are used to determine whether a seller of tangible personal property has nexus. The nexus standards and thresholds described in this rule pertain only to sellers of tangible personal property. The remainder of Part 1 of this rule describes these nexus standards and thresholds and how they apply in the context of Washington's wholesaling and retailing B&O classifications and the retail sales tax.
(102) Physical presence nexus standard. A person who sells tangible personal property in a retail sale is deemed to have nexus with Washington if the person has a physical presence in this state, which need only be demonstrably more than the slightest presence. RCW 82.04.067(6). This standard applies to retail sales both in the retail sales tax and retailing B&O tax context.
(a) Physical presence. A person is physically present in this state if:
(i) The person has property in this state;
(ii) The person has one or more employees in this state;
(iii) The person, either directly or through an agent or other representative, engages in activities in this state that are significantly associated with the person's ability to establish or maintain a market for its products in Washington; or
(iv) The person is a remote seller as defined in RCW 82.08.052 and is unable to rebut the substantial nexus presumption for remote sellers set out in RCW 82.04.067 (6)(c)(ii).
(b) Property. A person has property in this state if the person owns, leases, or otherwise has a legal or beneficial interest in real or personal property in Washington.
(c) Employees. A person has employees in this state if the person is required to report its employees for Washington unemployment insurance tax purposes, or the facts and circumstances otherwise indicate that the person has employees in the state.
(d) In-state activities. Even if a person does not have property or employees in Washington, the person is physically present in Washington when the person, either directly or through an agent or other representative, engages in activities in this state that are significantly associated with the person's ability to establish or maintain a market for its products in Washington. It is immaterial that the activities that establish nexus are not significantly associated with a particular sale into this state.
For purposes of this rule, the term "agent or other representative" includes an employee, independent contractor, commissioned sales representative, or other person acting either at the direction of or on behalf of another.
A person performing the following nonexclusive list of activities, directly or through an agent or other representative, generally is performing activities that are significantly associated with establishing or maintaining a market for a person's products in this state:
(i) Soliciting sales of goods in Washington;
(ii) Installing, assembling, or repairing goods in Washington;
(iii) Constructing, installing, repairing, or maintaining real property or tangible personal property in Washington;
(iv) Delivering products into Washington other than by mail or common carrier;
(v) Having an exhibit at a trade show to maintain or establish a market for one's products in the state, except as described in subsection (102)(f) of this rule;
(vi) An online seller having a brick-and-mortar store in this state accepting returns on its behalf;
(vii) Performing activities designed to establish or maintain customer relationships including, but not limited to:
(A) Meeting with customers in Washington to gather or provide product or marketing information, evaluate customer needs, or generate goodwill; or
(B) Being available to provide services associated with the product sold (such as warranty repairs, installation assistance or guidance, and training on the use of the product), if the availability of such services is referenced by the seller in its marketing materials, communications, or other information accessible to customers.
(e) Remote sellers – Click-through nexus. Effective September 1, 2015, a remote seller as defined in RCW 82.08.052 is presumed to meet the physical presence nexus standard described in this subsection for purposes of the retail sales tax if the remote seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, refers potential customers to the remote seller, whether by link on an internet website or otherwise, but only if the cumulative gross receipts from sales by the remote seller to customers in this state who are referred to the remote seller through such agreements exceeds ten thousand dollars during the preceding calendar year. For more information related to the presumption and how to rebut the presumption, see RCW 82.08.052 and 82.04.067 (6)(c)(ii).
(f) Trade convention exception. For the physical presence nexus standard described in this subsection, the department may not make a determination of nexus based solely on the attendance or participation of one or more representatives of a person at a single trade convention per calendar year in Washington state in determining if such person is physically present in this state for the purposes of establishing substantial nexus with this state. This does not apply to persons making retail sales at a trade convention in this state, including persons taking orders for products or services where receipt will occur at a later time in Washington state. RCW 82.32.531.
Definitions. The following definitions apply only to (f) of this subsection:
(i) "Not marketed to the general public" means that the sponsor of a trade convention limits its marketing efforts for the trade convention to its members and specific invited guests of the sponsoring organization.
(ii) "Physically present in this state" and "substantial nexus with this state" have the same meaning as provided in RCW 82.04.067.
(iii) "Trade convention" means an exhibition for a specific industry or profession, which is not marketed to the general public, for the purposes of:
(A) Exhibiting, demonstrating, and explaining services, products, or equipment to potential customers; or
(B) The exchange of information, ideas, and attitudes in regards to that industry or profession.
(103) Economic nexus thresholds. RCW 82.04.067 establishes substantial nexus thresholds that apply to persons who sell tangible personal property. For more information on the economic nexus thresholds, see WAC 458-20-19401.
Application to retail sales. Effective July 1, 2017, for B&O tax purposes, a person making retail sales taxable under RCW 82.04.250(1) or 82.04.257(1) is deemed to have substantial nexus with Washington if the person's receipts meet the economic nexus thresholds under RCW 82.04.067 (1)(c)(iii) and (iv). The receipts threshold is met if the person has more than two hundred sixty-seven thousand dollars of receipts (as adjusted by RCW 82.04.067(5)) from this state or at least twenty-five percent of the person's total receipts are in this state. For more information, see WAC 458-20-19401.
(104) Application of standards and thresholds to wholesale sales. The physical presence nexus standard described in subsection (102) of this rule, applies to wholesale sales for periods prior to September 1, 2015. Effective September 1, 2015, wholesale sales taxable under RCW 82.04.257(1) and 82.04.270 are subject to the RCW 82.04.067 (1) through (5) economic nexus thresholds. Wholesaling activities not taxable under RCW 82.04.257(1) and 82.04.270 remain subject to the physical presence nexus standard. For more information, see WAC 458-20-19401.
(105) Effect of having nexus.
(a) Retail sales. A person that makes retail sales of tangible personal property and meets either the physical presence nexus standard or whose receipts meet the economic nexus thresholds described in RCW 82.04.067 (1)(c)(iii) or (iv) is subject to B&O tax on that person's retail sales received in the state. In addition, a person that makes retail sales of tangible personal property and meets the physical presence nexus standard, including as described in subsection (102)(e) of this rule, is also responsible for collecting and remitting retail sales tax on that person's sales of tangible personal property sourced to Washington, unless a specific exemption applies.
(b) Wholesale sales. A person that makes wholesale sales of tangible personal property and has nexus with Washington (as described in subsection (104) of this rule) is subject to B&O tax on that person's wholesale sales sourced to Washington.
(106) Trailing nexus. Effective July 1, 2017, for B&O tax purposes, a person is deemed to have substantial nexus with Washington for the current year if that person meets any of the requirements in RCW 82.04.067 in either the current or immediately preceding calendar year. Thus, a person who stops the business activity that created nexus in Washington continues to have nexus in the calendar year following any calendar year in which the person met any of the requirements in RCW 82.04.067 (also known as "trailing nexus").
Prior to July 1, 2017, RCW 82.04.220 provided that for B&O tax purposes a person who stopped the business activity that created nexus in Washington continued to have nexus for the remainder of that calendar year, plus one additional calendar year.
The department of revenue applies the same trailing nexus period for retail sales tax and other taxes reported on the excise tax return.
(107) Public Law 86-272. Public Law 86-272 (15 U.S.C. Sec. 381 et. seq.) applies only to taxes on or measured by net income. Washington's B&O tax is measured by gross receipts. Consequently, Public Law 86-272 does not apply.
Part II – Sourcing Sales of Tangible Personal Property
(201) Introduction. RCW 82.32.730 explains how to determine where a sale of tangible personal property occurs based on "sourcing rules" established under the streamlined sales and use tax agreement. Sourcing rules for the lease or rental of tangible personal property are beyond the scope of this rule, as are the sourcing rules for "direct mail," "advertising and promotional direct mail," or "other direct mail" as such terms are defined in RCW 82.32.730. See RCW 82.32.730 for further explanation of the sourcing rules for those particular transactions.
(202) Receive and receipt.
(a) Definition. "Receive" and "receipt" mean the purchaser first either taking physical possession of, or having dominion and control over, tangible personal property.
(b) Receipt by a shipping company.
(i) "Receive" and "receipt" do not include possession by a shipping company on behalf of the purchaser, regardless of whether the shipping company has the authority to accept and inspect the goods on behalf of the purchaser.
(ii) A "shipping company" for purposes of this rule means a separate legal entity that ships, transports, or delivers tangible personal property on behalf of another, such as a common carrier, contract carrier, or private carrier either affiliated (e.g., an entity wholly owned by the seller or purchaser) or unaffiliated (e.g., third-party carrier) with the seller or purchaser. A shipping company is not a division or branch of a seller or purchaser that carries out shipping duties for the seller or purchaser, respectively. Whether an entity is a "shipping company" for purposes of this rule applies only to sourcing sales of tangible personal property and does not apply to whether a "shipping company" can create nexus for a seller.
(203) Sourcing sales of tangible personal property – In general. The following provisions in this subsection apply to sourcing sales of most items of tangible personal property.
(a) Business location. When tangible personal property is received by the purchaser at a business location of the seller, the sale is sourced to that business location.
Example 1. Jane is an Idaho resident who purchases tangible personal property at a retailer's physical store location in Washington. Even though Jane takes the property back to Idaho for her use, the sale is sourced to Washington because Jane received the property at the seller's business location in Washington.
Example 2. Department Store has retail stores located in Washington, Oregon, and in several other states. John, a Washington resident, goes to Department Store's store in Portland, Oregon to purchase luggage. John takes possession of the luggage at the store. Although Department Store has nexus with Washington through its Washington store locations, Department Store is not liable for B&O tax and does not have any responsibility to collect Washington retail sales tax on this transaction because the purchaser, John, took possession of the luggage at the seller's business location outside of Washington.
Example 3. An out-of-state purchaser sends its own trucks to Washington to receive goods at a Washington-based seller and to immediately transport the goods to the purchaser's out-of-state location. The sale occurs in Washington because the purchaser receives the goods in Washington. The sale is subject to B&O and retail sales tax.
Example 4. The same purchaser in Example 3 uses a wholly owned affiliated shipping company (a legal entity separate from the purchaser) to pick up the goods in Washington and deliver them to the purchaser's out-of-state location. Because "receive" and "receipt" do not include possession by the shipping company, the purchaser receives the goods when the goods arrive at the purchaser's out-of-state location and not when the shipping company takes possession of the goods in Washington. The sale is not subject to B&O tax or retail sales tax.
(b) Place of receipt. If the sourcing rule explained in (a) of this subsection does not apply, the sale is sourced to the location where receipt by the purchaser or purchaser's donee, designated as such by the purchaser, occurs, including the location indicated by instructions for delivery to the purchaser or purchaser's donee, as known to the seller.
(i) The term "purchaser" includes the purchaser's agent or designee.
(ii) The term "purchaser's donee" means a person to whom the purchaser directs shipment of goods in a gratuitous transfer (e.g., a gift recipient).
(iii) Commercial law delivery terms, and the Uniform Commercial Code's provisions defining sale or where risk of loss passes, do not determine where the place of receipt occurs.
(iv) The seller must retain in its records documents used in the ordinary course of the seller's business to show how the seller knows the location of where the purchaser or purchaser's donee received the goods. Acceptable proof includes, but is not limited to, the following documents:
(A) Instructions for delivery to the seller indicating where the purchaser wants the goods delivered, provided on a sales contract, sales invoice, or any other document used in the seller's ordinary course of business showing the instructions for delivery;
(B) If shipped by a shipping company, a waybill, bill of lading or other contract of carriage indicating where delivery occurs; or
(C) If shipped by the seller using the seller's own transportation equipment, a trip-sheet signed by the person making delivery for the seller and showing:
• The seller's name and address;
• The purchaser's name and address;
• The place of delivery, if different from the purchaser's address; and
• The time of delivery to the purchaser together with the signature of the purchaser or its agent acknowledging receipt of the goods at the place designated by the purchaser.
Example 5. John buys luggage from a Department Store that has nexus with Washington (as in Example 2), but has the store ship the luggage to John in Washington. Department Store has nexus with Washington, and receipt of the luggage by John occurred in Washington. Department Store owes Washington retailing B&O tax and must collect Washington retail sales tax on this sale.
Example 6. Parts Store is located in Washington. It sells machine parts at retail and wholesale. Parts Collector is located in California and buys machine parts from Parts Store. Parts Store ships the parts directly to Parts Collector in California, and Parts Collector takes possession of the machine parts in California. The sale is not subject to B&O or retail sales taxes in this state because Parts Collector did not receive the parts in Washington.
Example 7. An out-of-state seller with nexus in Washington uses a third-party shipping company to ship goods to a customer located in Washington. The seller first delivers the goods to the shipping company outside Washington using its own transportation equipment. Even though the shipping company took possession of the goods outside of Washington, possession by the shipping company is not receipt by the purchaser for Washington tax purposes. The sale is subject to B&O and retail sales tax in this state because the purchaser has taken possession of the goods in Washington.
Example 8. A Washington purchaser's affiliated shipping company arranges to pick up goods from an out-of-state seller at its out-of-state location, and deliver those goods to the Washington purchaser's Yakima facility. The affiliated shipping company has the authority to accept and inspect the goods prior to transport on behalf of the buyer. When the affiliated shipping company takes possession of the goods out-of-state, the Washington purchaser has not received the goods out-of-state. Possession by a shipping company on behalf of a purchaser is not receipt for purposes of this rule, regardless of whether the shipping company has the authority to accept and inspect the goods on behalf of the buyer. Receipt occurs when the buyer takes possession of the goods in Washington. The sale is subject to B&O and retail sales tax in this state.
Example 9. An instate seller arranges for shipping its goods to an out-of-state purchaser by first delivering its goods to a Washington-based shipping company at its Washington location for further transport to the out-of-state customer's location. Possession of the goods by the shipping company in Washington is not receipt by the purchaser for Washington tax purposes, and the sale is not subject to B&O and retail sales tax in Washington.
Example 10. An out-of-state manufacturer/seller of a bulk good with nexus in Washington sells the good to a Washington-based purchaser in the business of selling small quantities of the good under its own label in its own packaging. The purchaser directs the seller to deliver the goods to a third-party packaging plant located out-of-state for repackaging of the goods in the purchaser's own packaging. The purchaser then has a third-party shipping company pick up the goods at the packaging plant. The Washington purchaser takes constructive possession of the goods outside of Washington because it has exercised dominion and control over the goods by having them repackaged at an out-of-state packaging facility before shipment to Washington. The sale is not subject to B&O and retail sales tax in this state because the purchaser received the goods outside of Washington.
Example 11. Company ABC is located in Washington and purchases goods from Company XYZ located in Ohio. Company ABC directs Company XYZ to ship the goods by a for-hire carrier to a commercial storage warehouse in Washington. The goods will be considered as having been received by Company ABC when the goods are delivered at the commercial storage warehouse. Assuming Company XYZ has nexus, Company XYZ is subject to B&O tax and must collect retail sales tax on the sale.
(c) Other sourcing rules. There may be unique situations where the sourcing rules provided in (a) and (b) of this subsection do not apply. In those cases, please refer to the provisions of RCW 82.32.730 (1)(c) through (e).
(204) Sourcing sales of certain types of property.
(a) Sales of commercial aircraft parts. As more particularly provided in RCW 82.04.627, the sale of certain parts to the manufacturer of a commercial airplane in Washington is deemed to take place at the site of the final testing or inspection.
(b) Sales of motor vehicles, watercraft, airplanes, manufactured homes, etc. Sales of the following types of property are sourced to the location at or from which the property is delivered in accordance with RCW 82.32.730 (7)(a) through (c): Watercraft; modular, manufactured, or mobile homes; and motor vehicles, trailers, semi-trailers, or aircraft that do not qualify as "transportation equipment" as defined in RCW 82.32.730. See WAC 458-20-145 (2)(b) for further information regarding the sourcing of these sales.
(c) Sales of flowers and related goods by florists. Sales by a "florist" are subject to a special origin sourcing rule. For specific information concerning "florist sales," who qualifies as a "florist," and the related sourcing rules, see RCW 82.32.730 (7)(d) and (9)(e) and WAC 458-20-158.
Part III – Drop Shipments
(301) Introduction. A drop shipment generally involves two separate sales. A person (the seller) contracts to sell tangible personal property to a customer. The seller then contracts to purchase that property from a wholesaler and instructs that wholesaler to deliver the property directly to the seller's customer. The place of receipt in a drop shipment transaction is where the property is delivered (i.e., the seller's customer's location). Below is a diagram of a basic drop shipment transaction:
The following subsections discuss the taxability of drop shipments in Washington when:
(a) The seller and wholesaler do not have nexus;
(b) The seller has nexus and the wholesaler does not;
(c) The wholesaler has nexus and the seller does not; and
(d) The seller and wholesaler both have nexus. In each of the following scenarios, the customer receives the property in Washington and the sale is sourced to Washington. Further, in each of the following scenarios, a reseller permit or other approved exemption certificate has been acquired to document any wholesale sales in Washington. For information about reseller permits issued by the department, see WAC 458-20-102.
(302) Seller and wholesaler do not have nexus. Where the seller and the wholesaler do not have nexus with Washington, sales of tangible personal property by the seller to the customer and the wholesaler to the seller are not subject to B&O tax. In addition, neither the seller nor the wholesaler is required to collect retail sales tax on the sale.
(303) Seller has nexus but wholesaler does not. Where the seller has nexus with Washington but the wholesaler does not have nexus with Washington, the wholesaler's sale of tangible personal property to the seller is not subject to B&O tax and the wholesaler is not required to collect retail sales tax on the sale. The sale by the seller to the customer is subject to wholesaling or retailing B&O tax, as the case may be. The seller must collect retail sales tax from the customer unless specifically exempt by law.
(304) Wholesaler has nexus but seller does not. Where the wholesaler has nexus with Washington but the seller does not have nexus with Washington, wholesaling B&O tax applies to the sale of tangible personal property by the wholesaler to the seller for shipment to the seller's customer. The sale from the seller to its Washington customer is not subject to B&O tax, and the seller is not required to collect retail sales tax on the sale.
Example 12. Seller is located in Ohio and does not have nexus with Washington. Seller receives an order from Customer, located in Washington, for parts that are to be shipped to Customer in Washington for its own use as a consumer. Seller buys the parts from Wholesaler, which has nexus with Washington, and requests that the parts be shipped directly to Customer. Seller is not subject to B&O tax and is not required to collect retail sales tax on its sale to Customer because Seller does not have nexus with Washington. The sale by Wholesaler to Seller is subject to wholesaling B&O tax because Wholesaler has nexus with Washington and Customer receives the parts (i.e., the parts are delivered to Customer) in Washington.
(305) Seller and wholesaler have nexus with Washington. Where the seller and wholesaler have nexus with Washington, wholesaling B&O tax applies to the wholesaler's sale of tangible personal property to the seller. The sale from the seller to the customer is subject to wholesaling or retailing B&O tax as the case may be. The seller must collect retail sales tax from the customer unless the sale is specifically exempt by law.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-06-078, § 458-20-193, filed 3/6/18, effective 4/6/18; WSR 17-09-087, § 458-20-193, filed 4/19/17, effective 5/20/17; WSR 16-12-083, § 458-20-193, filed 5/31/16, effective 7/1/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.24.550(2), and 82.26.220(2). WSR 15-15-025, § 458-20-193, filed 7/7/15, effective 8/7/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-193, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 91-24-020, § 458-20-193, filed 11/22/91, effective 1/1/92. Formerly WAC 458-20-193A and 458-20-193B.]


PDF458-20-19301

Multiple activities tax credits.

(1) Introduction. Under the provisions of RCW 82.04.440 as amended effective August 12, 1987, Washington state's business and occupation taxes imposed under chapter 82.04 RCW were adjusted to achieve constitutional equality in the tax treatment of persons engaged in intrastate commerce (within this state only) and interstate commerce (between Washington and other states). The business and occupation tax system taxes the privilege of engaging in specified business activities based upon "gross proceeds of sales" (RCW 82.04.070) and the "value of products" (RCW 82.04.450) produced in this state. In order to maintain the integrity of this taxing system, to eliminate the possibility of discrimination between taxpayers, and to provide equal and uniform treatment of persons engaged in extracting, manufacturing, and/or selling activities regardless of where performed, a statutory system of internal and external tax credits was adopted, effective August 12, 1987. This tax credits system replaces the multiple activities exemption which, formerly, assured that the gross receipts tax would be paid only once by persons engaged in more than one taxable activity in this state in connection with the same end products. Unlike the multiple activities exemption which only prevented multiple taxation from within this state, the credits of the new system apply for gross receipts taxes paid to other taxing jurisdictions outside this state as well.
(2) Definitions. For purposes of this rule the following terms will apply.
(a) "Credits" means the multiple activities tax credit(s) authorized under this statutory system also referred to as MATC.
(b) "Gross receipts tax" means a tax:
(i) Which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which the deductions allowed would not constitute the tax an income tax or value added tax; and
(ii) Which is not, pursuant to law or custom, separately stated from the selling price.
(c) "Extracting tax" means a gross receipts tax imposed on the act or privilege of engaging in business as an extractor, and includes the tax imposed by RCW 82.04.230 (tax on extractors) and similar gross receipts taxes paid to other states.
(d) "Manufacturing tax" means a gross receipts tax imposed on the act or privilege of engaging in business as a manufacturer, and includes:
(i) The taxes imposed in RCW 82.04.240 (tax on manufacturers) and subsections (2) through (5) and (7) of RCW 82.04.260 (tax on special manufacturing activities) and
(ii) Similar gross receipts taxes paid to other states.
The term "manufacturing tax," by nature, includes a gross receipts tax upon the combination of printing and publishing activities when performed by the same person.
(e) "Selling tax" means a gross receipts tax imposed on the act or privilege of engaging in business as a wholesaler or retailer of tangible personal property in this state or any other state. The term "selling" has its common and ordinary meaning and includes the acts of making either wholesale sales or retail sales or both.
(f) "State" means:
(i) The state of Washington,
(ii) A state of the United States other than Washington or any political subdivision of such other state,
(iii) The District of Columbia,
(iv) Territories and possessions of the United States, and
(v) Any foreign country or political subdivision thereof.
(g) "Taxes paid" means taxes legally imposed and actually paid in terms of money, credits, or other emoluments to a taxing authority of any "state." The term does not include taxes for which liability for payment has accrued but for which payment has not actually been made. This term also includes business and occupation taxes being paid to Washington state together with the same combined excise tax return upon which MATC are taken.
(h) "Business," "manufacturer," "extractor," and other terms expressly defined in RCW 82.04.020 through 82.04.212 have the meanings given in those statutory sections regardless of how the terms may be used for other states' taxing purposes.
(3) Scope of credits. This integrated tax credits system is intended to assure that gross receipts from sales or the value of products determined by such gross receipts are taxed only one time, whether the activities occur entirely within this state or both within and outside this state. External tax credits arise when activities are taxed in this state and similar activities with respect to the same products produced and sold are also subject to similar taxes outside this state. There are five ways in which external tax credits may arise because of taxes paid in other states.
(a) Products or ingredients are extracted (taken from the ground) in this state and are manufactured or sold and delivered in another state which imposes a gross receipts tax on the latter activity(s). The credit created by payment of the other state's tax may be used to offset the Washington extracting tax liability.
(b) Products are manufactured, in whole or in part, in this state and sold and delivered in another state which imposes a gross receipts tax on the selling activity. Again, payment of the other state's tax may be taken as a credit against the Washington manufacturing tax liability.
(c) Conversely, products or ingredients are extracted outside this state upon which a gross receipts tax is paid in the state of extracting, and which are sold and delivered to buyers here. The other state tax payment may be taken as a credit against Washington's selling taxes.
(d) Similarly, products are manufactured, in whole or in part, outside this state and sold and delivered to buyers here. Any other state's gross receipts tax on manufacturing may be taken as a credit against Washington's selling tax.
(e) Products are partly manufactured in this state and partly in another state and are sold and delivered here or in another state. The combination of all other states' gross receipts taxes paid may be taken as credits against Washington's manufacturing and/or selling taxes.
Thus, the external tax credits may arise in the flow of commerce, either upstream or downstream from the taxable activity in this state, or both. Products extracted in another state, manufactured in Washington state, and sold and delivered in a third state may derive credits for taxes paid on both of the out-of-state activities.
Internal tax credits arise from multiple business activities performed entirely within this state, all of which are now subject to tax, but with the integrated credits offsetting the liabilities so that tax is only paid once on gross receipts. Under this system Washington extractors and manufacturers who sell their products in this state at wholesale and/or retail must report the value of products or gross receipts under each applicable tax classification. Credits may then be taken in the amount of the extracting and/or manufacturing tax paid to offset the selling taxes due. There are three ways in which credits may arise because of taxes paid exclusively in this state.
(f) Products are extracted in Washington and directly sold in Washington. Extracting business and occupation tax and selling business and occupation tax must both be reported but the payment of the former is a credit against the latter.
(g) Similarly, ingredients are extracted in Washington and manufactured into new products in this state. The extracting business and occupation tax reported and paid may be taken as a credit against manufacturing tax reported.
(h) Products manufactured in Washington are sold in Washington. Again, the payment of the manufacturing tax reported may be credited against the selling tax (wholesaling and/or retailing business and occupation tax) reported.
All of the external and internal tax credits derived from any flow of commerce may be used, repeatedly if necessary, to offset other tax liabilities related to the production and sale of the same products.
(4) Eligibility for taking credits. Statutory law places the following eligibility requirements and limitations upon the MATC system.
(a) The amount of the credit(s), however derived, may not exceed the Washington tax liability against which the credit(s) may be used. Any excess of credit(s) over liability may not be carried over or used for any purpose.
(b) The person claiming the credit(s) must be the same person who is legally obligated to pay both the taxes which give rise to the credit(s) and the taxes against which the credit is claimed. The MATC is not assignable.
(c) The taxes which give rise to the credit(s) must be actually paid before credit may be claimed against any other tax liability. Tax liability merely accrued is not creditable.
(d) The business activity subject to tax, and against which credit(s) is claimed, must involve the same ingredients or product upon which the tax giving rise to the credit(s) was paid. The credits must be product-specific.
(e) The effective date for developing and claiming credit(s) for products manufactured in Washington state and sold and delivered in other states which impose gross receipts selling taxes is June 1, 1987.
(f) The effective date for developing and claiming all credits other than those explained in subsection (e) above, is August 12, 1987.
(g) Persons who are engaged only in making wholesale or retail sales of tangible personal property which they have not extracted or manufactured are not entitled to claim MATC. Also, persons engaged in rendering services in this state are not so entitled, even if such services have been defined as "retail sales" under RCW 82.04.050. (See WAC 458-20-194 for rules governing apportionment of gross receipts from interstate services.)
(5) Other states' qualifying taxes. The law defines "gross receipts tax" paid to other states to exclude income taxes, value added taxes, retail sales taxes, use taxes, or other taxes which are generally stated separately from the selling price of products sold. Only those taxes imposed by other states which include gross receipts of a business activity within their measure or base are qualified for these credit(s). The burden rests with the person claiming any MATC for other states' taxes paid to show that the other states' tax was a tax on gross receipts as defined herein. Gross receipts taxes generally include:
(a) Business and occupation privileges taxes upon extracting, manufacturing, and selling activities which are similar to those imposed in Washington state in that the tax measure or base is not reduced by any allocation, apportionment, or other formulary method resulting in a downward adjustment of the tax base. If costs of doing business may be generally or routinely deducted from the tax base, the tax is not one which is similar to Washington state's gross receipts tax.
(b) Severance taxes measured by the selling price of the ingredients or products severed (oil, logs, minerals, natural products, etc.) rather than measured by costs of production, stumpage values, the volume or number of units produced, or some other formulary tax base.
(c) Business franchise or licensing taxes measured by the gross volume of business in terms of gross receipts or other financial terms rather than units of production or the volume of units sold.
Other states' tax payments claimed for MATC must be identifiable with the same ingredients or products which incurred tax liability in Washington state, i.e., they must be product specific.
(d) The department will periodically publish an excise tax bulletin listing current taxes in other jurisdictions which are either qualified or disqualified for credit under the MATC system.
(6) Deductions in combination with MATC. Effective August 12, 1987, with the enactment of the MATC system, the liability for actual payment of tax by persons who extract, manufacture, and sell products in this state was shifted from the selling activity (wholesaling or retailing) to the production activity (extracting and/or manufacturing). As explained, the payment of the production taxes may now be credited against the liability for selling taxes on the same products. However, the deductions from tax provided by chapter 82.04 RCW (business and occupation tax deductions) may still be taken before tax credits are computed and used, with noted exceptions. In order for the MATC system to result in the correct computation of tax liabilities and credit applications, the tax deductions which may apply for any reporting period must be taken equally against both levels of tax liability reported, i.e., at both the production and selling levels. Failure to report tax deductions in this manner will result in overreporting tax due and may result in overpayment of tax. Thus, with the exceptions noted below, tax deductions formerly reported only against selling activities should now be reported against production activities as well. All such deductions, the result of which is to reduce the measure of tax reported, should be taken against both the production taxes (extracting or manufacturing) and the selling taxes (wholesaling and/or retailing) equally.
(a) Example:
(i) A company manufactures products in Washington which it also sells at wholesale for $5,000 and delivers to a buyer in this state. The buyer defaults on part of the payment and the seller incurs a $2,000 credit loss which it writes off as a bad debt during the tax reporting period. The bad debt deduction provided by RCW 82.04.4284 must be shown on both the manufacturing-other line and the wholesaling-other line of the combined excise tax return. Taking the deduction on only one of those activities results in overreported tax liability on the $2,000 loss.
(b) Exceptions. The deductions generally provided by RCW 82.04.4286, for interstate or foreign sales (where goods are sold and delivered outside this state) may not be taken against tax reported at the production level (extracting or manufacturing). This is because the MATC system itself provides for tax credits instead of tax deductions on gross receipts from transactions involving goods produced in this state and sold in interstate or foreign commerce. Thus, deductions which eliminate transactions from tax reporting may be taken only against selling taxes.
(c) Applicable deductions should be shown on the front of the combined excise tax return (Column #3) on each applicable tax classification line and detailed on the back side of the return, as usual, before MATC is taken.
(d) It is not the intent of the MATC law to invalidate or nullify the business and occupation tax exemption for taxable amounts below minimum (see WAC 458-20-104). Thus any person whose gross receipts or value of products reported under any single tax classification with respect to the production and sale of any product is less than the minimum taxable amount will not incur tax liability merely because of the requirement to report those gross receipts or value of products on the same product under other tax classifications as well.
(i) Example: A person both manufactures and sells at wholesale $2,000 worth of widgets in the first quarter of a tax year. The requirement to report the $2,000 tax measure under both the manufacturing-other classification and the wholesaling-other classification gives the false appearance of $4,000 in gross receipts during this quarter. However, only the amount reported under the manufacturing-other classification need be considered to determine eligibility for the amount-below-minimum exemption.
(7) How and when to take MATC. The credits available under the MATC system are all to be taken on the combined excise tax return beginning in August, 1987 and thereafter. The return form has been modified to accommodate these credits. Each tax return upon which MATC has been taken must be accompanied by a completed Schedule C. This schedule details the business activities and credits computations. The line by line instructions insure that no more or no less credits are claimed than are authorized under the law.
(8) Consolidation of tax liabilities and credits. Under the MATC system a person's Washington tax liability for all activities involved in that person's production and sale of the same ingredients or products (extracting, and/or manufacturing, and/or selling) is to be reported only at the time of the sale of such products or at the time of that person's own use of such products for commercial or industrial consumption. All of the taxable activities are to be reported on that same periodic excise tax return. Also, all external and internal tax credits derived from the payment of any gross receipts taxes on any of these activities are to be taken at that time. Thus, the taxable activities and the tax credits are procedurally consolidated for reporting. This consolidation generally overcomes any need to track ingredients or products from their extraction to their sale. It also overcomes any need to report and pay Washington tax liability during one reporting period and to take credits against that tax liability in a different reporting period. Thus, except as noted below, there can be no credit carryovers or carrybacks under this system.
(a) Exception. Where different tax reporting periods are assigned by Washington state and another state to a company doing business both within and outside Washington state, the other state's gross receipts tax on the same products may not yet have been paid when the Washington tax is due for reporting and payment. In such cases the Washington tax due must be timely reported and paid during the period in which the sale is made. The external credit arising later, when the other state's tax is paid, may be taken as a credit against any Washington business and occupation tax reported during that later period. Thus, the limitation that the MATC must be product-specific by being limited to the amount of Washington tax paid on the same products does not mean that the credit(s) can only be used against precisely those same Washington taxes paid.
(i) In the situation described in subsection (a) above, if there is not sufficient Washington business and occupation tax due for payment in the later period, when the external tax credit arises, to allow for utilization of the entire credit, the amount of any overage may be carried forward and taken against Washington taxes reported in subsequent reporting periods until fully used.
When filing such exception returns, the full amount of any credits should be claimed, even though that credit amount will exceed the amount of tax liability reported for that period. The department of revenue itself will make the necessary adjustments and will perform the carrying over of any excess credits into future reporting periods.
(ii) In the same situation, if the person entitled to claim such credit overage is no longer engaged in taxable business in this state or for any other reason does not incur sufficient Washington business and occupation tax liability to fully utilize the perfected credit overage, a tax refund will be issued.
(iii) No tax refunds, MATC carryovers, or MATC carrybacks will be allowed under any circumstances other than those explained above.
(b) Special circumstances may arise where it is not possible to specifically identify ingredients or products as they move from production to sale (e.g., fungible commodities from various sources stored in a common warehouse). In such cases the taxpayer should seek advance approval from the department, in writing, for tax reporting and credit taking on a test period, formulary, or volume percentage basis, subject to audit verification.
(9) Recordkeeping requirements. Persons claiming the MATC must keep and preserve such records and documents as may be necessary to prove their entitlement to any credits taken under this system (RCW 82.32.070). It is not required to submit copies of such proofs when credits are claimed or together with the Schedule C detail. Rather, such records must be kept for a period no less than five years from the date of the tax return upon which the related tax credits are claimed. Such records are fully subject to audit for confirmation of the validity and amounts of credits taken. Records which must be preserved by persons claiming external tax credits include:
(a) Copies of sales contracts, or other written or memorialized evidence of any sales agreements, including purchase and billing invoices showing the origin state and destination state of products sold.
(b) Copies of shipping or other delivery documents identifying the products sold and delivered, reconcilable with the selling documents of subsection (a) above, if appropriate.
(c) Copies of production reports, transfer orders, and similar such documents which will reflect the intercompany or interdepartmental movement of extracted ingredients or manufactured products where no sale has occurred.
(d) Copies of tax returns or reports filed with other states' taxing authorities showing the kinds and amounts of taxes paid to such other states for which MATC is claimed.
(e) Copies of canceled checks or other proofs of actual tax payment to the other state(s) giving rise to the MATC claimed.
(f) Copies of any other state(s) taxing statutes, laws, ordinances, and other appropriate legal authorities necessary to establish the nature of the other states' tax as a gross receipts tax, as defined in this rule.
(g) Failure to keep and preserve proofs of entitlement to the MATC will result in the denial of credits claimed and the assessment of all taxes offset or reduced by such credits as well as the additional assessment of interest and penalties as required by law. (See RCW 82.32.050.)
(10) MATC in combination with other credits. The tax credits authorized under this system may be taken in combination with other tax credits available under Washington law. Such other credit programs, however, authorize credit carryovers from reporting period to period until the credits are fully utilized. Thus, the MATC must be computed and used to offset business and occupation tax liabilities during any tax reporting period before any other program credits to which a claimant may be entitled are claimed or applied. Failure to compute and take the MATC before applying other available credits may result in the loss of the other credit benefits.
(11) Superseding provisions. The MATC provisions of this rule supersede and control the provisions of other rules of chapter 458-20 WAC (other tax rules) relating to intrastate, interstate, and foreign transactions to the extent that such provisions are or appear to be contrary or conflicting.
(12) Unique or special credit situations—Reviews. The provisions of this rule generally explain the nature of the MATC system and the tax credit qualifications, limitations, and claiming procedures. The complexity of the integrated tax reporting and credit taking procedures may develop situations or questions which are not addressed herein. Such matters and requests for specialized rulings should be submitted to the department of revenue for prior determination before credits are claimed. Generally, prior determinations will be provided within sixty days after the department receives the information necessary to make such a ruling. Adverse rulings, tax credit denials, or tax assessments resulting from audits or other examinations of returns upon which the MATC is claimed may be administratively reviewed under the provisions of chapter 82.32 RCW and WAC 458-20-100.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-19301, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300. WSR 87-23-008 (Order 87-8), § 458-20-19301, filed 11/6/87.]


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PDF458-20-193C

Imports and exports—Sales of goods from or to persons in foreign countries.

(1) Introduction. This rule explains the application of the business and occupation (B&O) and retail sales taxes to sales of imports and exports. For purposes of this rule, the terms "good," "goods," "article," and "articles" mean "tangible personal property."
(2) Other rules that may apply. Readers may want to refer to other rules for additional information, including:
(a) WAC 458-20-178 Use tax and the use of tangible personal property.
(b) WAC 458-20-193 Interstate sales of tangible personal property.
(3) Definitions. The following definitions apply throughout this rule:
(a) "Export" means tangible personal property that originates within the taxing jurisdiction of this state destined for delivery to a purchaser in a foreign country. Exports do not include "ship's stores."
(i) Export sales require as a necessary incident of the contract of sale, the seller to deliver the tangible personal property by agreement:
(A) To the buyer at a foreign destination; or
(B) To a carrier consigned to and for transportation to a foreign destination; or
(C) To the buyer at shipside or aboard the buyer's vessel or other vehicle of transportation under circumstances where it is clear that the process of exportation of the tangible personal property has begun.
(ii) Exportation will not necessarily be deemed to have begun if goods are merely in storage awaiting shipment, even though there is reasonable certainty that the goods will be exported.
(iii) The intention to export, as evidenced, for example, by financial and contractual relationships, does not indicate "certainty of export" if the goods have not commenced their journey abroad; there must be an actual entrance of the goods into the export stream.
(iv) In all circumstances there must be a certainty of export and the process of export must have started. It is not important that title and/or possession of the goods pass in this state so long as delivery is made directly into the export channel.
(b) "Foreign commerce" means commerce that involves the purchase, sale or exchange of property and its transportation from a state or territory of the United States to a foreign country, or from a foreign country to a state or territory of the United States.
(c) "Import" means tangible personal property in import transportation.
(i) An "import" includes goods that are still in the process of importation, i.e., while they are still in import transportation. Except as provided in RCW 82.04.460, property is in the process of import transportation from the time the property begins its transportation at a point outside of the United States until the time that the property is delivered to the buyer in this state. Property is also in the process of import transportation if it is merely flowing through this state on its way to a destination in some other state or country.
(ii) An "import" does not include property that is no longer in the process of import transportation.
(d) "Ship's stores" means the supplies and equipment required for the operation and upkeep of a ship.
(4) Business and occupation tax – Wholesaling and retailing.
(a) Imports. Sales of imports are subject to the B&O tax, except for the following wholesale sales of imports:
(i) A sale of unroasted coffee beans; or
(ii) A sale between a parent company and its wholly owned subsidiary.
(b) Exports. Sales of exports are not subject to the B&O tax.
(i) To be tax exempt, the seller must document the fact that it placed the goods into the export process. This may be shown by the seller obtaining and keeping any of the following documentation:
(A) A bona fide bill of lading in which the seller is shipper/consignor and by which the carrier agrees to transport the goods sold to the foreign buyer/consignee at a foreign destination; or
(B) A copy of the shipper's export declaration, showing that the seller was the exporter of the goods sold; or
(C) Documents consisting of:
(I) Purchase orders or contracts of sale which show that the seller is required to get the goods into the export stream, e.g., "f.a.s. vessel"; and
(II) Local delivery receipts, tripsheets, waybills, warehouse releases, etc., reflecting how and when the goods were delivered into the export stream; and
(III) When available, United States export or customs clearance documents showing that the goods were actually exported; and
(IV) When available, records showing that the goods were packaged, numbered, or otherwise handled in a way which is exclusively attributable to goods for export.
(ii) Thus, where the seller actually delivers the goods into the export stream and retains such records as above set forth, the B&O tax does not apply. It is not sufficient to show that the goods ultimately reached a foreign destination; but rather, the seller must show that it was required to, and did put the goods into the export process.
(iii) Sales of tangible personal property, of ship's stores, and supplies to operators of steamships, etc., are not exempt irrespective of the fact that the property will be consumed on the high seas, or outside the territorial jurisdiction of this state, or by a vessel engaged in conducting foreign commerce.
However, under RCW 82.04.433, a B&O tax deduction is available for sales of fuel for consumption outside the territorial waters of the United States by vessels used primarily in foreign commerce.
(A) To qualify for this deduction sellers must take a certificate signed by the buyer or the buyer's agent stating: The name of the vessel for which the fuel is purchased; that the vessel is primarily used in foreign commerce; and, the amount of fuel purchased which will be consumed outside of the territorial waters of the United States. Sellers must exercise good faith in accepting such certificates and are required to add their own signed statement to the certificate to the effect that to best of their knowledge the information contained in the certificate is correct.
(B) The following is an acceptable certificate form:
Foreign Fuel Exemption Certificate
SELLER: . . . .
VESSEL: . . . .
WE HEREBY CERTIFY that this purchase of (kind and amount of product) from (seller) will be consumed as fuel outside the territorial waters of the United States by the above-named vessel. We further certify that said vessel is used primarily in foreign commerce and that none of the fuel purchased will be consumed within the territorial boundaries of the State of Washington.
DATED . . . . . , 20 . . .
. . . .
Purchaser
 
. . . .
Purchaser's Agent
 
By: . . . .
 
. . . .
Title or Office
(C) When a seller takes a completed certification such as this in good faith, the sale is exempt from the B&O tax, whether made at wholesale or retail, and even though the fuel is delivered to the buyer in this state.
(5) Business and occupation tax - Extracting and manufacturing. Persons engaged in extracting or manufacturing activities in Washington that transfer or make delivery of articles produced to points outside the state are subject to the B&O tax under the extracting or manufacturing classification and are not subject to the B&O tax under the retailing or wholesaling classification. See also WAC 458-20-135 and 458-20-136. The activities taxed occur entirely within the state, are inherently local, and are conducted prior to the commercial journey. The tax is measured by the value of products as determined by the selling price. See WAC 458-20-112. It is immaterial that the value so determined includes an additional increment of value because the sale occurs outside the state.
(6) Retail sales tax. The same principles apply to the retail sales tax as are set forth for the business and occupation tax described in subsections (4) and (5) of this rule, except that certain statutory exemptions may apply. (See WAC 458-20-174, 458-20-175, 458-20-176, 458-20-177, 458-20-238 and 458-20-239.)
(7) Use tax. The use tax is imposed upon the use, including storage, of all tangible personal property acquired for any use or consumption in this state unless specifically exempt by statute.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 19-18-068, § 458-20-193C, filed 9/3/19, effective 10/4/19. Statutory Authority: RCW 82.32.300. WSR 86-07-005 (Order ET 86-3), § 458-20-193C, filed 3/6/86; WSR 83-07-033 (Order ET 83-16), § 458-20-193C, filed 3/15/83; Order ET 76-3, § 458-20-193C, filed 8/31/76; Order ET 70-3, § 458-20-193C (Rule 193 Part C), filed 5/29/70, effective 7/1/70.]


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PDF458-20-193D

Transportation, communication, public utility activities, or other services in interstate or foreign commerce.

WAC 458-20-193 deals with interstate and foreign commerce and is published in four separate parts:
Part A.
Sales of goods originating in Washington to persons in other states.
Part B.
Sales of goods originating in other states to persons in Washington.
Part C.
Imports and Exports: Sales of goods from or to persons in foreign countries.
Part D.
Transportation, communication, public utility activities, or other services in interstate or foreign commerce.
Business and Occupation Tax, Public Utility Tax
In computing tax there may be deducted from gross income the amount thereof derived as compensation for performance of services which in themselves constitute interstate or foreign commerce to the extent that a tax measured thereby constitutes an impermissible burden upon such commerce. A tax does not constitute an impermissible burden upon interstate or foreign commerce unless the tax discriminates against that commerce by placing a burden thereon that is not borne by intrastate commerce, or unless the tax subjects the activity to the risk of repeated exactions of the same nature from other states. Transporting across the state's boundaries is exempt, whereas supplying such transporters with facilities, arranging accommodations, providing funds and the like, by which they engage in such commerce is taxable.
Examples of Exempt Income:
(1) Income from those activities which consist of the actual transportation of persons or property across the state's boundaries is exempt.
(2) That portion of commissions received by local brokers or commission merchants for interstate or foreign sales which was paid to out-of-state independent agents is exempt.
(3) Income from services rendered by an out-of-state branch or office of the taxpayer regularly maintained outside the state is exempt. (See WAC 458-20-194.)
Examples of Taxable Income:
(1) Compensation received by persons engaged in business within this state for performance of business activities which are only ancillary to transportation across the state's boundaries is taxable.
(2) Compensation received by merchandise brokers or commission merchants for services rendered within this state to principals engaged in interstate or foreign commerce is taxable.
(3) Compensation received by contracting, stevedoring or loading companies for services performed within this state is taxable.
Persons engaged in stevedoring and associated activities involving the movement of goods and commodities in waterborne interstate or foreign commerce are subject to business tax at the rate .0033 upon the gross proceeds from such activities. Stevedoring and associated activities means all activities of a labor, service, or transportation nature whereby cargo is loaded or unloaded to or from vessels or barges, passing over, onto, or under a wharf, pier, or similar structure, including also the moving of cargo to a warehouse or similar holding or storage yard or area to await further movement in import or export; also the movement to a consolidation freight station to be stuffed, unstuffed, containerized, separated or otherwise segregated or aggregated for delivery or loading on any mode of transportation for delivery to its consignee. Specific activities included in this definition are: Wharfage, handling, loading, unloading, moving of cargo to a convenient place of delivery to the consignee or a convenient place for further movement to export mode; documentation services in connection with the receipt, delivery, checking, care, custody and control of cargo required in the transfer of cargo; imported automobile handling prior to delivery to consignee; terminal stevedoring and incidental vessel services, including but not limited to plugging and unplugging refrigerator service to containers, trailers, and other refrigerated cargo receptacles, and securing ship hatch covers.
Persons engaging in business as an international steamship agent, international customs house broker, international freight forwarder, vessel and/or cargo charter broker in foreign commerce, or international air cargo agent are subject to business tax at the rate .0033 upon gross income with respect to such international activities.
In computing public utility tax, there may be deducted from gross income so much thereof as is derived from actually transporting persons or property or transmitting communications or electrical energy, from this state to another state or territory or to a foreign country and vice versa.
Persons, including dock companies or wharfage companies, are permitted no deduction from gross income of amounts received for services performed in this state consisting of the handling of cargo or freight even though such cargo or freight has moved or will move across the state's boundaries.
No deduction is permitted with respect to gross income derived from activities which are ancillary to transportation across the state's boundaries, such as income received by a wharf company or warehouse company for the storage of goods. The mere ownership or operation of facilities by means of which others engage in foreign or interstate commerce is an activity ancillary to such commerce and any income received therefrom is taxable.
Insofar as the transportation of goods is concerned, the interstate movement of cargo or freight ceases when the goods have arrived at the destination to which it was billed by the out-of-state shipper, and no deduction is permitted of the gross income derived from transporting the same from such point of destination in this state to another point within this state. Thus, freight is billed from San Francisco, or a foreign point, to Seattle. After arrival in Seattle it is transported to Spokane. No deduction is permitted of the gross income received for the transportation from Seattle to Spokane. Again, freight is billed from San Francisco, or a foreign point, to a line carrier's terminal, or a public warehouse in Seattle. After arrival in Seattle it is transported from the line carrier's terminal or public warehouse to the buyer's place of business in Seattle. No deduction is permitted of the gross income received as transportation charges from the line carrier's terminal or public warehouse to the buyer's place of business in Seattle.
The interstate movement of cargo or freight begins when the goods are committed to a carrier for transportation out of the state, which carrier will start the transportation to a point outside the state.
[Statutory Authority: RCW 82.32.300. WSR 83-07-033 (Order ET 83-16), § 458-20-193D, filed 3/15/83; Order ET 74-1, § 458-20-193D, filed 5/7/74 ; Emergency Order ET 74-6, filed 9/30/74 and Emergency Order ET 74-7, filed 10/3/74, effective 1/1/75; Order ET 70-3, § 458-20-193D (Rule 193 Part D), filed 5/29/70, effective 7/1/70.]


PDF458-20-194

Doing business inside and outside the state.

(1) Introduction.
(a) This section explains the apportionment requirements of persons entitled to apportion income under RCW 82.04.460(1), and applies only to tax liability incurred during the period of January 1, 2006, through May 31, 2010. Chapter 23, Laws of 2010, sp. sess. (2ESSB 6143) changed the apportionment provisions of RCW 82.04.460(1) effective June 1, 2010. This section specifically applies to taxpayers who maintain places of business both within and without the state that contribute to the rendition of services and who are taxable under RCW 82.04.290, 82.04.2908, or any other statute that provides for apportionment under RCW 82.04.460(1) during this period.
Persons subject to the service and other activities, international investment income, licensed boarding home, and low-level radioactive waste disposal business and occupation (B&O) tax classifications, and who are not required to apportion their income under another statute or rule, should use this section. In addition, this section describes Washington nexus standards for business activities subject to apportionment under RCW 82.04.460(1) for tax liability incurred between January 1, 2006, through May 31, 2010. Nexus is described in subsection (2) of this section; separate accounting in subsection (3) of this section; and cost apportionment in subsection (4) of this section.
(b) Readers may also find helpful information in the following rules:
(i) WAC 458-20-19401, Minimum nexus thresholds for apportionable activities. This section describes minimum nexus thresholds that are effective June 1, 2010.
(ii) WAC 458-20-19402, Single factor receipts apportionment—Generally. This section describes the general application of single factor receipts apportionment that is effective June 1, 2010.
(iii) WAC 458-20-19403, Single factor receipts apportionment—Royalties. This section describes the application of single factor receipts apportionment to gross income from royalties and applies only to tax liability incurred after May 31, 2010.
(iv) WAC 458-20-19404, Single factor receipts apportionment—Financial institutions. This section describes the application of single factor receipts apportionment to certain income of financial institutions and applies only to tax liability incurred after May 31, 2010.
(v) WAC 458-20-14601, Financial institutions—Income apportionment. This section describes the apportionment of income for financial institutions for tax liability incurred prior to June 1, 2010.
(c) The examples included in this section identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances.
(2) Nexus.
(a) Place of business - Minimum presence necessary for tax. The following discussion of nexus applies only to gross income from activities subject to apportionment under this rule. A place of business exists in a state when a taxpayer engages in activities in the state that are sufficient to create nexus. Nexus is that minimum level of business activity or connection with the state of Washington which subjects the business to the taxing jurisdiction of this state. Nexus is created when a taxpayer is engaged in activities in the state, either directly or through a representative, for the purpose of performing a business activity. It is not necessary that a taxpayer have a permanent place of business within a state to create nexus.
(b) Examples. The following examples demonstrate Washington's nexus principles.
(i) Assume an attorney licensed to practice only in Washington performs services for clients located in both Washington and Florida. All of the services are performed within Washington. The attorney does not have nexus with any state other than Washington.
(ii) Assume the same facts as the example in (b)(i) of this subsection, plus the attorney attends continuing education classes in Florida related to the subject matter for which his Florida clients hired him. The attorney's presence in Florida for the continuing education classes does not create nexus because he is not engaging in business in Florida.
(iii) Assume the same facts as the example in (b)(ii) of this subsection, plus the attorney is licensed to practice law in Florida and frequently travels to Florida for the purpose of conducting discovery and trial work. Even though the attorney does not maintain an office in Florida, the attorney has nexus with both Washington and Florida.
(iv) Assume an architectural firm maintains physical offices in both Washington and Idaho. The architectural firm has nexus with both Washington and Idaho.
(v) Assume an architectural firm maintains its only physical office in Washington, and when the firm needs a presence in Idaho, it contracts with nonemployee architects in Idaho instead of maintaining a physical office in Idaho. Employees of the Washington firm do not travel to Idaho. Instead, the contract architects interact directly with the clients in Idaho, and perform the services the firm contracted to perform in Idaho. The architectural firm has nexus with both Washington and Idaho.
(vi) Assume the same facts as the example in (b)(v) of this subsection except the contracted architects never meet with the firm's clients and instead forward all work products to the firm's Washington office, which then submits that work product to the client. In this case, the architectural firm does not have nexus with Idaho. The mere purchase of services from a subcontractor located in another state that does not act as the business' representative to customers does not create nexus.
(vii) Assume that an accounting firm maintains its only office in Washington. The accounting firm enters into contracts with individual accountants to perform services for the firm in Oregon and Idaho. The contracted accountants represent the firm when they perform services for the firm's clients. The firm has nexus with Washington, Oregon, and Idaho.
(viii) Assume that an accounting firm maintains its only office in Washington and has clients located in Washington, Oregon, and Idaho. The accounting firm's employees frequently travel to Oregon to meet with clients, review client's records, and present their findings, but do not travel to Idaho. The accounting firm has nexus with Washington and Oregon, but does not have nexus with Idaho.
(ix) Assume that a sales representative earns commissions from the sale of tangible personal property. The sales representative is located in Oregon and does not enter Washington for any business purpose. The sales representative contacts Washington customers only by telephone and earns commissions on sales of tangible personal property to Washington customers. The sales representative does not have nexus with Washington and the commissions earned on sales to Washington customers are not subject to Washington's business and occupation tax.
(x) The examples in this subsection (2) apply equally to situations where the Washington activities and out-of-state activities are reversed. For example, in example (b)(ix) of this subsection, if the locations were reversed, the sales representative would have nexus with Washington, but not in Oregon.
(3) Separate accounting.
(a) In general. "Separate accounting" refers to a method of accounting that segregates and identifies sources or activities which account for the generation of income within the state of Washington. Separate accounting is distinct from cost apportionment, which assigns a formulary portion of total worldwide income to Washington. A separate accounting method must be used by a business entitled to apportion its income under RCW 82.04.460(1) if this use results in an accurate description of gross income attributable to its Washington activities.
(b) Accuracy. Separate accounting is accurate only when the activities that significantly contribute, directly or indirectly, to the production of income can be identified and segregated geographically. Separate accounting thus links taxable income to activities occurring in a discrete jurisdiction. The result is inaccurate when services directly supporting these activities occur in different jurisdictions. For example, if a taxpayer provides investment advice to clients in Washington, but performs all of its research and due diligence activities in another state, then separate accounting would not be accurate. However, if instead of research and due diligence, only the client billing activity is performed in another state, then separate accounting would be allowed.
(c) Approved methods of separate accounting. The following methods of separate accounting are acceptable to the department, if accurate:
(i) Billable hours of employees or representative third parties performing services in Washington. If a business charges clients an hourly rate for the performance of services, and the place of performance of the employee, contractor, or other individual whose time is billed is reasonably ascertainable, then the billable hours may be used as a basis for separate accounting. The gross amount received from hours billed for services performed in Washington should be reported.
(ii) Specific projects or contracts. A business may assign the revenue from specific projects or contracts in or out of Washington by the primary place of performance. For example:
(A) A consulting business with no other presence in Washington that agrees to provide on-site management consulting services for a Washington business and receives five hundred thousand dollars in payment for the project must report five hundred thousand dollars in gross income to Washington.
(B) If the same business gets another Washington client for on-site management consulting, and receives another payment of five hundred thousand dollars, the business must report an additional five hundred thousand dollars in gross income to Washington.
(C) If a business contracts to distribute advertisements for another business within the state of Washington, the gross amount received for this action should be reported as Washington income.
(iii) Other reasonable and accurate methods—Notice to the department.
(A) A taxpayer may report with, or the department may require, the use of one of the alternative methods of separate accounting.
(B) A taxpayer reporting under this subsection must notify the department at the time of filing that it is using an alternative method and provide a brief description of the method employed. If a taxpayer reports using an alternate method, the same method must be used for all subsequent tax reporting periods unless it is demonstrated another method is necessary under the standard in (c)(iii)(E) of this subsection.
(C) If on review of a taxpayer's return(s) the department determines another method is necessary to fairly represent the extent of a taxpayer's business activity in Washington, then the department may impose the method for all returns within the statute of limitations. Statutory interest applies to both balances due and refund or credit claims arising under this section. Further, applicable penalties will be imposed on balances due arising under this section. However, if the taxpayer reported using the separate accounting method in (c)(i) or (ii) of this subsection or cost apportionment under subsection (4)(a) through (h) of this section, the department may impose the alternate method for future periods only.
(D) A taxpayer may request that the department approve an alternative method of separate accounting by submitting a request for prior ruling pursuant to WAC 458-20-100. Such letter ruling may be subject to audit verification before issuance.
(E) The taxpayer or the department, in requesting or imposing an alternate method of separate accounting, must demonstrate by clear and convincing evidence that the separate accounting methods in (c) of this subsection do not fairly represent the extent of the taxpayer's business activity in Washington.
(4) Cost apportionment.
(a) Apportionment ratio.
(i) Each cost must be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for Washington state tax purposes for the taxable period. Persons should refer to WAC 458-20-197 (When tax liability arises) and WAC 458-20-199 (Accounting methods) for further guidance on the requirements of each accounting method. Taxpayers must file returns using costs calculated based on the taxpayer's most recent fiscal year for which information is available, unless there is a significant change in business operations during the current period. A significant change in business operations includes commencement, expansion, or termination of business activities in or out of Washington, formation of a new business entity, merger, consolidation, creation of a subsidiary, or similar change. If there is a significant change in business operations, then the taxpayer must estimate its cost apportionment formula based on the best records available and then make the appropriate adjustments when the final data is available.
(ii) The apportionment ratio is the cost of doing business in Washington divided by the total cost of doing business as described in RCW 82.04.460(1). The apportionment ratio is calculated under this section as follows. The denominator of the apportionment ratio is the worldwide costs of the apportionable activity and the numerator is all costs specifically assigned to Washington plus all costs assigned to Washington by formula, as described below. Costs are calculated on a worldwide basis for the tax reporting period in question. The tax due to Washington is calculated by multiplying total income times the apportionment ratio times the tax rate. Available tax credits may be applied against the result. Statutory interest and penalties apply to underreported income. For the purposes of this rule, "total income" means gross income under the tax classification in question, less deductions, calculated as if the B&O tax classification applied on a worldwide basis.
(b) Place of business requirement. A taxpayer must maintain places of business within and without Washington that contribute to the rendition of its services in order to apportion its income. This "place of business" requirement, however, does not mean that the taxpayer must maintain a physical location as a place of business in another taxing jurisdiction in order to apportion its income. If a taxpayer has activities in a jurisdiction sufficient to create nexus under Washington standards, then the taxpayer is deemed to have a "place of business" in that jurisdiction for apportionment purposes. See subsection (2) of this section.
(c) Noncost expenditures. The following is a list of expenditures that are not costs of doing business within the meaning of RCW 82.04.460 and are therefore excluded from both the numerator and the denominator of the apportionment ratio. Expenditures that are not costs of doing business include expenditures that exchange one business asset for another; that reflect a revaluation of an asset not consumed in the course of business; or federal, state, or local taxes measured by gross or net business income. This list is not exclusive. Costs of an activity taxable under another B&O tax classification are also excluded from the apportionment ratio. Similarly, the costs of acquiring a business by merger or otherwise, including the financing costs, are not the costs of doing the apportioned business activity and must be excluded from the cost apportionment calculation.
(i) The cost of acquiring assets that are not depreciated, amortized, or otherwise expensed on the taxpayer's books and records on the basis of generally accepted accounting principles (GAAP), or a loss incurred on the sale of such assets. For example, expenditures for land and investments are excluded from the cost apportionment formula.
(ii) Taxes (other then taxes specifically related to items of property such as retail sales or use taxes and real and personal property taxes).
(iii) Asset revaluations such as stock impairment or goodwill impairment.
(iv) Costs of doing a business activity subject to the B&O tax under a classification other than RCW 82.04.290 or 82.04.2908. For example, if a taxpayer were subject to manufacturing, wholesaling and service and other activities B&O tax, the costs associated with a warehouse and a manufacturing plant (property and employee costs) are excluded from the cost apportionment formula. But if costs support both the service activity and either manufacturing or wholesaling (for example, costs associated with headquarters or joint operating centers), then those costs must be included in the cost apportionment formula without segregating the service portion of the costs.
(d) Specifically assigned costs. Real or tangible personal property costs, employee costs, and certain payments to third parties are specifically assigned under (e) through (g) of this subsection.
(e) Property costs.
(i) Definitions. Real or tangible personal property costs are defined to include:
(A) Depreciation as reported on the taxpayer's books and records according to GAAP, provided that if a taxpayer does not maintain its books and records in accordance with GAAP, it may use tax reporting depreciation. A taxpayer may not change its method of calculating depreciation costs without approval of the department;
(B) Maintenance and warranty costs for specific property;
(C) Insurance costs for specific property;
(D) Utility costs for specific property;
(E) Lease or rental payments for specific property;
(F) Interest costs for specific property; and
(G) Taxes for specific property.
(ii) Assignment of costs. Real or tangible personal property costs are assigned to the location of the property. Property in transit between locations of the taxpayer to which it belongs is assigned to the destination state. Property in transit between a buyer and seller and included by a taxpayer in the denominator of the apportionment ratio in accordance with its regular accounting practices is assigned to the destination state. Mobile or movable property located both within and without Washington during the measuring period is assigned in proportion to the total time within Washington during the measuring period. An automobile assigned to a traveling employee is assigned to the state to which the employee's compensation is assigned below or to the state in which the automobile is licensed. Where a business contracts for the maintenance, warranty services, or insurance of multiple properties, the relative rental or depreciation expense may be used to assign these costs.
(f) Employee costs.
(i) Definitions. For the purposes of this subsection:
(A) "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to or accrued to employees for personal services. Employer contributions under a qualified cash plan, deferred arrangement plan, and nonqualified deferred compensation plan are considered compensation. Stock based compensation is considered compensation under this rule to the extent included in gross income for federal income tax purposes.
(B) "Employee" means any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee, but does not include corporate officers.
(ii) Allocation method. Employee costs include all compensation paid to employees and all employment based taxes and other fees, for example, amounts paid related to unemployment compensation, labor and industries insurance premiums, and the employer's share of Social Security and medicare taxes. An employee's compensation is assigned to Washington if the taxpayer reports the employee's wages to Washington for unemployment compensation purposes. Employee wages reported for federal income tax purposes may be used to assign the remaining compensation costs.
(g) Representative third-party costs.
(i) Definitions. For the purposes of this section:
"Representative third party" includes an agent, independent contractor, or other representative of the taxpayer who provides services on behalf of the taxpayer directly to customers. The term includes leased employees who meet the standards under (g) of this subsection.
(ii) Allocation method. Payments to a representative third party are assigned to the third party's place of performance. For example, if a business subcontracts with a representative third party who provides services on behalf of the taxpayer from a California location, the cost of compensating the representative third party is assigned to California. This is true even if the third party provides services to Washington customers. Conversely, the cost of compensating a representative third party providing services to California customers from a Washington location is assigned to Washington.
(iii) Examples.
(A) X, a Washington business, hires Taxpayer to design and write custom software for a document management system. Taxpayer subcontracts with Z, whose employees determine the needs of X, negotiate a statement of work, write the custom software, and install the software. Z's employees perform all of these services on-site at the X business location. Taxpayer's payments to Z are representative third-party costs and specifically assigned to Washington.
(B) Taxpayer, a service provider, subcontracts with X, who agrees to maintain a customer service center where staff will answer telephone inquiries about Taxpayer's services. X in turn subcontracts with Z, whose employees actually respond to questions from a phone center located in California. The payments by taxpayer to X are representative third-party costs with respect to Taxpayer because X is responsible for providing the staff of the service center. The payments to X are specifically assigned to California.
(C) Taxpayer sells various manufacturers' products at wholesale on a commission basis. Taxpayer subcontracts with X, who agrees to act as Taxpayer's sales representative on the West Coast. Taxpayer has various other sales representatives working on as independent contractors, who are assigned territories, but may make sales from an office or through in-person visits, or a combination of both. Taxpayer does not maintain records sufficient to show the representatives' places of performance. Taxpayer may use sales records and the standards under (h) of this subsection to assign commissions by each subcontractor.
(h) Costs assigned by formula.
(i) Costs not specifically assigned under (e) through (g) of this subsection and not excluded from consideration by (c) of this subsection are assigned to Washington by formula. These costs are multiplied by the ratio of sales in Washington over sales everywhere. For example, if a business has one thousand dollars in other unassigned costs and sales of ten thousand dollars in each of the four states in which it has nexus under Washington standards (including Washington), twenty-five percent ($10,000/$40,000), or two hundred fifty dollars of the other costs are assigned to Washington.
(ii) Sales are assigned to where the customer receives the benefit of the service. If the location where the services are received is not readily determinable, the services are attributed to the location of the office of the customer from which the services were ordered in the regular course of the customer's trade or business. If the ordering office cannot be determined, the services are attributed to the office of the customer to which the services are billed.
(iii) If under the method described above a sale is attributed to a location where the taxpayer does not have nexus under Washington standards, the sale must be excluded from both the numerator and denominator of the sales ratio. For the purposes of this calculation only, the department will presume a taxpayer has nexus anywhere the taxpayer has employees or real property, or where the taxpayer reports business and occupation, franchise, value added, income or other business activity taxes in the state. The burden is on the taxpayer to demonstrate nexus exists in other states.
(i) Alternative methods.
(i) A taxpayer may report with, or the department may require, the use of one of the alternative methods of cost apportionment described below:
(A) The exclusion of one or more categories of costs from consideration;
(B) The specific allocation of one or more categories of costs which will fairly represent the taxpayer's business activity in Washington; or
(C) The employment of another method of cost apportionment that will effectuate an equitable apportionment of the taxpayer's gross income.
(ii) A taxpayer reporting under (i) of this subsection must notify the department at the time of filing that it is using an alternative method and provide a brief description of the method employed. If a taxpayer reports using an alternate method, the same method must be used for all subsequent tax reporting periods unless it is demonstrated another method is necessary under the standard in (i)(v) of this subsection.
(iii) If on review of a taxpayer's return(s) the department determines another method is necessary to fairly represent the extent of a taxpayer's business activity in Washington, the department may impose the method for all returns within the statute of limitations. Statutory interest applies to both balances due and refund or credit claims arising under this section. Further, applicable penalties will be imposed on balances due arising under this section. However, if the taxpayer reported using the cost apportionment method in (a) through (h) of this subsection and separate accounting is unavailable, the department may impose the alternate method for future periods only.
(iv) A taxpayer may request that the department approve an alternative method of cost apportionment by submitting a request for prior ruling pursuant to WAC 458-20-100. Such letter ruling may be subject to audit verification before issuance.
(v) The taxpayer or the department, in requesting or imposing an alternate method, must demonstrate by clear and convincing evidence that the cost apportionment method in (a) through (h) of this subsection does not fairly represent the extent of the taxpayer's business activity in Washington.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-22-089, § 458-20-194, filed 11/1/10, effective 12/2/10; WSR 05-24-054, § 458-20-194, filed 12/1/05, effective 1/1/06. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-194, filed 3/30/83; Order ET 70-3, § 458-20-194 (Rule 194), filed 5/29/70, effective 7/1/70.]


PDF458-20-19401

Minimum nexus thresholds for apportionable activities and selling activities.

(1) Introduction.
(a) The state of Washington imposes business and occupation (B&O) tax on persons that have "substantial nexus" with this state. For apportionable activities and for selling activities taxable under RCW 82.04.250(1), 82.04.257(1) or 82.04.270, substantial nexus does not require a physical presence in this state, as that phrase is described in RCW 82.04.067(6).
(b) This rule only applies to periods after May 31, 2010, and applies as follows:
(i) In 2015, Washington changed the thresholds for substantial nexus described in subsection (3)(a)(iii) of this rule.
(ii) Prior to September 1, 2015, these thresholds only applied to apportionable activities, and did not apply to wholesaling or retailing activity.
(iii) Effective September 1, 2015, Washington expanded the scope of these tests to apply to wholesaling activity.
(iv) Effective July 1, 2017, Washington expanded the scope of some of these tests to apply to retailing activity taxable under RCW 82.04.250(1) or 82.04.257(1).
(c) Effective July 1, 2017, the thresholds are measured based on a person's payroll, property, and receipts in the current or immediately preceding calendar year. For the period from September 1, 2015, to June 30, 2017, the thresholds were measured based on a person's payroll, property, and receipts in the immediately preceding calendar year. See subsection (9) of this rule for additional information. For periods from June 1, 2010, to August 31, 2015, the thresholds were based on the person's payroll, property, and receipts in the current calendar year. See subsection (10) of this rule for additional information.
(d) Other rules that may apply. Readers may also want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-193 Interstate sales of tangible personal property. This rule describes the taxation of interstate sales of tangible personal property.
(ii) WAC 458-20-194 Doing business inside and outside the state. This rule describes separate accounting and cost apportionment and applies only to tax liability incurred from January 1, 2006, through May 31, 2010.
(iii) WAC 458-20-19402 Single factor receipts apportionment—Generally. This rule describes the general application of single factor receipts apportionment and applies only to tax liability incurred after May 31, 2010.
(iv) WAC 458-20-19403 Apportionable royalty receipts attribution. This rule describes the application of single factor receipts apportionment to gross income from royalties and applies only to tax liability incurred after May 31, 2010.
(v) WAC 458-20-19404 Financial institutions—Income apportionment. This rule describes the application of single factor receipts apportionment to certain income of financial institutions and applies only to tax liability incurred after December 31, 2015.
(vi) WAC 458-20-19404A Financial institutions—Income apportionment. This rule describes the application of single factor receipts apportionment to certain income of financial institutions and applies only to tax liability incurred between June 1, 2010, and December 31, 2015.
(e) Examples included in this rule identify a number of facts and then state a conclusion; they should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances. For the examples in this rule, gross income received by the taxpayer is from engaging in apportionable activities or from making wholesale or retail sales. Also, unless otherwise stated, the years in the examples are time periods that occur after June 30, 2017.
The minimum nexus thresholds described in this rule and used in examples are unadjusted for consumer price index changes applicable for years after 2017.
(2) Definitions. Unless the context clearly requires otherwise, the definitions in this subsection apply throughout this rule.
(a) "Apportionable activities" includes only those activities subject to B&O tax under the following classifications:
(i) Service and other activities;
(ii) Royalties;
(iii) Travel agents and tour operators;
(iv) International steamship agent, international customs house broker, international freight forwarder, vessel and/or cargo charter broker in foreign commerce, and/or international air cargo agent;
(v) Stevedoring and associated activities;
(vi) Disposing of low-level waste;
(vii) Insurance producers, title insurance agents, or surplus line brokers;
(viii) Public or nonprofit hospitals;
(ix) Real estate brokers;
(x) Research and development performed by nonprofit corporations or associations;
(xi) Inspecting, testing, labeling, and storing canned salmon owned by another person;
(xii) Representing and performing services for fire or casualty insurance companies as an independent resident managing general agent licensed under the provisions of chapter 48.17 RCW;
(xiii) Contests of chance;
(xiv) Horse races;
(xv) International investment management services;
(xvi) Room and domiciliary care to residents of a boarding home;
(xvii) Aerospace product development;
(xviii) Printing or publishing a newspaper (but only with respect to advertising income);
(xix) Printing materials other than newspapers and publishing periodicals or magazines (but only with respect to advertising income); and
(xx) Cleaning up radioactive waste and other by-products of weapons production and nuclear research and development, but only with respect to activities that would be taxable as an "apportionable activity" under any of the tax classifications listed in (a)(i) through (xix) of this subsection if this special tax classification did not exist.
(b) "Credit card" means a card or device existing for the purpose of obtaining money, property, labor, or services on credit.
(c) "Gross income of the business" means the value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses. The term gross receipts means gross income from apportionable activities.
(d) "Loan" means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another. Loan includes participations, syndications, and leases treated as loans for federal income tax purposes. Loan does not include: Futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; noninterest bearing balances due from depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a real estate mortgage investment conduit (REMIC) or other mortgage-backed or asset-backed security; and other similar items.
(e) "Net annual rental rate" means the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals.
(f) The terms "nexus" and "substantial nexus" are used interchangeably in this rule.
(g) "Property" means tangible, intangible, and real property owned or rented and used in this state during the calendar year, except property does not include ownership of or rights in computer software, including computer software used in providing a digital automated service; master copies of software; and digital goods or digital codes residing on servers located in this state. Refer to RCW 82.04.192 and 82.04.215 for definitions of the terms computer software, digital automated services, digital goods, digital codes, and master copies.
(h) "Securities" includes any intangible property defined as a security under section 2 (a)(1) of the Securities Act of 1933 including, but not limited to, negotiable certificates of deposit and municipal bonds.
(i) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or any foreign country or political subdivision of a foreign country.
(j) "Wholesale sales" means wholesale sales taxable under RCW 82.04.257(1) or 82.04.270 and "wholesaling" means the activity of making such sales. For substantial nexus standards applicable to wholesale sales taxable under another classification, see WAC 458-20-193.
(3) Substantial nexus.
(a) With respect to taxes on persons engaged in apportionable activities as defined in RCW 82.04.460 or making wholesale sales taxable under RCW 82.04.257(1) or 82.04.270, substantial nexus exists where, in the current or immediately preceding calendar year, a person is:
(i) An individual and is a resident or domiciliary of this state;
(ii) A business entity and is organized or commercially domiciled in this state; or
(iii) A nonresident individual or a business entity that is organized and commercially domiciled outside this state, and the person had:
(A) More than fifty-three thousand dollars of property in this state;
(B) More than fifty-three thousand dollars of payroll in this state;
(C) More than two hundred sixty-seven thousand dollars of receipts from this state from apportionable activities, from selling activities, or from a combination of both; or
(D) At least twenty-five percent of the person's total property, total payroll, or total receipts in this state.
(b) With respect to taxes on a person making sales at retail taxable under RCW 82.04.250(1) or 82.04.257(1), substantial nexus exists if, in the current or immediately preceding calendar year:
(i) The person has a physical presence in this state as that phrase is described in RCW 82.04.067(6); or
(ii) The person's receipts exceed the receipts threshold described in (a)(iii)(C) or (D) of this subsection.
(c) A person who has a substantial nexus with this state in the current calendar year based solely on exceeding property, payroll, or receipts thresholds during the current calendar year, but did not exceed the thresholds in the immediately preceding year, is subject to B&O tax on business activity occurring on and after the date that the person established a substantial nexus with this state in the current calendar year. RCW 82.04.220(2). If the person exceeded any of the thresholds in the immediately preceding year, the person is subject to B&O tax on its business activity occurring throughout the current year.
Example 1. Company C is commercially domiciled in Washington and has one employee in Washington who earns $30,000 per year. Company C has substantial nexus with Washington because it is commercially domiciled in Washington. The minimum nexus thresholds for property, payroll, and receipts do not apply to a business entity commercially domiciled in this state.
(d) The department will adjust the amounts listed in (a) of this subsection based on changes in the consumer price index as required by RCW 82.04.067. (These adjustments are published in ETA 3195 "Economic Nexus Minimum Thresholds.")
(e) The minimum nexus thresholds are applied on a calendar year basis.
Example 2. Assume Corporation N, which is not commercially domiciled or organized in Washington, earns receipts attributable to Washington in 2017 that exceed the minimum nexus receipts threshold for determining substantial nexus. If Corporation N's 2018 and later payroll, property, and receipts do not exceed any of the minimum nexus thresholds for determining substantial nexus, its B&O tax reporting obligation for any gross receipts attributable to Washington continues through the calendar year 2018.
Example 3. Company Q is organized and domiciled outside of Washington. Company Q maintains an office in Washington which housed a single employee in the immediately preceding calendar year. In 2016, Company Q had $40,000 in property located in Washington, paid $45,000 in compensation to the Washington employee, and had $200,000 in apportionable receipts attributed to Washington and $0 wholesaling or retailing receipts sourced to Washington. In 2016, Company Q's total property everywhere was valued at $200,000, total payroll was $400,000, and total apportionable and wholesaling or retailing receipts were $5,000,000. In 2017, Company Q had $45,000 in property located in Washington, paid $48,000 in compensation to the Washington employee, and had $200,000 in apportionable receipts attributed to Washington and $0 wholesaling or retailing receipts sourced to Washington. In 2017, Company Q's total property everywhere was valued at $225,000, total payroll was $420,000, and total apportionable and wholesaling or retailing receipts were $6,000,000. Although Company Q has physical presence in Washington, as described in RCW 82.04.067(6), it is not treated as having substantial nexus with Washington with respect to its apportionable and wholesaling activities because (a) it is not organized or domiciled in Washington and (b) it did not have sufficient property, payroll, or receipts in the current or immediately preceding calendar year to exceed the minimum nexus thresholds identified in subsection (3)(a)(iii) of this rule.
(4) Property threshold.
(a) Location of property.
(i) Real property - Real property owned or rented is in this state if the real property is located in this state.
(ii) Tangible personal property - Tangible personal property is in this state if it is physically located in this state.
(iii) Intangible property - Intangible property is in this state based on the following:
A loan is located in this state if:
(A) More than fifty percent of the fair market value of the real and/or personal property securing the loan is in this state. An automobile loan is in this state if the vehicle is properly registered in this state. Other than for property that is subject to registered ownership, the determination of whether the real or personal property securing a loan is in this state must be made as of the time the original agreement was made, and any and all subsequent substitutions of collateral must be disregarded; or
(B) If (a)(iii)(A) of this subsection does not apply and the borrower is located in this state.
(iv) A borrower is located in this state if:
(A) The borrower is engaged in business and the borrower's commercial domicile is located in this state; or
(B) The borrower is not engaged in business and the borrower's billing address is located in this state.
(v) A credit card receivable is in this state if the billing address of the card holder is located in this state.
(vi) A nonnegotiable certificate of deposit is property in this state if the issuing bank is in this state.
(vii) Securities:
(A) A negotiable certificate of deposit is property in this state if the owner is located in this state.
(B) A municipal bond is property in this state if the owner is located in this state.
(b) Value of property.
(i) Property the taxpayer owns and uses in this state, other than loans and credit card receivables, is valued at its original cost basis.
Examples 4 and 5 assume the businesses depicted are not engaged in retailing activity. Therefore, the businesses' mere physical presence in Washington is not used as the basis for determining whether they have nexus with Washington.
Example 4. In January 2013, ABC Corp. bought Machinery for $65,000 for use in State X. On March 1, 2018, ABC Corp. brought that Machinery into Washington for the remainder of the year. ABC Corp. has nexus with Washington beginning on March 1, 2018, based on Machinery's original cost basis value of $65,000. The value is $65,000 even though the property has depreciated prior to entering the state.
(ii) Property the taxpayer rents and uses in this state is valued at eight times the net annual rental rate.
Example 5. In 2018, out-of-state Business X rented office space in Washington for $6,000 and had $7,000 of office furniture and equipment in Washington. Business X has nexus with Washington in 2018 because the value of the rented office space ($6,000 multiplied by eight, which is $48,000) plus the value of office furniture and equipment exceeds the $53,000 property threshold.
(iii) Loans and credit card receivables owned by the taxpayer are valued at their outstanding principal balance, without regard to any reserve for bad debts. However, if a loan or credit card receivable is actually charged off as a bad debt in whole or in part for federal income tax purposes (see 26 U.S.C. 166), the portion of the loan or credit card receivable charged off is deducted from the outstanding principal balance.
(c) Calculating property value. To determine whether the $53,000 property threshold has been exceeded, average the value of property in this state on the first and last day of the calendar year. The department may require the averaging of monthly values during the calendar year if reasonably required to properly reflect the average value of the taxpayer's property in this state throughout the taxable period. Examples 6 through 9 assume the businesses depicted are not engaged in retailing activity. Therefore, the businesses' mere physical presence in Washington is not used as the basis for determining whether they have nexus with Washington.
Example 6. Company Y has property in Washington valued at $90,000 on January 1st and $20,000 on December 31st. The value of property in Washington is $55,000 ((90,000 + 20,000)/2). Company Y exceeds the property threshold in this calendar year because it exceeds the $53,000 property threshold.
Example 7. Company A had no property located in Washington on January 1st or on December 31st. However, it brought $100,000 in property into Washington on January 15th and removed it from Washington on November 15th of that calendar year. In this situation, the department may compute the value of Company A's property over the period of time it was in the state during the calendar year in order to properly reflect its average value ($100,000 multiplied by ten (months) divided by 12 (months), which is $83,333). Company A exceeds the $53,000 property threshold in this calendar year.
Example 8. Company B had no property located in Washington on January 1st or on December 31st of 2018. However, it brought $100,000 in property into Washington on January 15th and removed it from Washington on February 15th of that calendar year. In this situation, the department may compute the value of Company B's property over the period of time it was in the state during the calendar year to properly reflect its average value, $8,333. ($100,000 multiplied by one (month) divided by 12 (months).) Company B also had no property located in Washington on January 1st or on December 31st of 2019. However, it brought $100,000 in property into Washington on January 15th and removed it from Washington on October 15th of that calendar year. For 2019, the average value of Company A's property is $75,000 ($100,000 multiplied by nine (months) divided by 12 (months)). Company B exceeds the property threshold in 2019 based on the average value of its property in Washington during 2019, but it did not exceed the property threshold based on the average value of its property in Washington during 2018.
Example 9. IT Co. is commercially domiciled in State X with Employee located in Washington who works from a home office. In 2018, IT Co. provided to Employee $5,000 of office supplies and $50,000 of equipment owned by IT Co. In 2019, the employee returned an unneeded portion of the equipment and IT Co. provided no other equipment to the employee. The cost of returned equipment was $25,000 of the total $50,000 of equipment. IT Co. is treated as having substantial nexus with Washington in both 2018 and 2019 based on the $53,000 property threshold because the value of its property in this state in 2018 ($55,000) exceeded $53,000. For 2018, IT Co. exceeded the threshold for the current year, and in 2019, IT Co. exceeded the threshold for the immediately preceding calendar year. If IT Co. does not exceed the property threshold in 2020, beginning in 2020 it will no longer have substantial nexus unless it exceeds another threshold.
(5) Payroll threshold. "Payroll" is the total compensation defined as gross income under 26 U.S.C. Sec. 61 (section 61 of the Internal Revenue Code of 1986), as of June 1, 2010, paid during the calendar year to employees and to third-party representatives who represent the taxpayer in interactions with the taxpayer's clients and includes sales commissions.
(a) Payroll compensation is received in this state if it is properly reportable in this state for unemployment compensation tax purposes, regardless of whether it was actually reported to this state.
Examples 10 and 11 assume the businesses depicted are not engaged in retailing activity. Therefore, the businesses' physical presence in Washington is not relevant in determining whether they have nexus with Washington.
Example 10. Company D is commercially domiciled in State X and has a single Employee whose pay of $80,000 2018 and 2019 was properly reportable in Washington for unemployment compensation purposes. Company D has substantial nexus with Washington during 2018 and 2019 because the compensation paid to Employee during the current or immediately preceding calendar year exceeds the $53,000 payroll threshold in both years. Company D will also have substantial nexus in 2020 because the payroll in the immediately preceding year (2019) exceeded the $53,000 payroll threshold.
Example 11. Assume the same facts as Example 9 except only 50% of Employee's pay for 2018 and 2019 was properly reportable in Washington for unemployment compensation purposes. Employee's Washington compensation of $40,000 does not exceed the $53,000 payroll threshold to establish substantial nexus with Washington during the current or immediately preceding calendar year, unless this amount exceeds 25% of total payroll compensation in the current or immediately preceding calendar year.
(b) Third-party representatives receive payroll compensation in this state if the service(s) performed occurs entirely or primarily within this state.
(6) Receipts threshold. The receipts threshold is exceeded if a taxpayer's receipts from apportionable and selling activities attributed and sourced, respectively, to Washington totaled more than $267,000 in the current or immediately preceding calendar year.
(a) All receipts from all apportionable and selling activities are accumulated to determine if the receipts threshold is satisfied. Receipts from activities other than apportionable and selling activities (e.g., extracting) are not used to determine if the receipts threshold has been satisfied.
(b) Apportionable receipts are attributed to Washington per WAC 458-20-19402 (general attribution), WAC 458-20-19403 (royalties), WAC 458-20-19404 (financial institutions, after 2015), and WAC 458-20-19404A (financial institutions, before 2016). Receipts from wholesale and retail sales are sourced to Washington in accordance with RCW 82.32.730.
Example 12. Company E is organized and commercially domiciled in State X. In a calendar year it had $50,000 in receipts from wholesale sales sourced to Washington in accordance with RCW 82.32.730, $50,000 in receipts from retail sales sourced to Washington in accordance with RCW 82.32.730, $50,000 in royalty receipts attributed to Washington per WAC 458-20-19403, and $150,000 in gross receipts from other apportionable activities attributed to Washington per WAC 458-20-19402. Company E has substantial nexus with Washington in the calendar year because its total of $300,000 in receipts from apportionable activities attributed to Washington and retail and wholesale sales sourced to Washington in a calendar year exceeded the $267,000 receipts threshold. It does not matter that a portion of the receipts were from apportionable activities that are subject to tax under different B&O tax classifications or that the receipts from apportionable activities or wholesaling or retailing activities did not separately exceed the receipts threshold. The receipts threshold is determined by the totality of the taxpayer's apportionable and selling activities in Washington.
(7) Application of 25% threshold.
(a) If, in the current or immediately preceding year, at least twenty-five percent of an out-of-state taxpayer's property, payroll, or receipts from apportionable and selling activities consisted of Washington property, Washington payroll, or Washington receipts, then the taxpayer has substantial nexus with Washington with respect to its apportionable and wholesaling activities.
(b) If, in the current or immediately preceding year, at least twenty-five percent of an out-of-state taxpayer's receipts from apportionable and selling activities consisted of Washington receipts, then the taxpayer also has substantial nexus with Washington with respect to its retailing activities.
(c) The twenty-five percent threshold is determined by dividing:
(i) The value of property located in Washington by the total value of taxpayer's property;
(ii) Payroll located in Washington by taxpayer's total payroll; or
(iii) Apportionable, wholesaling and retailing receipts attributed and sourced to Washington by total apportionable, wholesaling and retailing receipts.
Example 13. Company G is organized and commercially domiciled in State X. In 2018 it had $45,000 in property, $45,000 in payroll, and $240,000 in gross receipts attributed to Washington. In 2018, its total property was valued at $200,000; its worldwide payroll was $150,000; and its gross receipts, all from apportionable activities, totaled $2,000,000. Company G had twenty-two and a half percent of its property, thirty percent of its payroll, and twelve percent of its receipts attributed to Washington. With respect to its apportionable activities, Company G has substantial nexus with Washington in 2018 because at least twenty-five percent of its payroll in 2018 was located in Washington. Based on its payroll in 2018, Company G will also have substantial nexus in 2019.
(8) Application to local gross receipts business and occupations taxes. This rule does not apply to the nexus requirements for local gross receipts business and occupation taxes.
(9) Periods from September 1, 2015, through June 30, 2017.
(a) Apportionable and wholesaling activities. From September 1, 2015, through June 30, 2017, substantial nexus with Washington of a nonresident individual or a business entity organized and commercially domiciled outside this state was established with respect to that person's apportionable activities and wholesaling activities taxable under RCW 82.04.257 or 82.04.270 in a particular calendar year by measuring the person's payroll, property, and receipts only in the immediately preceding calendar year. Pursuant to RCW 82.04.220, in effect during this period, once established, substantial nexus continued through the following calendar year. See WAC 458-20-193 regarding the continuing application of the physical presence substantial nexus standard on wholesaling activity not subject to the economic nexus thresholds discussed in this rule.
(b) Retailing activities. Prior to July 1, 2017, a nonresident individual or a business entity organized and commercially domiciled outside of Washington was deemed to have substantial nexus with this state with respect to its retailing activity taxable under RCW 82.04.250(1) in a calendar year only if it had a physical presence in Washington in the calendar year. See WAC 458-20-193 regarding the continuing application of the physical presence substantial nexus standard on retailing activities.
(10) Periods from June 1, 2010, through August 31, 2015.
(a) Apportionable activities. From June 1, 2010, through August 31, 2015, substantial nexus with Washington of a nonresident individual or a business entity organized and commercially domiciled outside this state was established with respect to that person's apportionable activities in a particular calendar year by measuring the person's payroll, property, and receipts in that calendar year rather than by measuring the person's payroll, property, and receipts in the immediately preceding calendar year. Pursuant to RCW 82.04.220, in effect during this period, once established, substantial nexus continued through the following calendar year.
Example 14. Company E was organized and commercially domiciled in State X. In 2013 it had $275,000 in gross receipts from apportionable activities attributed to Washington per WAC 458-20-19402. Company E had substantial nexus with Washington in 2013 because its total receipts from apportionable activities attributed to Washington in that calendar year, $275,000, exceeded the receipts threshold. Therefore, Company E was subject to B&O taxes for the entire 2013 calendar year and its substantial nexus continued through at least the 2014 calendar year.
(b) Wholesaling activity. Prior to September 1, 2015, other than as a result of continuing substantial nexus pursuant to RCW 82.04.220, a nonresident individual or a business entity organized and commercially domiciled outside of Washington was deemed to have substantial nexus with this state with respect to its wholesaling activity in a calendar year only if it had a physical presence in Washington in the calendar year. See WAC 458-20-193 regarding the continuing application of the physical presence substantial nexus standard on wholesaling activity not subject to the economic nexus thresholds discussed in this rule.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-06-078, § 458-20-19401, filed 3/6/18, effective 4/6/18; WSR 16-13-040, § 458-20-19401, filed 6/7/16, effective 7/8/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.067, 82.04.460, and 82.04.462. WSR 15-04-004, § 458-20-19401, filed 1/22/15, effective 2/22/15. Statutory Authority: RCW 82.04.067, 82.32.300, and 82.01.060(2). WSR 13-22-044, § 458-20-19401, filed 10/31/13, effective 12/1/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 11-19-038, § 458-20-19401, filed 9/12/11, effective 10/13/11.]


PDF458-20-19402

Single factor receipts apportionment—Generally.

PART 1. INTRODUCTION.
(101) General. RCW 82.04.462 establishes the method for determining the portion of a person's apportionable income that is derived from business activities performed within Washington and subject to business and occupation (B&O) tax for periods after May 31, 2010. The express purpose of the apportionment framework set out in RCW 82.04.462 is to require businesses that "earn significant income from Washington residents from providing services" to "pay their fair share of the cost of services that this state renders and the infrastructure it provides." Section 101, chapter 23, 1st special session, 2010.
(102) Guide to this rule.
(a) This rule is divided into six parts, as follows:
1. Introduction.
2. Overview of single factor receipts apportionment.
3. How to attribute receipts.
4. Receipts factor.
5. How to determine Washington taxable income.
6. Reporting instructions.
(b)(i) Examples included in this rule identify a number of facts and then state a conclusion; they should be used only as a general guide. The tax results of all situations must be determined after a review of all the relevant facts and circumstances.
(ii) The examples in this rule assume all gross income received by the taxpayer is from engaging in apportionable activities.
(iii) When an example uses a particular reasonable method of proportionally attributing the benefit of a service, this does not preclude the existence of other reasonable methods of proportionally attributing the benefit of a service depending on the specific facts and circumstances of a taxpayer's situation.
(103) Scope of rule. This rule applies to the apportionment of income from engaging in apportionable activities, except:
(a) To the apportionment of income received by financial institutions and taxable under RCW 82.04.290; and
(b) To the attribution of royalty income from granting the right to use intangible property.
(104) Separate accounting and cost apportionment. Separate accounting and cost apportionment methods are not authorized for periods after May 31, 2010.
(105) Other rules. Taxpayers may also find helpful information in the following rules:
(a) WAC 458-20-19401 Substantial nexus. This rule explains the standards for substantial nexus in Washington beginning June 1, 2010.
(b) WAC 458-20-19403 Royalty receipts attribution. This rule describes the attribution of royalty income for the purposes of single factor receipts apportionment for periods after May 31, 2010.
(c) WAC 458-20-19404A and 458-20-19404 Single factor receipts apportionment—Financial institutions. These rules describe the application of single factor receipts apportionment to certain income of financial institutions, for tax liability incurred between June 1, 2010, and December 31, 2015, and on or after January 1, 2016, respectively.
(106) Definitions. The following definitions apply to this rule:
(a) "Apportionable activities" has the same meaning as used in WAC 458-20-19401 Minimum nexus thresholds for apportionable activities.
(b) "Apportionable income" means apportionable receipts less the deductions allowable under chapter 82.04 RCW.
(c) "Apportionable receipts" means gross income of the business from engaging in apportionable activities, including income received from apportionable activities attributed to locations outside this state. "Apportionable receipts" does not include amounts that are exempt under chapter 82.04 RCW.
(d) "Business activities tax" means a tax measured by the amount of, or economic results of, business activity conducted in a state. The term includes taxes measured in whole or in part on net income or gross income or receipts. The term also includes personal income taxes or corporate income taxes if the gross income from apportionable activities is included in the gross income subject to the personal income tax or corporate income tax, as the case may be. The term "business activities tax" does not include retail sales tax, use tax, or similar transaction taxes, imposed on the sale or acquisition of goods or services, whether or not labeled as a gross receipts tax or a tax imposed on the privilege of doing business.
(e) "Customer" means a person or entity to whom the taxpayer makes a sale, grants the right to use intangible property, or renders services or from whom the taxpayer otherwise directly or indirectly receives gross income of the business.
(i) If the taxpayer engages in apportionable activities for the benefit of a third party, the term "customer" means the third-party beneficiary.
Example 1. Assume a parent purchases apportionable tax preparation services for their child. The child is the customer for the purpose of determining where the benefit is received.
(ii) The department will consider the terms of the contract and all other books and records as a whole to determine whether a "third-party beneficiary" relationship exists. A third-party beneficiary exists if the contracting parties intend that the taxpayer will assume a direct obligation to the intended beneficiary at the time they enter into a contract. This element of "intent" is met if performance under the contract would necessarily and directly benefit the third party.
(iii) Where the taxpayer does not render services under a contract or otherwise does not provide the department with a contract, the department will proceed, in such manner as it may deem best, to obtain facts and information to identify the customer.
(f) "Reasonable method of proportionally attributing" means a method of determining where the benefit of an activity is received and where the receipts are attributed that is uniform, consistent, fair, and does not distort the taxpayer's market.
(g) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or any foreign country or political subdivision of a foreign country.
(h)(i) "Taxable in another state" means either:
(A) The taxpayer is subject to a business activities tax by another state on the taxpayer's income received from engaging in apportionable activity; or
(B) The taxpayer is not subject to a business activities tax by another state on the taxpayer's income received from engaging in apportionable activity, but the taxpayer meets the substantial nexus thresholds described in WAC 458-20-19401 for that state.
(ii) The determination of whether a taxpayer is taxable in a foreign country or political subdivision of a foreign country is made at the country or political subdivision level.
Example 2. Assume Taxpayer A is subject to a business activity tax in State X of Mexico (e.g., Taxpayer pays tax to State X), but nowhere else in Mexico. Also, assume that Taxpayer A is not subject to any national business activity tax in Mexico and does not meet the substantial nexus thresholds described in WAC 458-20-19401 for Mexico as a whole. In this case, Taxpayer is "taxable in another state," namely the Mexican state of State X, but not taxable in any other portion or any other state of Mexico.
Example 3. Assume Taxpayer B is not subject to any business activity taxes in Mexico, but satisfies the substantial nexus thresholds described in WAC 458-20-19401 for Mexico as a whole. Taxpayer B is "taxable in another state," namely the foreign country of Mexico.
PART 2. OVERVIEW OF SINGLE FACTOR RECEIPTS APPORTIONMENT.
(201) Single factor receipts apportionment generally.
(a) Persons, other than financial institutions, that have substantial nexus with Washington as specified in WAC 458-20-19401 and earn apportionable income that is also taxable in another state must use the apportionment formula described in this rule to determine their taxable income from apportionable activities for B&O tax purposes. The apportionment formula that applies to financial institutions is described in WAC 458-20-19404 and 458-20-19404A.
(b) Taxable income is determined by multiplying apportionable income from each apportionable activity by the receipts factor for that apportionable activity.
This formula is:
(Taxable
income)
=
(Apportionable income)
x
(Receipts
factor)
See Part 4 of this rule for a discussion of the receipts factor.
(202) Tax year. The receipts factor applies to each tax year. A tax year is the calendar year, unless the taxpayer has specific permission from the department to use another period. (RCW 82.32.270.) For the purposes of this rule, "tax year" and "calendar year" have the same meaning.
PART 3. HOW TO ATTRIBUTE RECEIPTS.
(301) Attribution of receipts generally. Except as specifically provided for in WAC 458-20-19403 for the attribution of apportionable royalty receipts, this Part 3 explains how to attribute apportionable receipts (the attribution method). Receipts are attributed to states based on a cascading method or series of steps. The steps in this cascading series are:
(a) Gross income of the business is attributed to a specific state(s) where the customer received the benefit of the taxpayer's service (see subsections (303) through (304) of this rule for an explanation and examples of the benefit of the service):
(i) If a taxpayer can reasonably determine the amount of a specific apportionable receipt that relates to a specific benefit of the services received in a state, that specific apportionable receipt is attributable to the state in which the benefit is received (see Example 12 in this rule).
(ii) If a taxpayer is unable to attribute an apportionable receipt under (a)(i) of this subsection, and a customer receives the benefit of the taxpayer's services in this and one or more other states and the amount of gross income of the business that was received by the taxpayer in return for the services received by the customer in this state can be reasonably determined by the taxpayer, such amount of gross income must be attributed to this state. This may be shown by application of a reasonable method of proportionally attributing the benefit among states. The result determines the receipts attributed to each state. Under certain situations, the use of data based on another attribution method specified in subsection (301)(c) through (g) of this rule may also be a reasonable method of proportionally attributing receipts among states (see Examples 5 and 6 in this rule).
(b) If a taxpayer is unable to separately determine or use a reasonable method of proportionally attributing the benefit of the services in specific states under subsection (301)(a) of this rule, and the customer received the benefit of the service in multiple states, the apportionable receipt is attributed to the state in which the customer primarily received the benefit of the service. Primarily means, in this case, more than 50 percent.
(c) If the taxpayer is unable to attribute an apportionable receipt under subsection (301)(a) or (b) of this rule, the apportionable receipt must be attributed to the state from which the customer ordered the service. Subsection (306) of this rule explains the meaning of "unable to attribute."
(d) If the taxpayer is unable to attribute an apportionable receipt under subsection (301)(a), (b), or (c) of this rule, the apportionable receipt must be attributed to the state to which the billing statements or invoices are sent to the customer by the taxpayer.
(e) If the taxpayer is unable to attribute an apportionable receipt under subsection (301)(a), (b), (c), or (d) of this rule, the apportionable receipt must be attributed to the state from which the customer sends payment to the taxpayer.
(f) If the taxpayer is unable to attribute an apportionable receipt under subsection (301)(a), (b), (c), (d), or (e) of this rule, the apportionable receipt must be attributed to the state where the customer is located as indicated by the customer's address:
(i) Shown in the taxpayer's business records maintained in the regular course of business; or
(ii) Obtained during consummation of the sale or the negotiation of the contract, including any address of a customer's payment instrument when readily available to the taxpayer and no other address is available.
(g) If the taxpayer is unable to attribute an apportionable receipt under subsection (301)(a), (b), (c), (d), (e), or (f) of this rule, the apportionable receipt must be attributed to the commercial domicile of the taxpayer.
(302) Application of cascading steps.
(a) The department expects that most taxpayers will be able to attribute apportionable receipts based on subsection (301)(a) of this rule because the taxpayer will either have access to books and records that contain sufficient information from which to determine where the customer actually received the benefit of the taxpayer's service, or will be able to use a "reasonable method of proportionally attributing receipts" that fairly apportions, and does not distort the apportionment of, where the customer received the benefit of the taxpayer's service.
(b) If a taxpayer is affiliated with another entity that has information indicating where the customer received the benefit of the taxpayer's service, the department will presume, unless the facts indicate otherwise, that the taxpayer is able to access that information from the affiliated entity (see Example 20 in this rule).
(c)(i) Neither the taxpayer nor the department may use an attribution method that unfairly attributes, or distorts the apportionment of, the taxpayer's apportionable receipts.
(ii) A taxpayer that has Washington apportionable receipts must keep all suitable books and records that are necessary to demonstrate that the attribution method used fairly apportions, and does not distort, the taxpayer's apportionable receipts. Such records must support the attribution method used and be provided upon request from the department.
(d) Except as otherwise provided in this rule, the taxpayer must use the same attribution method for all apportionable receipts in a tax year from the same service.
Example 4. Engineering Co. negotiates with Phone Manufacturer 1 and Phone Manufacturer 2 to provide design services for both manufacturers' upcoming lines of cell phones. Engineering Co. must use the same attribution method for its apportionable receipts from Phone Manufacturer 1 and Phone Manufacturer 2 for design services, because Engineering Co. is providing the same service to both customers.
Engineering Co. separately charges Phone Manufacturer 1 to solicit sales of Phone Manufacturer 1's phones on a commissioned sales basis. Engineering Co. would separately determine the attribution methods for its apportionable receipts from design services and commissioned sales for Phone Manufacturer 1, even if both services are taxable under the same B&O tax classification, because the design services and commissioned sales are separate services.
Example 5. Assume Law Firm has thousands of charges to clients, and that Law Firm can show it is not commercially reasonable for Law Firm to track each charge to each client to determine where the benefit related to each service is received. Assume the scope of Law Firm's practice is such that it is reasonable to assume that the benefits of Law Firm's services are received at the location of the customer as reflected by the customer's billing address. Under these circumstances, Law Firm can use the billing addresses of each client as a reasonable method of proportionally attributing the benefit of its services.
Example 6. Same facts as Example 5 except, Law Firm has a client that represents a significant portion of its revenue from legal services (five percent for purposes of this example). Law Firm has records substantiating that the billing address of this client is unrelated to any of the services provided. In this case, using the billing address of this client would not fairly relate to where the customer received the benefit of the services. Using the billing address for this client to determine where the benefit is received would not fairly represent, or distort, the apportionment of Law Firm's receipts. Therefore, Law Firm would need to evaluate the specific services provided to that client to determine where the benefits of those services are received. Similarly, use of billing address would not be a reasonable method of proportionally attributing the benefit of Law Firm's services for any other clients representing five percent or more of Law Firm's revenue from legal services. Law Firm would need to evaluate the specific services provided to these clients to determine where the benefits are received. However, Law Firm may use billing addresses to attribute the income received from other clients representing less than five percent of Law Firm's legal service revenue if appropriate.
Example 7. Assume Taxpayer R attributes an apportionable receipt based on its customer's billing address, using subsection (301)(d) of this rule, and the billing address is a P.O. Box located in another state. Taxpayer R also knows that mail delivered to this P.O. Box is automatically forwarded to the customer's actual location. In this case, use of the billing address is not allowed because it would not fairly apportion, or would distort the apportionment of, Taxpayer R's receipts.
(303) Benefit of the service explained. The first two cascading steps (subsection (301)(a) and (b) of this rule) used to attribute apportionable receipts to a state are based on where the taxpayer's customer receives the benefit of the service. This subsection explains the framework for determining where the customer receives the benefit of a service.
(a)(i) If the taxpayer's service relates to real property, then the customer receives the benefit where the real property is located.
(ii) The following is a nonexclusive list of services that relate to real property:
(A) Architectural;
(B) Surveying;
(C) Janitorial;
(D) Security;
(E) Appraisals; and
(F) Real estate brokerage.
(b) (Reserved.)
(c) If subsection (303)(a) of this rule does not apply, the taxpayer's service is provided to a customer engaged in business, and the service relates to the customer's business activities, then the customer receives the benefit of the service where the customer's related business activities occur.
A customer's related business activities will generally occur either in the customer's market or at the customer's business location(s).
(i) Customer's market. The determination of a customer's market depends on the customer's facts and circumstances. The customer's related business activities occur in the customer's market if the taxpayer's service is:
(A) Promoting the customer's products (goods and services);
(B) Engaging in or completing sales of the customer's products;
(C) Obtaining or facilitating payment of amounts owed to the customer from the sale of its products; or
(D) Establishing or maintaining the customer's market. In determining whether a service is establishing or maintaining the customer's market, the department will consider the nonexclusive list of activities provided by WAC 458-20-193 (102)(d)(vii), but for purposes of this consideration, will replace any references to "this state" or "Washington" with "any state."
(ii) Customer's business location(s). The customer's related business activities occur at the customer's business location(s) if subsection (303)(c)(i) of this rule does not apply.
(iii) The customer's business location(s) is determined as follows:
(A) If the taxpayer's service requires the customer to be physically present, the customer's business location(s) is where the customer is located when the taxpayer provides the service.
(B) If the taxpayer's service does not require the customer to be physically present, and the taxpayer's service relates to a specific, known business location(s), the customer's business location(s) is that specific, known business location(s).
(C) If subsection (303)(c)(iii)(A) and (B) of this rule do not apply, then the customer's business location is the customer's principal place of business or commercial domicile.
(iv) The following is a nonexclusive list of business-related services:
(A) Designing, appraisal, inspection, or testing of tangible personal property;
(B) Developing a business management plan;
(C) Commission sales (other than sales of real property);
(D) Debt collection services;
(E) Legal and accounting services not specific to real property; and
(F) Advertising services.
(d) If subsection (303)(a) and (c) of this rule do not apply, then the location(s) where the customer receives the benefit of the service is determined as follows:
(i) If the taxpayer's service requires the customer to be physically present, then the customer receives the benefit of the service where the customer is located when the taxpayer performs the service. The following is a nonexclusive list of services that require the customer to be physically present:
(A) Medical examinations;
(B) Hospital stays;
(C) Haircuts; and
(D) Massage services.
(ii) If the taxpayer's service does not require the customer to be physically present, and the taxpayer's service relates to a specific, known location(s), then the customer receives the benefit at that location(s). The following is a nonexclusive list of services related to a specific, known location(s):
(A) Wedding planning;
(B) Receptions;
(C) Party planning;
(D) Travel agent and tour operator services (see Example 40); and
(E) Preparing or filing state and local tax returns (see Example 39).
(iii) If subsection (303)(d)(i) and (ii) of this rule do not apply, the customer receives the benefit of the service where the customer resides. The following is a nonexclusive list of services whose benefit is received at the customer's residence:
(A) Drafting a will (see Example 41);
(B) Preparing or filing federal tax returns (see Examples 39 and 42);
(C) Selling investments; and
(D) Blood tests (not blood drawing).
(e) Special rule for extension of credit. See subsection (305) of this rule for special rules attributing income related to loans (secured and unsecured) and credit cards that is received by persons who are not financial institutions as defined in WAC 458-20-19404.
(304) Examples of the application of the benefit of service analysis and reasonable methods of proportionally attributing receipts.
(a) Services related to real property:
Example 8. Architect drafts plans for a building to be built in Washington. Architect's services relate to real property, which is located in Washington, therefore the customer receives the benefit of that service in Washington at the location of the real property. Architect's receipts for this service are solely attributed to Washington because the customer receives the entire benefit in Washington.
Example 9. Franchisor hires Taxpayer, an architect, to create a design of a standardized building that will be used at four locations in Washington and two locations in Oregon. Taxpayer's services relate to real property at those six locations, therefore the customer receives the benefit of the service at the four Washington locations and the two Oregon locations. Taxpayer will attribute 2/3 (4 of 6 sites) of the receipts for this service to Washington and 1/3 (2 of 6 sites) of the receipts to Oregon.
Example 10. Assume the same facts as Example 9 except Franchisor will use the same design in all 50 states for all its franchisee's locations. Taxpayer and Franchisor do not know at the time the service is provided (and cannot reasonably estimate) how many franchise locations will exist in each state. If there is no reasonable means of proportionally attributing receipts at the time the services are performed, and it is clear that no state will have a majority of the franchise locations, the apportionable receipts must be attributed following the steps in subsection (301) (c) through (g) of this rule.
Example 11. Real estate broker located in Florida receives a commission for arranging the sale of real property located in Washington. The real estate broker's service is related to the real property, therefore the customer receives the benefit in Washington, where the real property is located, and the commission income is attributed to Washington.
(b) Reserved.
(c) Services related to customer's business activities. The examples in this subsection assume that the customer is engaged in business and the services relate to the customer's business activities.
(i) The following are examples where the customer's related business activities occur in the customer's market.
Example 12. Taxpayer, a commissioned salesperson, sells tangible personal property (100 widgets) for Distributor to XYZ Company for delivery to Spokane. Taxpayer's service is engaging in Distributor's product sales. Distributor receives the benefit of Taxpayer's service in its market, which in this case is Spokane, the location where XYZ Company receives the widgets. Taxpayer will attribute the commission income from this sale to Washington.
Example 13. Same facts as in Example 12, but 50 of the widgets are to be delivered to Spokane, 25 to Idaho, and 25 to Oregon. In this case, Distributor receives the benefit of Taxpayer's services in all three states. Taxpayer will attribute the receipts (commission income) from this sale 50% to Washington, 25% to Idaho, and 25% to Oregon, the locations where XYZ receives the widgets. It is assumed that the commission income is not proportionally different from percentage of widgets delivered into each state.
Example 14. Debt Collector provides debt collection services to ABC. Debt Collector's service is obtaining and facilitating amounts owed to ABC from the sale of ABC's products. ABC receives the benefit of Debt Collector's service in ABC's market. It is reasonable to assume that ABC's market is where the debtors are located in various states. If Debt Collector is able to attribute specific receipts to a specific debtor, then the receipt is attributed to where the debtor is located.
Example 15. Same facts as Example 14, except Debt Collector is paid a lump sum amount and is unable to attribute specific benefits with specific debtors. In this case, a reasonable method of proportionally attributing benefits/receipts should be employed. Depending on Debt Collector's specific facts and circumstances, a reasonable method of proportionally attributing benefits/receipts could be: Relative number of debtors in each state; relative debt actually collected from debtors in each state; the relative amount of debt owed by debtors in each state; or another method that fairly apportions, and does not distort the apportionment of, Debt Collector's receipts.
Example 16. Call Center provides "customer service" services to Retailer who has customers in all 50 states. Call Center handles inquiries from Retailer's customers on how to install and use Retailer's products, and troubleshoots customer issues related to the products sold. Call Center also informs Retailer's customers about package deals and other discounts on Retailer's new lines of products. Call Center's services are promoting Retailer's products by incentivizing customers to make additional purchases, and establishing or maintaining Retailer's market by supporting existing customers. Retailer receives the benefit of Call Center's services in its market, which in this case is all 50 states. Call Center has offices in Iowa and Alabama that answer questions about Retailer's products. Call Center records Retailer's customers' calls by area code. Call Center may attribute receipts received from Retailer based on the number of calls from area codes assigned to each state. This would be a reasonable method of proportionally attributing receipts notwithstanding the fact that mobile phone numbers and related area codes may not exactly reflect the physical location of the customer in all cases.
Example 17. Taxpayer provides internet advertising services to national retail chains, regional businesses, businesses with a single location, and businesses that operate solely over the internet. Taxpayer's services are promoting customers' products. Generally, each customer receives the benefit of Taxpayer's advertising services in each customer's market. Taxpayer determines, based on its books and records, where each customer receives the benefit in its market. If Taxpayer cannot obtain this information, it would then use a reasonable method of proportionally attributing the benefit of its service to the customer's market. Depending on what products or services Taxpayer's customers are providing, the use of relative internet connections in the customer's market based on Federal Communications Commission (FCC) data may be a reasonable method of proportionally attributing the benefit of Taxpayer's services to customers' markets.
Example 18. Oregon Newspaper sells newspaper advertising to Merlin's Potion Shop. Merlin's only makes over-the-counter sales from its single location in Vancouver, Washington. Oregon Newspaper is promoting Merlin's Potion Shop's products. Merlin's Potion Shop receives the benefit of Oregon Newspaper's advertising services in its market in Washington, where it makes sales to its customers. In this case Oregon Newspaper will report 100% of its receipts from Merlin's to Washington.
Example 19. Recording Company provides content development services for its customer, Licensing Company. Recording Company's content development services consist of recording and developing a live television program, and selling this program to Licensing Company. Before Recording Company records and develops the program, Licensing Company has already sold the broadcasting rights for this program to third-party broadcasters. Licensing Company does not conduct any further development of its own on the television program. Recording Company's service is completing Licensing Company's sales. Licensing Company receives the benefit of Recording Company's service in Licensing Company's market. In this case Licensing Company's market is where the broadcasters use Licensing Company's rights to the television program.
Example 20. Marketer A contracts with Seller to conduct a "marketing campaign" service for Seller. Marketer A's marketing campaign consists of researching population groups most likely to purchase Seller's products, developing targeted promotional materials, and distributing those materials to the identified population groups via mail and social media. Marketer A subcontracts with Marketer B, for Marketer B to conduct the marketing campaign service.
Marketer A's services are promoting Seller's products. Seller receives the benefit of Marketer A's services in Seller's market, where Seller sells the products being promoted by Marketer A's campaign.
Marketer B's services are completing Marketer A's product sales. By conducting the marketing campaign for Marketer A, Marketer B is fulfilling Marketer A's contractual obligations to Seller. Marketer A receives the benefit of Marketer B's services in Marketer A's market. In this case, Marketer A's market is the same as Seller's market, where Seller receives the benefit of Marketer A's service.
Marketer B will attribute its receipts from Marketer A to Seller's market using information supplied by Marketer A about Seller's market. If Marketer A and Marketer B are affiliated, the presumption is that Marketer A should be able to provide to Marketer B the information about Seller's market.
Example 21. Investment Manager contracts with a mutual fund company to manage a fund. Investment Manager receives a fee from the mutual fund company for managing the fund based on the value of the assets in the fund on particular days. Responsibilities in managing the fund consist of: Helping the fund execute business strategies through daily management of the fund, overseeing the buying and selling of fund holdings, and investor servicing. Investment Manager determines what assets the fund will buy with investors' money. The fund manager is responsible for making sure the portfolio is earning the expected return, which is a significant consideration when investors decide which fund to invest their money in. The mutual fund discloses to investors in the fund's prospectus statement who the Investment Manager is and the management fees paid. Investment Manager knows or should know the identity of the investors in the fund and their mailing addresses. Investment Manager's service is establishing or maintaining the mutual fund company's market. In this case, it is reasonable to assume that the mutual fund company's market is where the investors are located. Investment Manager will attribute its receipts from managing the fund to those investor locations.
Example 22. Staffing Co. contracts with ISP Inc., an internet service provider, to provide supplemental marketing staff at ISP's sole office in State A. The supplemental marketing staff make calls to current and prospective customers of ISP, offering additional or enhanced services such as faster internet speed, ad blocking, and video conferencing. ISP sells internet services in States A, B, and C. The activities of Staffing Co.'s supplemental marketing staff are promoting ISP's products. ISP receives the benefit of Staffing Co.'s service in ISP's market, which in this case is States A, B, and C.
Example 23. Management Co. provides customer support services to Customer A. Customer A's only physical location is its office in State Z. Customer A makes sales throughout the United States. Per the contract between Management Co. and Customer A, customer support services provided by Management Co. consist of operating a call center to handle Customer A's calls and emails related to services and sales. Management Co.'s customer support services are establishing and maintaining Customer A's market. Customer A receives the benefit of Management Co.'s service in Customer A's market throughout the United States.
(ii) The following are examples where the customer's related business activities occur at the customer's business location(s). In these examples, the taxpayer's service is not promoting the customer's products, is not engaging in or completing sales of the customer's products, is not obtaining or facilitating payment of amounts owed to the customer from the sale of its products, and is not establishing or maintaining the customer's market.
Example 24. Same facts as Example 22, except Staffing Co. provides supplemental human resources staff to support business operations at ISP Inc.'s office in State A. Some of the supplemental staff work remotely, while others work at ISP's office. The supplemental human resources staff's work consists of recruiting and onboarding employees, facilitating communications between employees and management, managing employee benefits, and handling internal disciplinary actions. ISP receives the benefit of Staffing Co.'s service at ISP's business location(s). ISP's only office location is in State A. In this case the staffing service does not require ISP to be physically present, but relates to a specific, known business location, ISP's office in State A. ISP receives the benefit of Staffing Co.'s service in State A.
Example 25. Same facts as Example 23, except Management Co. also provides network support services to Customer A. Per the contract between Management Co. and Customer A, network support services provided by Management Co. consist of providing administrative, technical, and engineering support staff to develop, implement, and maintain all internal software elements for Customer A. Customer A's internal software allows Customer A's employees to perform their job duties, and includes operating systems, recordkeeping, filesharing, data and antivirus protection, and timekeeping software. Customer A receives the benefit of Management Co.'s service at Customer A's business location(s). In this case the network support services do not require Management Co. to be physically present, but relate to a specific, known business location, Customer A's physical location in State Z. Customer A receives the benefit of Management Co.'s network support services in State Z.
Example 26. Big Manufacturing hires an engineer to design a tool that will only be used in a factory located in Brewster, Washington. Big Manufacturing receives the benefit of the engineer's services at its business location. In this case the design service does not require Big Manufacturing to be physically present, but relates to a specific, known business location, the single location in Washington where Big Manufacturing intends to use the tool. One hundred percent of engineer's receipts from this service must be attributed to Washington.
Example 27. The same facts as in Example 26, except Big Manufacturing will use the tool equally in factories located in Brewster and in Kapa'a, Hawai'i. Big Manufacturing receives the benefit of the service at its business locations equally in two states. As a result, a reasonable method of proportionally attributing receipts would be to attribute 1/2 of the receipts to each state.
Example 28. Training Company provides training to Customer's employees on how to operate a specific piece of equipment used solely in Washington. Customer receives the benefit of the service at its business location(s). In this case the training service does not require the customer to be physically present, but relates to a specific, known business location in Washington, where employees use the equipment. Training Company will attribute 100% of its receipts received from Customer to its business location in Washington.
Example 29. Training Company provides manufacturing process improvement training to Customer's employees who are all located in State A. The training is provided from State B. Customer receives the benefit of Training Company's service at Customer's business location(s). In this case the training service does not require Customer's employees to be physically present, but it relates to the specific, known business location at Customer's office in State A, where the employees improve the manufacturing process. Training Company must attribute the apportionable receipts to State A where Customer solely receives the benefit of Training Company's service.
Example 30. Same facts as Example 29, except the training is provided for employees from several states and Training Company knows where each employee is assigned to work. Training Company's services relate to Customer's specific, known business locations where the employees are assigned to work in those several states, which is presumed to be where the employees use the training. Attributing receipts from the training based on where the employees are assigned to work is a reasonable method of proportionally attributing the receipts income.
Example 31. Training Company provides sales strategy training to Retailer's sales employees who are all located at Retailer's office in State A but make sales to Retailer's customers in all 50 states. The training is provided from State B via a combination of in-person and virtual attendance. Retailer receives the benefit of Training Company's service at Retailer's business location(s). In this case the training service does not require Retailer's employees to be physically present, but it relates to the specific, known business location at Retailer's office in State A, where Retailer's employees are assigned to work. This location is presumed to be where Retailer's sales employees use their improved skill sets from the training. Retailer receives the benefit of Training Company's service at Retailer's business location in State A.
Example 32. Manufacturer hires Law Firm to defend Manufacturer in a class action product liability lawsuit involving Manufacturer's Widgets. Manufacturer's principal place of business is in Washington. Manufacturer receives the benefit of Law Firm's service at Manufacturer's business location(s). In this case, Law Firm's service does not require Manufacturer to be physically present, and does not relate to a specific, known business location(s). Manufacturer's business location is its principal place of business or commercial domicile in Washington, where Manufacturer receives the benefit of Law Firm's services.
Example 33. Game Publisher hires Developer to perform software development services in connection with a new computer game that Game Publisher will release in the following year. Under the contract between Game Publisher and Developer, Developer's primary duty is to deliver a "beta" version of the computer game that Game Publisher will use for further development. Developer performs all of its software development activities at its office in Seattle. After Developer delivers a beta version of the game, Game Publisher will perform additional development on the game at its locations in California. Game Publisher receives the benefit of Developer's service at Game Publisher's business location(s). In this case Developer's service does not require Game Publisher to be physically present, but relates to the specific, known business locations in California where Game Publisher performs additional development. Developer will attribute 100% of its receipts from Game Publisher to California where Game Publisher receives the benefit of the service.
Example 34. Game Publisher received consumer complaints about its game console overheating and contracts with QA Company to determine the cause of and a possible solution to the problem. Under the contract, QA Company will receive compensation for providing testing services specific to the game console. Game Publisher will use QA Company's findings and recommendation to determine how to repair the video game console at its manufacturing location in California. Game Publisher receives the benefit of QA Company's service at Game Publisher's business location(s). In this case QA Company's service does not require Game Publisher to be physically present, but relates to the specific, known business location(s) in California where Game Publisher will perform additional development to resolve the issue. QA Company will attribute 100% of its receipts from Game Publisher to California where Game Publisher receives the benefit of the service.
Example 35. Company A provides human resources services to Racko, Inc. which has three offices that use those services in Washington, Oregon, and Idaho. Racko sells widgets and has customers for its widgets in all 50 states. Racko receives the benefit of Company A's services at Racko's business locations. In this case Company A's services do not require Racko's employees to be physically present, but relate to the specific, known business locations of Racko's offices in Washington, Oregon, and Idaho. Assuming that each office is approximately the same size and uses the services to approximately the same extent, then attributing 1/3 of the receipts to each of the states in which Racko has locations using the services is a reasonable method of proportionally attributing Company A's receipts from Racko.
Example 36. Director serves on the board of directors for DEF, Inc. Director's services relate to the general management of DEF. DEF is Director's customer and receives the benefit of Director's services at DEF's business location(s). In this case Director's services do not require any employees of DEF to be physically present, and do not relate to any specific, known business location. DEF's business location is its principal place of business or commercial domicile. Director must attribute the receipts earned from Director's services to DEF to DEF's principal place of business or commercial domicile.
Example 37. Insurance Company hires Law Firm to provide insurance defense services. Law Firm's insurance defense services involve representing one of Insurance Company's policyholders to minimize liability in a third-party lawsuit claiming damages against that policyholder. Insurance Company receives the benefit of Law Firm's service at Insurance Company's business location(s). In this case, Law Firm's service does not require Insurance Company to be physically present. However, Law Firm's service relates to a specific, known business location(s) that can be tied to its representation of the specific policyholder. Law Firm knows or should know the jurisdiction where the third party files its lawsuit against the policyholder, or where settlement occurs. This jurisdiction is the business location where Law Firm represents the policyholder and minimizes Insurance Company's liability. Insurance Company receives the benefit of Law Firm's service at this jurisdiction where the third party files its lawsuit, or where settlement occurs.
(d) Services not related to real property and either provided to customers not engaged in business or unrelated to the customer's business activities.
Example 38. A Washington resident travels to California for a medical procedure. Because the Washington resident must be physically present in California, the Washington resident receives the benefit of the service in California. The service provider must attribute its income from the procedure to California.
Example 39. Washington accountant prepares a Nevada couple's Arizona and Oregon state income tax returns as well as their federal income tax return. The benefit of the accountant's service associated with the state income tax returns is attributed to Arizona and Oregon because these returns relate to specific locations (states). The benefit associated with the federal income tax return is attributed to the couple's residence. The fees for the state tax returns are attributed to Arizona and Oregon, respectively, and the fee for the federal income tax return is attributed to Nevada.
Example 40. Tour Operator provides cruises through Washington's San Juan Islands for four days and Victoria, British Columbia for one day. Tour Operator's customers receive the benefit of Tour Operator's services where the tour occurs. Tour Operator may use a reasonable method of proportionally attributing the benefit to determine that its customers receive 80% of the benefit in Washington and 20% outside of Washington. Tour Operator must attribute 80% of apportionable receipts to Washington and 20% to British Columbia.
Example 41. A Washington couple hires a Washington attorney to prepare a last will and testament for Daughter who lives in California. Daughter is a third-party beneficiary and receives the benefit of the attorney's services in California because that is where Daughter lives. Washington Attorney must attribute the fee to California.
Example 42. A Washington couple hires a California accountant to prepare their joint federal income tax return. Because the couple does not have to be physically present for the accountant to perform services and services are not related to a specific location, the Washington couple receives the benefit of the accountant's services at their residence in Washington. California accountant must attribute its fee for this service to Washington.
Example 43. An Arizona resident retains a Washington stockbroker to handle its investments. The stockbroker receives orders from the client and executes trades of securities on the New York Stock Exchange. Because (a) the Arizona resident is not investing as part of a business; (b) the activity does not relate to real property; (c) the client does not need to be physically present for the stockbroker to perform its services; and (d) the services are not related to a specific location, the client receives the benefit of the services at client's place of residence. Washington stockbroker must attribute the fee to Arizona.
(305) Special rules related to extending credit performed by nonfinancial institutions. Businesses not included in the definition of a financial institution under WAC 458-20-19404 that provide services related to the extension of credit must attribute their income from such activities as follows:
(a) Activities related to extending credit where real property secures the debt. Such activities include, but are not limited to, servicing loans, making loans subject to deeds of trust or mortgages (including any fees in the nature of interest related to the loan), and buying and selling loans. Apportionable receipts from these activities are attributed in the same manner as a financial institution attributes these apportionable receipts under WAC 458-20-19404.
(b) Activities related to credit cards. Such activities include, but are not limited to, issuing credit cards, servicing, and billing. Apportionable receipts from these activities are attributed to the billing address of the card holder.
(c) Other activities related to extending credit where real property does not secure the debt. Such activities include, but are not limited to, servicing loans, making loans (including any fees related to such loans), and buying and selling loans. Apportionable receipts from these activities are attributed in the same manner a financial institution attributes income under WAC 458-20-19404.
(d) All other apportionable receipts. All other apportionable receipts from such businesses are attributed using subsections (301) through (304) of this rule or WAC 458-20-19403.
(306) What does "unable to attribute" mean? A taxpayer is "unable to attribute" apportionable receipts when the taxpayer has no commercially reasonable means to acquire the information necessary to attribute the apportionable receipts. Cost and time may be considered to determine whether a taxpayer has no commercially reasonable means to acquire the information necessary to attribute apportionable receipts. See Examples 44 through 46 below, as well as Examples 5 through 7 in this rule.
Example 44. The marketing office of ZYX LLC has information that can easily be used to determine a reasonable proportional attribution of receipts from providing marketing services to customers, but does not provide this information to the accounting office preparing the tax returns. ZYX must use the information maintained by the marketing office to attribute its receipts.
Example 45. CBA, Inc. is entitled to receive information from an affiliate or unrelated third party which it could use to determine where the customer receives the benefit of CBA's services, but chooses not to obtain that information. CBA must use the information maintained by the affiliate or unrelated third party to attribute its apportionable receipts.
Example 46. Same facts as Example 45, except that the information is raw data that must be formatted and otherwise processed at a cost that exceeds a reasonable estimate of the possible difference in the amount of tax CBA would owe if it used another attribution method authorized in subsection (301) (c) through (g) of this rule. In this case, it is not commercially reasonable for CBA to use this data to determine where to attribute its income.
PART 4. RECEIPTS FACTOR.
(401) General. The receipts factor is a fraction that applies to apportionable income for each calendar year. Taxpayers must calculate a separate receipts factor for each apportionable activity ( B&O tax classification) engaged in.
(402) Receipts factor calculation. The receipts factor is: Washington-attributed apportionable receipts divided by world-wide apportionable receipts less throw-out income (see subsection (403) of this section). The receipts factor expressed algebraically is:
(Receipts
factor)
=
(Washington apportionable receipts)
((Worldwide apportionable receipts) - (Throw-out income))
(a) The numerator of the receipts factor is: The total apportionable receipts attributable to Washington during the calendar year from engaging in the apportionable activity.
(b) The denominator of the receipts factor is: The total (worldwide, including Washington) apportionable receipts from engaging in the apportionable activity during the calendar year, less throw-out income.
Example 47. NOP, Inc. has $400,000 of receipts attributed to Washington and $1,000,000 of worldwide receipts. Assuming that there is no throw-out income, NOP's receipts factor is 40% (400,000/1,000,000).
(c) In the very rare situation where the receipts factor (after reducing the denominator by the throw-out income) is zero divided by zero, the receipts factor is deemed to be zero.
(403) Throw-out income. Throw-out income includes all apportionable receipts attributed to states where the taxpayer:
(a) Is not taxable (see subsection (106) of this rule); and
(b) At least part of the activity of the taxpayer related to the throw-out income is performed in Washington.
Example 48. During 2019, XYZ Corp. performs all services in Washington and has apportionable receipts attributed using the criteria listed in subsections (301) through (305) of this rule or WAC 458-20-19403 as follows: Washington $500,000; Idaho $50,000; Oregon $100,000; and California $300,000. XYZ is subject to Oregon and Idaho corporate income tax, but does not owe any California business activities taxes. XYZ does not have any throw-out income because Oregon and Idaho impose a business activities tax on its activities and it is deemed to be taxable in California because it satisfies the minimum nexus standards for 2019 explained in WAC 458-20-19401. XYZ's receipts factor is: 500,000/950,000 or 52.63%. See current minimum nexus standard for periods beginning January 1, 2020.
Example 49. Same facts as Example 48 except Idaho does not impose any tax on XYZ. The $50,000 attributed to Idaho is throw-out income that is excluded from the denominator because: XYZ is not subject to Idaho business activities taxes, does not have substantial nexus with Idaho under Washington standards, and performs in Washington at least part of the activities related to the receipts attributed to Idaho. The receipts factor is 500,000/900,000 or 55.56%.
Example 50. The same facts as Example 49 except XYZ performs no activities in Washington related to the $50,000 attributed to Idaho. In this situation, the $50,000 is not throw-out income and remains in the denominator. The receipts factor is: 500,000/950,000 or 52.63%.
PART 5. HOW TO DETERMINE WASHINGTON TAXABLE INCOME.
(501) General. Washington taxable income is determined by multiplying apportionable income by the receipts factor for each apportionable activity the taxpayer engages in. While the receipts factor is calculated without accounting for deductions authorized under chapter 82.04 RCW, apportionable income is determined by reducing the apportionable receipts by amounts that are deductible under chapter 82.04 RCW, regardless of where the deduction may be attributed. This formula can be expressed algebraically as:
(Taxable Income)
=
(Receipts Factor)
x
(Apportionable receipts
deductions)
Example 51. Calculating apportionable income. Corporation A received $2,000,000 in apportionable receipts from its worldwide apportionable activities, which included $500,000 of receipts that are deductible under Washington law. Corporation A's total apportionable income is $1,500,000 ($2,000,000 minus $500,000 of deductions). If Corporation A's receipts factor is 31.25%, then its taxable income is $468,750 ($1,500,000 multiplied by 0.3125).
PART 6. REPORTING INSTRUCTIONS.
(601) General.
(a) Taxpayers required to use this rule's apportionment method may report their taxable income based on their apportionable income for the reporting period multiplied by the receipts factor for the most recent calendar year the taxpayer has available.
(b) If a taxpayer does not calculate its taxable income using (a) of this subsection, the taxpayer must use actual current calendar year information.
(602) Reconciliation. Regardless of how a taxpayer reports its taxable income under subsection (601)(a) or (b) of this rule, a taxpayer that has reportable apportionable income must file a reconciliation to determine the receipts factor for an entire calendar year by October 31st of the following year. If the date for filing falls on a Saturday, Sunday, or legal holiday, the reconciliation will be considered timely if filed on the next business day. The reconciliation filing must be on the department's "annual reconciliation of apportionable income" form. The reconciliation may result in the taxpayer either obtaining a refund or paying any additional tax due. In either event (refund or additional taxes due), interest will apply in a manner consistent with tax assessments. If the reconciliation is completed and any additional tax shown on the reconciliation has been paid by the October 31st due date, no penalties will apply to the additional tax shown on the reconciliation.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 24-11-073, § 458-20-19402, filed 5/15/24, effective 6/15/24. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.067, 82.04.460, and 82.04.462. WSR 15-04-004, § 458-20-19402, filed 1/22/15, effective 2/22/15. Statutory Authority: RCW 82.04.067, 82.32.300, and 82.01.060(2). WSR 13-22-044, § 458-20-19402, filed 10/31/13, effective 12/1/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 12-19-071, § 458-20-19402, filed 9/17/12, effective 10/18/12.]


PDF458-20-19403

Apportionable royalty receipts attribution.

PART 1. INTRODUCTION.
(101) General. Effective June 1, 2010, Washington changed its method of apportioning royalty receipts. This rule only addresses how apportionable royalty receipts must be attributed for the purposes of economic nexus and single factor receipts apportionment. This rule is limited to the attribution of apportionable royalty receipts for periods after May 31, 2010.
(102) Guide to this rule. This rule is divided into two parts as follows:
1. Introduction.
2. How to attribute apportionable royalty receipts.
(103) Reference to WAC 458-20-19402. This rule only provides a method to attribute apportionable royalty receipts in lieu of the attribution methods specified in WAC 458-20-19402 (301)(a) and (b). Otherwise, WAC 458-20-19402 controls the apportionment of royalty receipts. Specifically, WAC 458-20-19402 provides: (a) An overview of single factor receipts apportionment (Part 2); (b) guidance on how to attribute apportionable royalty receipts if this rule does not apply (Part 3); (c) guidance on how to calculate the receipts factor (Part 4); (d) guidance on how to determine taxable income (Part 5); and (e) reporting instructions (Part 6).
(104) Other rules. Taxpayers may also find helpful information in the following rules:
(a) WAC 458-20-19401 Minimum nexus thresholds for apportionable activities. This rule describes minimum nexus thresholds applicable to apportionable activities that are effective after May 31, 2010.
(b) WAC 458-20-19402 Single factor receipts apportionment—Generally. This rule describes the general application of single factor receipts apportionment and applies only to tax liability incurred after May 31, 2010.
(c) WAC 458-20-19404 Single factor receipts apportionment—Financial institutions. This rule describes the application of single factor receipts apportionment to certain income of financial institutions and applies only to tax liability incurred after May 31, 2010.
(d) WAC 458-20-194 Doing business inside and outside the state. This rule describes separate accounting and cost apportionment and applies only to tax liability incurred from January 1, 2006, through May 31, 2010.
(e) WAC 458-20-14601 Financial institutions—Income apportionment. This rule describes the apportionment of income for financial institutions for tax liability incurred prior to June 1, 2010.
(105) Examples. Examples included in this rule identify a number of facts and then state a conclusion; they should be used only as a general guide. The tax results of all situations must be determined after a review of all the facts and circumstances. The examples in this rule assume all gross income received by the taxpayer is apportionable royalty receipts. Unless otherwise stated, the examples do not apply to tax liability prior to June 1, 2010.
When an example states that a particular attribution method is a reasonable method of proportionally attributing the use of an intangible, this does not preclude the existence of other reasonable methods of proportionally attributing the use depending on the specific facts and circumstances of a taxpayer's situation.
(106) Definitions. The definitions included in WAC 458-20-19401 and 458-20-19402 apply to this rule unless the context clearly requires otherwise. Additionally, the definitions in this subsection apply specifically to this rule.
(a) "Apportionable royalty receipts" means all compensation for the use of intangible property, including charges in the nature of royalties, regardless of where the intangible property will be used. Apportionable royalty receipts does not include:
(i) Compensation for any natural resources;
(ii) The licensing of prewritten computer software to an end user;
(iii) The licensing of digital goods, digital codes, or digital automated services to an end user as defined in RCW 82.04.190(11); or
(iv) Receipts from the outright sale of intangible property.
(b) "Intangible property" includes: Copyrights, patents, licenses, franchises, trademarks, trade names, and other similar intangible property/rights.
(c) "Reasonable method of proportionally attributing" means a method of determining where the use occurs, and thus where receipts are attributed that is uniform, consistent, accurately reflects the market, and is not distortive.
PART 2. HOW TO ATTRIBUTE APPORTIONABLE ROYALTY RECEIPTS.
(201) Attribution of income. Apportionable royalty receipts are attributed to states based on a cascading method or series of steps. The department expects that most taxpayers will attribute apportionable royalty receipts based on (a)(i) of this subsection because the department believes that either taxpayers will know the place of use or a "reasonable method of proportionally attributing" receipts will generally be available. These steps are:
(a) Where the customer uses the intangible property.
(i) If a taxpayer can reasonably determine the amount of a specific apportionable royalty receipt that relates to a specific use in a state, that royalty receipt is attributable to that state. When a customer uses the taxpayer's intangible property in this and one or more other states and the amount of gross income of the business that was received by the taxpayer in return for intangible property used by the customer in this state can be reasonably determined by the taxpayer, such amount of gross income must be attributed to this state. This may be shown by application of a reasonable method of proportionally attributing use, and thus receipts, among the states. The result determines the apportionable royalty receipts attributed to each state. Under certain situations, the use of data based on an attribution method specified in (b) and (c) of this subsection may also be a reasonable method of proportionally attributing receipts among states.
(ii) If a taxpayer is unable to separately determine, or use a reasonable method of proportionally attributing, the use and receipts in specific states under (a)(i) of this subsection, and the customer used the intangible property in multiple states, the apportionable royalty receipts are attributed to the state in which the intangible property was primarily used. Primarily means, in this case, more than fifty percent.
(b) Office of negotiation. If the taxpayer is unable to attribute apportionable royalty receipts to a location under (a) of this subsection, then apportionable royalty receipts must be attributed to the office of the customer from which the royalty agreement with the taxpayer was negotiated.
(c) If the taxpayer is unable to attribute apportionable royalty receipts to a location under (a) and (b) of this subsection, then the steps specified in WAC 458-20-19402 (301)(c) through (g) shall apply to apportionable royalty receipts.
(202) Framework for analysis of the "use of intangible property." The use of intangible property and therefore the attribution of apportionable royalty receipts from the use of intangible property will generally fall into one of the following three categories:
(a) Marketing use means the intangible property is used by the taxpayer's customer for purposes that include, but are not limited to, marketing, displaying, selling, and exhibiting. The use of the intangible property is connected to the sale of goods or services. Typically, this category includes trademarks, copyrights, trade names, logos, or other intangibles with promotional value. Receipts from the marketing use of intangible property are generally attributed to the location of the consumer of the goods or services promoted using the intangible property.
Example 1. SportsCo licenses to AthleticCo the right to use its trademark on a basketball that AthleticCo manufactures, markets, and sells at retail on its website. This is a marketing use. SportsCo is paid a fee based on AthleticCo's basketball sales in multiple states. SportsCo knows that sales from the AthleticCo website delivered to Washington represent 10% of AthleticCo's total sales. Pursuant to subsection (201)(a)(i) of this section, SportsCo will attribute 10% of its apportionable royalty receipts received from AthleticCo to Washington. The remaining 90% will be attributed to other states.
Example 2. Same facts as Example 1, except that AthleticCo sells its basketballs at wholesale to MiddleCo, a distributor with its receiving warehouse located in Idaho. MiddleCo then sells the basketballs to RetailW, a retailer with stores in Washington, Oregon, and California. SportsCo would generally attribute its apportionable royalty receipts to the location of RetailW's customers. However, SportsCo does not have any data, and cannot reasonably obtain any data, relating to RetailW's customer locations. Pursuant to subsection (201)(a)(i) of this section, SportsCo may reasonably attribute receipts to Washington based on the percentage of RetailW's store locations in Washington as long as such attribution does not distort the number of customers in each state. SportsCo knows that 15% of RetailW's store locations are in Washington therefore it is reasonable for SportsCo to attribute 15% of its apportionable royalty receipts to Washington. The remaining 85% will be attributed to other states.
Example 3. MusicCo licenses to RetailCo the right to make copies of a digital song and sell those copies at retail on the internet for the U.S. market only. This is a marketing use. RetailCo has a single copy of the song on its server in Virginia. Each time a customer comes to RetailCo's website and makes a purchase of the song, RetailCo creates a copy of the song (e.g., a new file) that is then available for sale to the customer. MusicCo would usually attribute its apportionable royalty receipts to the location of RetailCo's customers. However, MusicCo does not have any data, and cannot reasonably obtain any specific data, relating to RetailCo's customers' locations. Pursuant to subsection (201)(a)(i) of this section, MusicCo may reasonably attribute receipts to each state based on the percentage that each state's population represents in relation to the total market population, which in this case is the U.S. population, as long as such attribution does not distort the number of customers in each state.
Example 4. A local baseball star, Joe Ball, plays for a professional athletic franchise located in Washington. Joe Ball licenses to T-ShirtCo the right to put his image on t-shirts and sell them on the internet in the U.S. market. This is a marketing use limited to the U.S. by license. Joe Ball does not know where T-ShirtCo's customers are located and cannot reasonably obtain data to reasonably attribute receipts. In the absence of actual sales data from T-ShirtCo, Joe Ball cannot use relative population data to attribute receipts to the states as was done in Example 3 above. This is because Joe Ball is an overwhelmingly "local" celebrity in Washington. Joe Ball does not have a "national appeal" such that t-shirt sales by T-ShirtCo would be significant outside Washington. In this case, Joe Ball is unable to separately determine the use of the intangible property in specific states pursuant to subsection (201)(a)(i) of this section. However, it is reasonable for Joe Ball to assume that sales by T-ShirtCo of Joe Ball shirts are primarily delivered to customers in Washington. Accordingly, Joe Ball should assign all receipts received from T-ShirtCo to Washington, pursuant to subsection (201)(a)(ii) of this section.
Example 5. MegaComputer ("Mega") manufactures and sells computers. SoftwareCo licenses to MegaComputer the right to copy and install the software on Mega's computers, which are then offered for sale to consumers. This is a marketing use by Mega. Mega sells its computers to DistributorX that in turn sells the computers to RetailerY. Mega uses the intangible property at the location of the consumer. If SoftwareCo can attribute its receipts to the location of the consumer (e.g., through the use of software registration data obtained from consumer), SoftwareCo should do so. In the absence of that more precise information, and pursuant to subsection (201)(a)(i) of this section, it would be "reasonable" for SoftwareCo to attribute its receipts in proportion to the number of RetailerY stores in each state.
(b) Nonmarketing use means the intangible property is used for purposes other than marketing, displaying, selling, and exhibiting. This use of the intangible property is often connected to manufacturing, research and development, or other similar nonmarketing uses. Typically, this category includes patents, know-how, designs, processes, models, and similar intangibles. Receipts from the nonmarketing use of intangible property are generally attributed to a specific location or locations where the manufacturing, research and development, or other similar nonmarketing use occurs.
Example 6. RideCo licenses the right to use its patented scooter brake to FunRide for the purpose of manufacturing scooters. FunRide will market the scooter under its own brand. This is a nonmarketing use. RideCo knows that FunRide will manufacture scooters in Michigan and Washington and that the scooter design is used equally in Michigan and Washington. Pursuant to subsection (201)(a)(i) of this section, RideCo will attribute its receipts from the license of its patent equally to Michigan and Washington.
Example 7. BurgerZ licenses to JoeHam the right to use its jumbo hamburger making process and know-how. This is a nonmarketing use. JoeHam markets the jumbo hamburgers under its own brand. JoeHam has two restaurant locations, one in Washington and one in Oregon. BurgerZ's fee for the intangible rights is based on a percentage of sales at each location. Pursuant to subsection (201)(a)(i) of this section, BurgerZ will attribute receipts from its license with JoeHam to each location based on sales at those locations.
Example 8. WidgetCo licenses the use of its patent to ManuCo, to manufacture widgets. ManuCo has three manufacturing plants located in Michigan where it will use the patent for manufacturing widgets. ManuCo also has a single research and development (R&D) facility in Washington where it will use the patented technology to develop the next generation of its widgets. These are nonmarketing uses. WidgetCo charges ManuCo a single price for the use of the patent in manufacturing and R&D. In the absence of information to the contrary, it is reasonable for WidgetCo to assume ManuCo's use of the patent is equal at all of ManuCo's relevant locations. Pursuant to subsection (201)(a)(i) of this section, because there are four locations where the patent is used equally, WidgetCo will attribute 25% of its apportionable royalty receipts to each of the four locations. Accordingly, 75% of the apportionable royalty receipts will be attributed to Michigan to reflect the use of the patent at the three manufacturing locations, and 25% of the apportionable royalty receipts will be attributable to Washington to reflect the use of the patent at the single R&D location.
(c) Mixed use means licensing the use of intangible property for both marketing and nonmarketing uses. Mixed use licenses may be sold for a single fee or more than one fee.
(i) Single fee. Where a single fee is charged for the mixed use license, it will be presumed that receipts were earned for a "marketing use" pursuant to the guidelines provided in (a) of this subsection, except to the extent that the taxpayer can reasonably establish otherwise or the department of revenue determines otherwise.
Example 9. ProcessCo licenses to KimchiCo, for a single fee, the right to use its patent and trademark for manufacturing and marketing a food processing device. KimchiCo has a single manufacturing plant in Washington and markets the finished product solely in Korea. This mixed use license for a single fee is presumed to be for a marketing use. Accordingly, ProcessCo must attribute receipts under the guidelines established for marketing uses. Pursuant to subsection (201)(a)(i) of this section, KimchiCo is marketing and selling the device only in Korea; therefore, all receipts will be attributed to Korea.
Example 10. FranchiseCo operates a restaurant franchising business and licenses the right to use its trademark, patent, and know-how to EatQuick for a single fee. EatQuick will use the intangibles to create and market its food product. This is a mixed use license for a single fee and will be presumed to be for a marketing use. EatQuick has a single restaurant location in Washington, where all sales are made. Pursuant to subsection (201)(a)(i) of this section, the intangible property is used by EatQuick in Washington at its restaurant location. Taxpayer will attribute 100% of its apportionable royalty receipts earned under the EatQuick license to Washington.
Example 11. Same facts as Example 10, except that EatQuick has five restaurant locations, one each in: Washington, California, Oregon, Idaho, and Montana. EatQuick pays an annual lump sum to FoodCo. This is a mixed use license for a single fee and will be presumed to be for marketing use. Further, FranchiseCo knows that EatQuick's use of the intangible property is equal at all locations. The intangible property is used equally by EatQuick in five states including Washington. Accordingly, pursuant to subsection (201)(a)(i) of this section, FoodCo will attribute 20% of its apportionable royalty receipts to each location, including Washington.
(ii) More than one fee. Where the mixed use license involves separate fees for each type of use and separate itemization is reasonable, then each fee will receive separate attribution treatment pursuant to (a) and (b) of this subsection. If the department determines that the separate itemization is not reasonable, the department may provide for more accurate attribution using the guidelines in (a) and (b) of this subsection.
Example 12. Same as Example 9, except the license agreement states that the nonmarketing use of the patent is valued at $450,000, and the marketing use of the trademark is valued at $550,000. This is a mixed use license with more than one fee. The stated values for the separate uses are reasonable. Pursuant to subsection (201)(a)(i) of this section, the receipts associated with the nonmarketing use are $450,000 and attributable to Washington where the patent is used in manufacturing. The receipts associated with the marketing use are $550,000 and attributed to Korea where the trademark is used for marketing and selling the finished product.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.067, 82.04.460, and 82.04.462. WSR 15-04-004, § 458-20-19403, filed 1/22/15, effective 2/22/15. Statutory Authority: RCW 82.04.067, 82.32.300, and 82.01.060(2). WSR 13-22-044, § 458-20-19403, filed 10/31/13, effective 12/1/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 12-19-072, § 458-20-19403, filed 9/17/12, effective 10/18/12.]


PDF458-20-19404

Financial institutions—Income apportionment.

(1) Introduction.
(a) Effective June 1, 2010, Washington changed its method of apportioning certain gross income from engaging in business as a financial institution. This rule addresses how such gross income must be apportioned when the financial institution engages in business both within and outside the state.
(b) RCW 82.04.460(2) requires the department, to the extent feasible, to adopt the multistate tax commission's recommended formula for apportionment and allocation of net income for financial institutions, with the exceptions that the definition of financial institution in the appendix to the recommended formula is advisory only and only the receipts factor will be used to apportion income.
(c) On July 29, 2015, the multistate tax commission approved amendments to its recommended formula for the apportionment and allocation of net income of financial institutions including amendments to how the receipts factor is calculated. The amendments are effective for tax years starting on or after January 1, 2016.
(d) This rule applies to the apportionment of income taxable under RCW 82.04.290 for periods beginning January 1, 2016.
(e) Taxpayers may also find helpful information in the following rules:
(i) WAC 458-20-19401 Minimum nexus thresholds for apportionable activities. This rule describes minimum nexus standards that are effective after May 31, 2010.
(ii) WAC 458-20-19402 Single factor receipts apportionment—Generally. This rule describes the general application of single factor receipts apportionment that is effective after May 31, 2010.
(iii) WAC 458-20-19403 Single factor receipts apportionment—Royalties. This rule describes the application of single factor receipts apportionment to gross income from royalties and applies only to tax liability incurred after May 31, 2010.
(iv) WAC 458-20-194 Doing business inside and outside the state. This rule describes separate accounting and cost apportionment. It applies only to the periods January 1, 2006, through May 31, 2010.
(v) WAC 458-20-19404A Financial institutions—Income apportionment. This rule describes the application of single factor receipts apportionment to gross income for financial institutions during the period June 1, 2010, through December 31, 2015.
(vi) WAC 458-20-14601 Financial institutions—Income apportionment. This rule describes the apportionment of income for financial institutions for periods prior to June 1, 2010.
(f) Financial institutions engaged in making interstate sales of tangible personal property should also refer to WAC 458-20-193, Inbound and outbound interstate sales of tangible personal property.
(2) Apportionment.
(a) Except as otherwise specifically provided, a financial institution taxable under RCW 82.04.290 and taxable in another state must attribute and apportion its service and other activities income as provided in this rule. Apportionable income that is not taxable under RCW 82.04.290 must be apportioned pursuant to WAC 458-20-19402 Single factor receipts apportionment—Generally or WAC 458-20-19403 Single factor receipts apportionment—Royalties. "Apportionable income" means gross income of the business generated from engaging in apportionable activities as defined in WAC 458-20-19401 Minimum nexus thresholds for apportionable activities, including income received from apportionable activities performed outside this state if the income would be taxable under chapter 82.04 RCW if received from activities in this state, less any deductions allowable under chapter 82.04 RCW. All gross income that is not from apportionable activities must be allocated pursuant to chapter 82.04 RCW. A financial institution organized under the laws of a foreign country, the Commonwealth of Puerto Rico, or a territory or possession of the United States, except such institutions that are exempt under RCW 82.04.315, whose effectively connected income (as defined under the federal Internal Revenue Code) is taxable both in this state and another state, other than the state in which it is organized, must allocate and apportion its gross income as provided in this rule.
(b) All service and other activities income, regardless of where that income is attributed, shall be apportioned to this state by multiplying such income, less any deductions or exemptions authorized under chapter 82.04 RCW, by the apportionment percentage. The apportionment percentage is determined by the taxpayer's receipts factor (as described in subsection (4) of this rule).
(c) The receipts factor must be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for Washington state tax purposes for the taxable period. For further guidance on the requirements of each accounting method refer to WAC 458-20-197 When tax liability arises and WAC 458-20-199 Accounting methods.
(d) Generally, financial institutions are required to file returns on a monthly basis. To enable financial institutions to more easily comply with this rule, financial institutions may file returns using the receipts factor calculated based on the most recent calendar year for which information is available. If a financial institution does not calculate its receipts factor based on the previous calendar year for which information is available, it must use the current year information to make that calculation. In either event, a reconciliation must be filed for each year not later than October 31st of the following year. The reconciliation must be filed on a form approved by the department. In the case of consolidations, mergers, or divestitures, a taxpayer must make the appropriate adjustments to the factors to reflect its changed operations.
(e) Interest and penalties on reconciliations under (d) of this subsection apply as follows:
(i) In either event (refund or additional taxes due), interest will apply in a manner consistent with tax assessments.
(ii) Penalties as provided in RCW 82.32.090 will apply to any such additional tax due only if the reconciliation for a tax year is not completed and additional tax is not paid by October 31st of the following year.
(f) If the apportionment provisions of this rule do not fairly represent the extent of its business activity in this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's business activity:
(i) Separate accounting;
(ii) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(iii) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's receipts.
(3) Definitions. The following definitions apply throughout this rule unless the context clearly requires otherwise:
(a) "Billing address" means the location indicated in the books and records of the taxpayer on the first day of the taxable period (or on such later date in the taxable period when the customer relationship began) as the address where any notice, statement or bill relating to a customer's account is mailed.
(b) "Borrower or credit card holder located in this state" means:
(i) A borrower, other than a credit card holder, that is engaged in a trade or business and maintains its commercial domicile in this state; or
(ii) A borrower that is not engaged in a trade or business or a credit card holder, whose billing address is in this state.
(c) "Card issuer's reimbursement fee" means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit, debit, or similar type of card has charged merchandise or services to the card.
(d) "Commercial domicile" means:
(i) The headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed; or
(ii) If a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile is deemed for the purposes of this rule to be the state of the United States or the District of Columbia from which such taxpayer's trade or business in the United States is principally managed and directed. It is presumed, subject to rebuttal by a preponderance of the evidence, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States or the District of Columbia to which the greatest number of employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the taxable period.
(e) "Credit card" means a card, or other means of providing information, that entitles the holder to charge the cost of purchases, or a cash advance, against a line of credit.
(f) "Debit card" means a card, or other means of providing information, that enables the holder to charge the cost of purchases, or a cash withdrawal, against the holder's bank account or a remaining balance on the card.
(g) "Department" means the department of revenue.
(h) "Employee" means, with respect to a particular taxpayer, any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee of that taxpayer.
(i) "Financial institution" means:
(i) Any corporation or other business entity authorized under Title 30A, 31, 32, or 33 RCW to engage in business in Washington, provided that persons authorized to act as a loan servicer pursuant to chapter 31.04 RCW or as a check casher or check seller pursuant to chapter 31.45 RCW shall not be considered a financial institution solely on that basis; or
(ii) Registered under the Federal Bank Holding Company Act of 1956, as amended, or registered as a savings and loan holding company under the Federal National Housing Act, as amended;
(iii) A national bank organized and existing as a national bank association pursuant to the provisions of the National Bank Act, 12 U.S.C. Sec. 21 et seq.;
(iv) A savings association or federal savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1813 (b)(1);
(v) Any bank or thrift institution incorporated or organized under the laws of any state;
(vi) Any corporation organized under the provisions of 12 U.S.C. Secs. 611 to 631;
(vii) Any agency or branch of a foreign depository as defined in 12 U.S.C. Sec. 3101 that is not exempt under RCW 82.04.315;
(viii) A production credit association organized under the Federal Farm Credit Act of 1933, all of whose stock held by the Federal Production Credit Corporation has been retired.
(j) "Gross income of the business,""gross income," or "income":
(i) Has the same meaning as in RCW 82.04.080 and means the value proceeding or accruing by reason of the transaction of the business engaged in and includes compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses; and
(ii) Does not include amounts received from an affiliated person if those amounts are required to be determined at arm's length per sections 23A or 23B of the Federal Reserve Act. For the purpose of this subsection, affiliated means the affiliated person and the financial institution are under common control. Control means the possession (directly or indirectly), of more than fifty percent of power to direct or cause the direction of the management and policies of each entity. Control may be through voting shares, contract, or otherwise.
(iii) Financial institutions must determine their gross income of the business from gains realized from trading in stocks, bonds, and other evidences of indebtedness on a net annualized basis.
(k) "Interest, fees, and penalties" means any fees related to a loan, credit card, or other extension of credit and includes any fees charged a prospective borrower prior to funding of a loan regardless of whether the loan is eventually funded.
(l) "Loan" means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another. Loan includes participations, syndications, and leases treated as loans for federal income tax purposes. Loan does not include: Futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; noninterest bearing balances due from depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a real estate mortgage investment conduit (REMIC), or other mortgage-backed or asset-backed security; and other similar items.
(m) "Loan secured by real property" means that more than fifty percent of the aggregate value of the collateral used to secure a loan or other obligation was real property, when valued at fair market value as of the time the original loan or obligation was incurred.
(n) "Merchant discount" means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit, debit, or similar type of card is accepted in payment for merchandise or services sold to the card holder, net of any card holder charge-back and unreduced by any interchange transaction or issuer reimbursement fee paid to another for charges or purchases made by its card holder.
(o) "Participation" means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.
(p) "Person" has the meaning given in RCW 82.04.030.
(q) "Regular place of business" means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.
(r) "Service and other activities income" means the gross income of the business taxable under RCW 82.04.290, including income received from activities outside this state if the income would be taxable under RCW 82.04.290 if received from activities in this state.
(s) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or any foreign country or political subdivision of a foreign country.
(t) "Syndication" means an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.
(u) "Taxable in another state" means either:
(i) The taxpayer is subject to business activities tax by another state on its service and other activities income; or
(ii) The taxpayer is not subject to a business activities tax by another state on its service and other activities income, but that state would have jurisdiction to subject the taxpayer to a business activities tax on such income under the substantial nexus standards explained in WAC 458-20-19401.
(iii) For purposes of this subsection (3)(u), "business activities tax" means a tax measured by the amount of, or economic results of, business activity conducted in a state. The term includes taxes measured in whole or in part on net income or gross income or receipts. Business activities tax does not include a sales tax, use tax, or a similar transaction tax, imposed on the sale or acquisition of goods or services, whether or not denominated a gross receipts tax or a tax imposed on the privilege of doing business.
(v) "Taxable period" means the calendar year during which tax liability is incurred.
(4) Receipts factor.
(a) General. The receipts factor is a fraction, the numerator of which is the service and other activities income of the taxpayer in this state during the taxable period and the denominator of which is the service and other activities income of the taxpayer inside and outside this state during the taxable period. The method of calculating receipts for purposes of the denominator is the same as the method used in determining receipts for purposes of the numerator.
(b) Interest, fees, and penalties imposed in connection with loans secured by real property.
(i) The numerator of the receipts factor includes interest, fees and penalties imposed in connection with loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the income described in this subsection (4)(b)(i) is included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the income described in this subsection (4)(b)(i) must be included in the numerator of the receipts factor if the borrower is located in this state.
(ii) The determination of whether the real property securing a loan is located within this state must be made as of the time the original agreement was made and any and all subsequent substitutions of collateral must be disregarded.
(c) Interest, fees, and penalties imposed in connection with loans not secured by real property. The numerator of the receipts factor includes interest, fees, and penalties imposed in connection with loans not secured by real property if the borrower is located in this state.
(d) Net gains from the sale of loans. The numerator of the receipts factor includes net gains from the sale of loans. Net gains from the sale of loans includes income recorded under the coupon stripping rules of Section 1286 of the federal Internal Revenue Code.
(i) The amount of net gains (but not less than zero) from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (b) of this subsection and the denominator of which is the total amount of interest and fees or penalties imposed in connection with loans secured by real property.
(ii) The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (c) of this subsection and the denominator of which is the total amount of interest and fees or penalties imposed in connection with loans not secured by real property.
(e) Receipts from fees, interest, and penalties charged to card holders. The numerator of the receipts factor includes fees, interest, and penalties charged to card holders including, but not limited to, annual fees and overdraft fees, if the billing address of the card holder is in this state.
(f) Net gains from the sale of credit card receivables. The numerator of the receipts factor includes net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of interest, fees, and penalties charged to credit card holders.
(g) Card issuer's reimbursement fees. The numerator of the receipts factor includes:
(i) All credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount of fees, interest, and penalties charged to credit card holders included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to credit card holders.
(ii) All debit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount of fees, interest, and penalties charged to debit card holders included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to debit card holders.
(iii) All other card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount of fees, interest, and penalties charged to all other card holders included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to all other card holders.
(h) Receipts from merchant discount.
(i) If the taxpayer can readily determine the location of the merchant and if the merchant is in this state, the numerator of the receipts factor includes receipts from merchant discount.
(ii) If the taxpayer cannot readily determine the location of the merchant, the numerator of the receipts factor includes such receipts from the merchant discount multiplied by a fraction:
(A) In the case of a merchant discount related to the use of a credit card, the numerator of which is the amount of fees, interest, and penalties charged to credit card holders that is included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to credit card holders; and
(B) In the case of a merchant discount related to the use of a debit card, the numerator of which is the amount of fees, interest, and penalties charged to debit card holders that is included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to debit card holders; and
(C) In the case of a merchant discount related to the use of all other types of cards, the numerator of which is the amount of fees, interest, and penalties charged to all other card holders that is included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of fees, interest, and penalties charged to all other card holders.
(iii) The taxpayer's method for sourcing each receipt from a merchant discount must be consistently applied to such receipt in all states that have adopted sourcing methods substantially similar to (h)(i) and (ii) of this subsection and must be used on all subsequent returns for sourcing receipts from such merchant unless the department permits or requires application of the alternative method.
(i) Receipts from ATM fees. The receipts factor includes all ATM fees that are not forwarded directly to another bank.
(i) The numerator of the receipts factor includes fees charged to a card holder for the use at an ATM of a card issued by the taxpayer if the card holder's billing address is in this state.
(ii) The numerator of the receipts factor includes fees charged to a card holder, other than the taxpayer's card holder, for the use of such card at an ATM owned or rented by the taxpayer, if the ATM is in this state.
(j) Loan servicing fees.
(i)(A) The numerator of the receipts factor includes loan servicing fees derived from loans secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor under (b) of this subsection and the denominator of which is the total amount of interest, fees, and penalties imposed in connection with loans secured by real property.
(B) The numerator of the receipts factor includes loan servicing fees derived from loans not secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor under (c) of this subsection and the denominator of which is the total amount of interest and fees or penalties imposed in connection with loans not secured by real property.
(ii) If the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor includes such fees if the borrower is located in this state.
(k) Receipts from the financial institution's investment assets and activities and trading assets and activities.
(i) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities that are reported on the taxpayer's financial statements, call reports, or similar reports are included in the receipts factor. Investment assets and activities and trading assets and activities include, but are not limited to: Investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in (k)(i)(A) and (B) of this subsection, the receipts factor includes the following:
(A) The receipts factor includes the amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.
(B) The receipts factor includes the amount by which interest, dividends, gains and other receipts from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends, and losses from such assets and activities.
(ii) The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other receipts from both investment assets and activities and from trading assets and activities described in (k)(i) of this subsection that are attributable to this state.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in each investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such funds and such securities.
(C) The amount of interest, dividends, gains and other income from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in (k)(i)(A) and (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(B) of this subsection by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(D) For purposes of (k)(ii) of this subsection, the average value of trading assets owned by the taxpayer is the original cost or other basis of such property for federal income tax purposes without regard to depletion, depreciation, or amortization.
(iii) In lieu of using the method set forth in (k)(ii) of this subsection, the taxpayer may elect, or the department may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this paragraph.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross receipts from such assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such funds and such securities.
(C) The amount of interest, dividends, gains and other receipts from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in (k)(ii)(A) or (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(B) of this subsection by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(iv) If the taxpayer elects or is required by the department to use the method set forth in (k)(iii) of this subsection, it must use this method on all subsequent returns unless the taxpayer receives prior permission from the department to use, or the department requires a different method.
(v) The taxpayer has the burden of proving that an asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside this state. If the day-to-day decisions regarding an asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity is considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Such policies and guidelines are presumed, subject to rebuttal by preponderance of the evidence, to be established at the commercial domicile of the taxpayer.
(l) All other receipts. The numerator of the receipts factor includes all other receipts from engaging in activities subject to tax under RCW 82.04.290 pursuant to the rules set forth in WAC 458-20-19402 Single factor receipts apportionment—Generally.
(m) Attribution of certain receipts to commercial domicile. All receipts which would be assigned under this rule to a state in which the taxpayer is not taxable are included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.
(5) Effective date. This rule applies to gross income that is reportable with respect to tax liability beginning on and after January 1, 2016.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-01-019, § 458-20-19404, filed 12/8/17, effective 1/8/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.067, 82.04.460, and 82.04.462. WSR 15-04-004, § 458-20-19404, filed 1/22/15, effective 2/22/15. Statutory Authority: RCW 82.04.067, 82.32.300, and 82.01.060(2). WSR 13-22-044, § 458-20-19404, filed 10/31/13, effective 12/1/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 12-19-064, § 458-20-19404, filed 9/14/12, effective 10/15/12.]


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PDF458-20-19404A

Financial institutions—Income apportionment.

(1) Introduction.
(a) Effective June 1, 2010, Washington changed its method of apportioning certain gross income from engaging in business as a financial institution. This rule addresses how such gross income must be apportioned when the financial institution engages in business both within and outside the state and applies to the period June 1, 2010, through December 31, 2015, only. See WAC 458-20-19404 Financial institutions—Income apportionment for the proper apportionment methodology for periods beginning January 1, 2016.
(b) Taxpayers may also find helpful information in the following rules:
(i) WAC 458-20-19401 Minimum nexus thresholds for apportionable activities. This rule describes minimum nexus standards that are effective after May 31, 2010.
(ii) WAC 458-20-19402 Single factor receipts apportionment—Generally. This rule describes the general application of single factor receipts apportionment that is effective after May 31, 2010.
(iii) WAC 458-20-19403 Single factor receipts apportionment—Royalties. This rule describes the application of single factor receipts apportionment to gross income from royalties and applies only to tax liability incurred after May 31, 2010.
(iv) WAC 458-20-194 Doing business inside and outside the state. This rule describes separate accounting and cost apportionment. It applies only to the periods January 1, 2006, through May 31, 2010.
(v) WAC 458-20-14601 Financial institutions—Income apportionment. This rule describes the apportionment of income for financial institutions for periods prior to June 1, 2010.
(c) Financial institutions engaged in making interstate sales of tangible personal property should also refer to WAC 458-20-193 Inbound and outbound interstate sales of tangible personal property.
(2) Apportionment and allocation.
(a) Except as otherwise specifically provided, a financial institution taxable under RCW 82.04.290 and taxable in another state must attribute and apportion its service and other activities income as provided in this rule. Any other apportionable income must be apportioned pursuant to WAC 458-20-19402 Single factor receipts apportionment—Generally or WAC 458-20-19403 Single factor receipts apportionment—Royalties. "Apportionable income" means gross income of the business generated from engaging in apportionable activities as defined in WAC 458-20-19401 Minimum nexus thresholds for apportionable activities, including income received from apportionable activities performed outside this state if the income would be taxable under chapter 82.04 RCW if received from activities in this state, less any deductions allowable under chapter 82.04 RCW. All gross income that is not includable from apportionable activities must be allocated pursuant to chapter 82.04 RCW. A financial institution organized under the laws of a foreign country, the Commonwealth of Puerto Rico, or a territory or possession of the United States, except such institutions that are exempt under RCW 82.04.315, whose effectively connected income (as defined under the federal Internal Revenue Code) is taxable both in this state and another state, other than the state in which it is organized, must allocate and apportion its gross income as provided in this rule.
(b) All apportionable income shall be apportioned to this state by multiplying such income by the apportionment percentage. The apportionment percentage is determined by the taxpayer's receipts factor (as described in subsection (4) of this rule).
(c) The receipts factor must be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for Washington state tax purposes for the taxable period. Persons should refer to WAC 458-20-197 When tax liability arises and WAC 458-20-199 Accounting methods for further guidance on the requirements of each accounting method. Generally, financial institutions are required to file returns on a monthly basis. To enable financial institutions to more easily comply with this rule, financial institutions may file returns using the receipts factor calculated based on the most recent calendar year for which information is available. If a financial institution does not calculate its receipts factor based on the previous calendar year for which information is available, it must use the current year information to make that calculation. In either event, a reconciliation must be filed for each year not later than October 31st of the following year. The reconciliation must be filed on a form approved by the department. In the case of consolidations, mergers, or divestitures, a taxpayer must make the appropriate adjustments to the factors to reflect its changed operations.
(d) Interest and penalties on reconciliations under (c) of this subsection apply as follows:
(i) In either event (refund or additional taxes due), interest will apply in a manner consistent with tax assessments.
(ii) Penalties as provided in RCW 82.32.090 will apply to any such additional tax due only if the reconciliation for a tax year is not completed and additional tax is not paid by October 31st of the following year.
(e) If the allocation and apportionment provisions of this rule do not fairly represent the extent of its business activity in this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's business activity:
(i) Separate accounting;
(ii) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(iii) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's receipts.
(3) Definitions. The following definitions apply throughout this rule unless the context clearly requires otherwise:
(a) "Billing address" means the location indicated in the books and records of the taxpayer on the first day of the taxable period (or on such later date in the taxable period when the customer relationship began) as the address where any notice, statement and/or bill relating to a customer's account is mailed.
(b) "Borrower or credit card holder located in this state" means:
(i) A borrower, other than a credit card holder, that is engaged in a trade or business and maintains its commercial domicile in this state; or
(ii) A borrower that is not engaged in a trade or business or a credit card holder, whose billing address is in this state.
(c) "Commercial domicile" means:
(i) The headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed; or
(ii) If a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile is deemed for the purposes of this rule to be the state of the United States or the District of Columbia from which such taxpayer's trade or business in the United States is principally managed and directed. It is presumed, subject to rebuttal by a preponderance of the evidence, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States or the District of Columbia to which the greatest number of employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the taxable period.
(d) "Credit card" means credit, travel or entertainment card.
(e) "Credit card issuer's reimbursement fee" means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit card has charged merchandise or services to the credit card.
(f) "Department" means the department of revenue.
(g) "Employee" means, with respect to a particular taxpayer, any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee of that taxpayer.
(h) "Financial institution" means:
(i) Any corporation or other business entity chartered under Title 30, 31, 32, or 33 RCW, or registered under the Federal Bank Holding Company Act of 1956, as amended, or registered as a savings and loan holding company under the Federal National Housing Act, as amended;
(ii) A national bank organized and existing as a national bank association pursuant to the provisions of the National Bank Act, 12 U.S.C. Sec. 21 et seq.;
(iii) A savings association or federal savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1813 (b)(1);
(iv) Any bank or thrift institution incorporated or organized under the laws of any state;
(v) Any corporation organized under the provisions of 12 U.S.C. Secs. 611 through 631;
(vi) Any agency or branch of a foreign depository as defined in 12 U.S.C. Sec. 3101 that is not exempt under RCW 82.04.315;
(vii) Any credit union, other than a state or federal credit union exempt under state or federal law;
(viii) A production credit association organized under the Federal Farm Credit Act of 1933, all of whose stock held by the Federal Production Credit Corporation has been retired.
(i) "Gross income of the business,""gross income," or "income":
(i) Has the same meaning as in RCW 82.04.080 and means the value proceeding or accruing by reason of the transaction of the business engaged in and includes compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses; and
(ii) Does not include amounts received from an affiliated person if those amounts are required to be determined at arm's length per sections 23A or 23B of the Federal Reserve Act. For the purpose of this subsection (3)(i), affiliated means the affiliated person and the financial institution are under common control. Control means the possession (directly or indirectly), of more than fifty percent of power to direct or cause the direction of the management and policies of each entity. Control may be through voting shares, contract, or otherwise.
(iii) Financial institutions must determine their gross income of the business from gains realized from trading in stocks, bonds, and other evidences of indebtedness on a net annualized basis.
(j) "Loan" means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another. Loan includes participations, syndications, and leases treated as loans for federal income tax purposes. Loan does not include: Futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; noninterest bearing balances due from depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a real estate mortgage investment conduit (REMIC), or other mortgage-backed or asset-backed security; and other similar items.
(k) "Loan secured by real property" means that fifty percent or more of the aggregate value of the collateral used to secure a loan or other obligation was real property, when valued at fair market value as of the time the original loan or obligation was incurred.
(l) "Merchant discount" means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit card is accepted in payment for merchandise or services sold to the card holder.
(m) "Participation" means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.
(n) "Person" has the meaning given in RCW 82.04.030.
(o) "Regular place of business" means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.
(p) "Service and other activities income" means the gross income of the business taxable under RCW 82.04.290, including income received from activities outside this state if the income would be taxable under RCW 82.04.290 if received from activities in this state, less the exemptions and deductions allowable under chapter 82.04 RCW.
(q) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or any foreign country or political subdivision of a foreign country.
(r) "Syndication" means an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.
(s) "Taxable in another state" means either:
(i) The taxpayer is subject to business activities tax by another state on its service and other activities income; or
(ii) The taxpayer is not subject to a business activities tax by another state on its service and other activities income, but that state has jurisdiction to subject the taxpayer to a business activities tax on such income under the substantial nexus standards explained in WAC 458-20-19401. For purposes of this subsection (3)(s), "business activities tax" means a tax measured by the amount of, or economic results of, business activity conducted in a state. The term includes taxes measured in whole or in part on net income or gross income or receipts. Business activities tax does not include a sales tax, use tax, or a similar transaction tax, imposed on the sale or acquisition of goods or services, whether or not denominated a gross receipts tax or a tax imposed on the privilege of doing business.
(t) "Taxable period" means the calendar year during which tax liability is incurred.
(4) Receipts factor.
(a) General. The receipts factor is a fraction, the numerator of which is the apportionable income of the taxpayer in this state during the taxable period and the denominator of which is the apportionable income of the taxpayer inside and outside this state during the taxable period. The method of calculating receipts for purposes of the denominator is the same as the method used in determining receipts for purposes of the numerator.
(b) Interest from loans secured by real property.
(i) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the income described in this subsection (4)(b)(i) is included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the income described in this subsection (4)(b)(i) must be included in the numerator of the receipts factor if the borrower is located in this state.
(ii) The determination of whether the real property securing a loan is located within this state must be made as of the time the original agreement was made and any and all subsequent substitutions of collateral must be disregarded.
(c) Interest from loans not secured by real property. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in this state.
(d) Net gains from the sale of loans. The numerator of the receipts factor includes net gains from the sale of loans. Net gains from the sale of loans includes income recorded under the coupon stripping rules of Section 1286 of the federal Internal Revenue Code.
(i) The amount of net gains (but not less than zero) from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (b) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(ii) The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (c) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(e) Receipts from credit card receivables. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from credit card receivables and income from fees charged to card holders, such as annual fees, if the billing address of the card holder is in this state.
(f) Net gains from the sale of credit card receivables. The numerator of the receipts factor includes net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(g) Credit card issuer's reimbursement fees. The numerator of the receipts factor includes all credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to (e) of this subsection and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(h) Receipts from merchant discount. The numerator of the receipts factor includes receipts from merchant discount if the commercial domicile of the merchant is in this state. Such receipts must be computed net of any card holder charge backs, but must not be reduced by any interchange transaction fees or by any issuer's reimbursement fees paid to another for charges made by its card holders.
(i) Loan servicing fees.
(i)(A) The numerator of the receipts factor includes loan servicing fees derived from loans secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor under (b) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(B) The numerator of the receipts factor includes loan servicing fees derived from loans not secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor under (c) of this subsection and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(ii) If the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor includes such fees if the borrower is located in this state.
(j) Receipts from services. The numerator of the receipts factor includes receipts from services not otherwise apportioned under this subsection (4) if the service is performed in this state. If the service is performed both inside and outside this state, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this subsection, if a greater proportion of the activity producing the receipts is performed in this state based on cost of performance.
(k) Receipts from investment assets and activities and trading assets and activities.
(i) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities are included in the receipts factor. Investment assets and activities and trading assets and activities include, but are not limited to: Investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in (k)(i)(A) and (B) of this subsection, the receipts factor includes the following:
(A) The receipts factor includes the amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.
(B) The receipts factor includes the amount by which interest, dividends, gains and other receipts from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends, and losses from such assets and activities.
(ii) The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other receipts from investment assets and activities and from trading assets and activities described in (k)(i) of this subsection that are attributable to this state.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such funds and such securities.
(C) The amount of interest, dividends, gains and other income from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in (k)(i)(A) and (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(B) of this subsection by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
(D) For purposes of (k)(ii) of this subsection, the average value of trading assets owned by the taxpayer is the original cost or other basis of such property for federal income tax purposes without regard to depletion, depreciation, or amortization.
(iii) In lieu of using the method set forth in (k)(ii) of this subsection, the taxpayer may elect, or the department may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this paragraph.
(A) The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross receipts from such assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(B) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(A) of this subsection from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such funds and such securities.
(C) The amount of interest, dividends, gains and other receipts from trading assets and activities including, but not limited to, assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in (k)(ii)(A) or (B) of this subsection), attributable to this state and included in the numerator is determined by multiplying the amount described in (k)(i)(B) of this subsection by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
(iv) If the taxpayer elects or is required by the department to use the method set forth in (k)(iii) of this subsection, it must use this method on all subsequent returns unless the taxpayer receives prior permission from the department to use, or the department requires a different method.
(v) The taxpayer has the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside this state. If the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity is considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Such policies and guidelines are presumed, subject to rebuttal by preponderance of the evidence, to be established at the commercial domicile of the taxpayer.
(l) Attribution of certain receipts to commercial domicile. All receipts which would be assigned under this rule to a state in which the taxpayer is not taxable are included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.
(5) Effective date. This rule applies to gross income that is reportable with respect to tax liability beginning on and after June 1, 2010, and before January 1, 2016.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-01-019, § 458-20-19404A, filed 12/8/17, effective 1/8/18.]


PDF458-20-195

Taxes, deductibility.

(1) Introduction. This rule explains the circumstances under which taxes may be deducted from the gross amount reported as the measure of tax under the business and occupation tax, retail sales tax, and public utility tax. It also lists deductible and nondeductible taxes.
(2) Deductibility of taxes. In computing tax liability, the amount of certain taxes may be excluded or deducted from the gross amount reported as the measure of tax under the business and occupation (B&O) tax, the retail sales tax, and the public utility tax. These taxes may be deducted provided they have been included in the gross amount reported under the classification with respect to which the deduction is sought, and have not been otherwise deducted through inclusion in the amount of another allowable deduction, such as credit losses.
The amount of taxes which are not allowable as deductions or exclusions must in every case be included in the gross amount reported. License and regulatory fees are not deductible. Questions regarding the deductibility or exclusion of a tax that is not specifically identified in this rule should be submitted to the department of revenue for determination.
(3) Motor vehicle fuel taxes. RCW 82.04.4285 provides a B&O tax deduction for certain state and federal motor vehicle fuel taxes when the taxes are included in the sales price. These taxes include:
Fuel tax. . . .
chapter 82.38 RCW;
Federal tax on diesel and special motor fuels (including leaking underground storage tank taxes), except train and aviation fuels. . . .
26 U.S.C.A. Sec. 4041;
Federal tax on inland waterway commercial fuel. . . .
26 U.S.C.A. Sec. 4042;
Federal tax on gasoline and diesel fuel for use in highway vehicles and motorboats. . . .
26 U.S.C.A. Sec. 4081.
(4) Taxes collected as an agent of municipalities, the state, or the federal government. The amount of taxes collected by a taxpayer, as agent for municipalities, the state of Washington or its political subdivisions, or the federal government, may be deducted from the gross amount reported. These taxes are deductible under each tax classification of the Revenue Act under which the gross amount from such sales or services must be reported.
This deduction applies only where the amount of such taxes is received by the taxpayer as collecting agent and is paid by the agent directly to a municipality, the state, its political subdivisions, or to the federal government. When the taxpayer is the person upon whom a tax is primarily imposed, no deduction or exclusion is allowed, since in such case the tax is a part of the cost of doing business. The mere fact that the amount of tax is added by the taxpayer as a separate item to the price of goods sold, or to the charge for services rendered, does not in itself, make such taxpayer a collecting agent for the purpose of this deduction. Examples of deductible taxes include:
federal—
Tax on communications services (telephone and teletype-writer exchange services). . . .
26 U.S.C.A. Sec. 4251;
Tax on transportation of persons. . . .
26 U.S.C.A. Sec. 4261;
Tax on transportation of property. . . .
26 U.S.C.A. Sec. 4271;
state—
 
988 crisis hotline tax collected
from subscribers. . . .
chapter 82.86 RCW;
Aviation fuel tax collected from buyers by a distributor as defined by RCW 82.42.010
. . . .
chapter 82.42 RCW;
Leasehold excise tax collected from lessees. . . .
chapter 82.29A RCW;
Oil spill response tax collected from taxpayers by marine terminal operators. . . .
chapter 82.23B RCW;
Retail sales tax collected from buyers. . . .
chapter 82.08 RCW;
Solid waste collection tax collected from buyers. . . .
chapter 82.18 RCW;
State 911 tax collected from subscribers. . . .
chapter 82.14B RCW;
Use tax collected from
buyers. . . .
chapter 82.12 RCW;
municipal—
 
City admission tax. . . .
County admissions and recreations tax. . . .
chapter 36.38 RCW;
County 911 tax collected from subscribers. . . .
chapter 82.14B RCW;
Local retail sales and use taxes collected from
buyers. . . .
chapter 82.14 RCW.
(5) Specific taxes which are not deductible. Examples of specific taxes which may be neither deducted nor excluded from the measure of the tax include the following:
federal—
 
Agricultural Adjustment Act (A.A.A.) compensating tax. . . .
7 U.S.C.A. Sec. 615(e);
A.A.A. processing tax. . . .
7 U.S.C.A. Sec. 609;
Aviation fuel. . . .
26 U.S.C.A. Sec. 4091;
Distilled spirits, wine, and beer taxes. . . .
26 U.S.C.A. chapter 51;
Diesel and special motor fuel tax for fuel used for purposes other than motor vehicles and motorboats. . . .
26 U.S.C.A. Sec. 4041;
Employment taxes. . . .
26 U.S.C.A. chapters 21-25;
Estate taxes. . . .
26 U.S.C.A. chapter 11;
Firearms, shells, and cartridges. . . .
26 U.S.C.A. Sec. 4181;
Gift taxes. . . .
26 U.S.C.A. chapter 12;
Importers, manufacturers, and dealers in firearms. . . .
26 U.S.C.A. Sec. 5801;
Income taxes. . . .
26 U.S.C.A. Subtitle A;
Insurance policies issued by foreign insurers. . . .
26 U.S.C.A. Sec. 4371;
Sale and transfer of firearms tax. . . .
26 U.S.C.A. Sec. 5811;
Sporting goods. . . .
26 U.S.C.A. Sec. 4161;
Superfund tax. . . .
26 U.S.C.A. Sec. 4611;
Tires. . . .
26 U.S.C.A. Sec. 4071;
Tobacco excise taxes. . . .
26 U.S.C.A. chapter 52;
Wagering taxes. . . .
26 U.S.C.A. chapter 35;
state —
 
Ad valorem property taxes. . . .
Title 84 RCW;
Alcoholic beverages licenses and stamp taxes (Breweries, distillers, distributors, and wineries). . . .
chapter 66.24 RCW;
Aviation fuel tax when not collected as agent for the state. . . .
chapter 82.42 RCW;
Boxing, sparring and wrestling tax. . . .
chapter 67.08 RCW;
Business and occupation tax. . . .
chapter 82.04 RCW;
Cigarette tax. . . .
chapter 82.24 RCW;
Estate tax. . . .
Title 83 RCW;
Insurance premiums tax. . . .
chapter 48.14 RCW;
Hazardous substance
tax. . . .
chapter 82.21 RCW;
Litter tax. . . .
chapter 82.19 RCW;
Pollution liability insurance fee. . . .
Parimutuel tax. . . .
Petroleum products - underground storage tank tax. . . .
chapter 82.23A RCW;
Public utility tax. . . .
chapter 82.16 RCW;
Real estate excise tax. . . .
chapter 82.45 RCW;
Tobacco products tax. . . .
chapter 82.26 RCW;
Use tax when not collected as agent for state. . . .
chapter 82.12 RCW;
municipal—
 
Local use tax when not collected as agent for cities or counties. . . .
chapter 82.14 RCW;
Municipal utility taxes. . . .
chapter 54.28 RCW;
Municipal and county real estate excise taxes. . . .
chapter 82.46 RCW.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-23-124, § 458-20-195, filed 11/16/23, effective 12/17/23; WSR 22-24-098, § 458-20-195, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 22-08-114A, § 458-20-195, filed 3/31/22, effective 5/1/22. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 20-22-093, § 458-20-195, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300. WSR 00-16-015, § 458-20-195, filed 7/21/00, effective 8/21/00; WSR 99-13-053, § 458-20-195, filed 6/9/99, effective 7/10/99; WSR 83-08-026 (Order ET 83-1), § 458-20-195, filed 3/30/83; Order ET 70-3, § 458-20-195 (Rule 195), filed 5/29/70, effective 7/1/70.]


PDF458-20-196

Bad debts.

(1) Introduction. This rule provides information about the tax treatment of bad debts when income is reported by a taxpayer, but that income is ultimately not received by the taxpayer.
(a) References to related rules. The department has adopted other rules that readers may want to refer to:
(i) WAC 458-20-197 When tax liability arises;
(ii) WAC 458-20-198 Installment sales, method of reporting;
(iii) WAC 458-20-199 Accounting methods;
(iv) WAC 458-20-229 Refunds.
(b) Examples. The rule includes a number of examples that identify a set of facts and then state a conclusion. These examples are only a general guide. The tax results of other situations must be determined after a review of all facts and circumstances. For each of the examples, assume an 8% retail sales tax rate.
(2) Definitions. The following definitions apply throughout this rule:
(a) "Bad debt" is an amount owed to the taxpayer as payment for the sale of goods, services, or digital products which is not actually received and is written off as a worthless debt on the taxpayer's books and records. For Washington excise tax reporting purposes, a bad debt is based on federal income tax standards of worthlessness under 26 U.S.C. Sec. 166, as amended or renumbered as of January 1, 2003. A bad debt may only be taken by the original seller of goods, services, or digital products.
(b) "Bad debts" do not include:
(i) Amounts due on property remaining in the seller's possession until the full purchase price is paid;
(ii) Expenses incurred in attempting to collect debt;
(iii) Sales or use taxes payable to a seller;
(iv) Debts sold or assigned by the seller to third parties, where the third party is without recourse against the seller (RCW 82.08.037 and 82.12.037. See subsection (6)(a) of this rule); and
(v) The value of repossessed property taken as payment of debt at the time the property is repossessed.
(3) Reporting a bad debt.
(a) Only amounts previously reported as gross income on the Washington excise tax return are eligible for reporting as bad debts to the state of Washington. The bad debts reported must meet the federal revenue code standards for worthlessness. However, if a taxpayer who is not required to file a federal return is otherwise eligible for a federal income tax bad debt deduction, credit, or refund, that taxpayer may claim a Washington bad debt deduction, credit, or refund on a previously paid Washington state tax. For taxpayers who file a consolidated federal return with controlled affiliates, the bad debt deduction, credit or refund is only available to the original seller or provider that incurred the loss from the worthless debt.
(b) Taxpayers who report using the cash method do not report income until it is received. For this reason, bad debts are most relevant to taxpayers reporting income on an accrual basis. However, some transactions must be reported on an accrual basis by all taxpayers, including installment sales and leases. These transactions are eligible for a bad debt deduction as described in this rule.
(c) Bad debts can be reported using one of the following methods:
(i) Deductions: Generally, a bad debt is reported as a deduction from the measure of the tax previously reported and paid on the excise tax return. The bad debts discussed in this rule are assumed to be reported as deductions unless otherwise stated.
(ii) Credits: A bad debt credit is most commonly taken when there is a change in the retail sales tax rate between the time of sale and the reporting of the bad debt. To claim the credit, a taxpayer must complete a Schedule B addendum to their excise tax return. This form is available on the department's website at dor.wa.gov.
(iii) Refunds: A taxpayer may also claim a bad debt by requesting a refund directly from the department using the process as described in WAC 458-20-229.
(d) Reserve method. Ordinarily, taxpayers must report bad debt deductions, credits, or refunds for specifically identified transactions. However, taxpayers who are allowed by the Internal Revenue Service to use a reserve method of reporting bad debts for federal income tax purposes, or who secure permission from the department to do so, may deduct a reasonable addition to a reserve for bad debts. What constitutes a reasonable addition to a reserve for bad debts will vary by business type and economic factors. The department presumes reserve methods allowed by the Internal Revenue Service for federal income tax purposes are reasonable, absent contrary evidence. When the reserve method is used, the amount of loss deducted must be adjusted annually to make the total loss claimed for the tax year coincide with the amount of actual loss.
(e) Statute of limitations for claiming bad debts. No deduction, credit, or refund may be claimed for debt that became eligible for a bad debt deduction for federal income tax purposes more than four years before the beginning of the calendar year in which the credit, refund, or deduction is claimed.
(4) Claiming bad debt deductions for various taxes paid.
(a) Business and occupation (B&O) tax. Taxpayers may deduct from the measure of B&O tax, bad debts on which B&O tax was previously paid. RCW 82.04.4284.
(b) Retail sales and use tax. Taxpayers may take a bad debt deduction for retail sales and use taxes previously paid on bad debts. RCW 82.08.037 and 82.12.037.
Example 1. Joe's Hardware, which reports on an accrual basis, sells $500 worth of goods to a buyer. Joe's Hardware receives no payment from the buyer at the time of sale. Joe's Hardware reports and remits $40 (8% of $500) in retail sales tax to the department. Joe's Hardware also reports $500 of gross income under the retailing B&O tax classification, and reports service and other activities B&O tax on the interest and fees accruing on the outstanding balance.
A year and a half after the sale, Joe's Hardware has still not received any payment, and the balance with interest and fees is $627 ($500 selling price + $40 retail sales tax + $87 accrued interest and fees). Joe's Hardware meets the requirements to claim a federal income tax bad debt deduction. Therefore, it may claim a $40 bad debt retail sales tax deduction, and a $500 bad debt deduction from gross income under the retailing B&O tax classification. It may also take a bad debt deduction of $87 for the accrued interest and fees previously reported under the service and other activities B&O tax classification.
(5) Post bad debt reporting: Payments, recoveries and repossessions.
(a) Application of payments.
If a taxpayer takes a bad debt deduction for a previously paid tax, and later collects some or all of the debt, the amount of tax recovered must be reported and paid in the tax-reporting period in which the collection was made. The amount of tax reported and paid on the recovery for B&O tax, retail sales tax, and use tax purposes is determined by first applying the recovered amount proportionally to the taxable price of the property or service and the retail sales or use tax thereon. Secondly, the recovered amount is applied to any interest, service charges, and any other charges. RCW 82.08.037(4).
Example 2. Joe's Hardware in Example 1 above receives a $50 payment on the $500 purchase six months after claiming the bad debt deduction. Joe's Hardware must report and pay an additional $3.70 of retail sales tax on its current excise tax return ($50 payment × ($40 retail sales tax/$540 selling price + retail sales tax)).
In addition, it must report $46.30 as gross income under the retailing B&O tax classification ($50 payment × ($500 selling price/$540 selling price + retail sales tax)).
Additional recoveries are reported in this same manner until the original $40 retail sales tax bad debt deduction reduces to zero.
(b) Repossessions:
(i) The value of any property repossessed from a buyer for nonpayment must be subtracted from the value of the bad debt. In determining the amount of the bad debt deduction for B&O tax, retail sales tax, or use tax purposes, the repossessed value must first be applied to any accrued interest and fees. Any remaining value must be proportionally applied to the original selling value and retail sales tax.
(ii) For bad debt purposes, the value of repossessed property is its fair market value on the recovery date (recovery value). If post-recovery repairs and improvements that increase the value of the property are made after recovery and prior to resale, the cost of these repairs may be subtracted from the selling price to establish its recovery value.
(iii) Only post-recovery repairs and improvements that increase the value of the repossessed property qualify to reduce its selling price to establish its recovery value. Repairs and improvements that are routine maintenance do not qualify to reduce the selling price of the repossessed property to establish its recovery value. In general, repairs and improvements considered routine in nature have a useful life of less than one year. Repairs with a useful life of more than one year are typically considered an improvement that increases the value of the property for the purpose of establishing recovery value.
In addition to routine maintenance costs, a taxpayer may not offset the value of repossessed property with any costs related to locating, repossessing, storing, or reselling the property, including associated attorney fees.
(iv) If the sales price of the repossessed property is less than the recovery value previously reported, the taxpayer must report the difference between the selling price and the claimed recovery value as an additional bad debt deduction. Alternatively, if the property resells for more than the recovery value previously reported, the taxpayer must report it as an additional recovery. This is because the sales price establishes the correct value of the repossessed goods.
Example 3. Phil's Fine Cars (Phil) sells a car to Alice on credit for $1,000. Initially, Phil reports $1,000 in gross income under the retailing B&O tax classification, and reports and remits $80 in retail sales tax (8% of $1,000). When Alice makes no payments, Phil repossesses the car. The recovery value of the repossessed car at the time of repossession is $700. Also, assume $63 in accrued interest at the time of repossession, resulting in an outstanding balance of $1,143 ($1,000 selling price + $80 retail sales tax + $63 accrued interest). The $700 recovery value is first applied to the accrued interest, resulting in a selling price and retail sales tax balance of $1,080. The remaining recovery value of $637 ($700-$63 accrued interest) is applied to the balance of $1,080, resulting in an outstanding balance of $443 ($1,080-$637) eligible for a bad debt deduction. Phil can claim a bad debt deduction of $32.81 against the retail sales tax ($443 × ($80/$1,080)), and a $410.19 deduction against the measure of the retailing B&O tax ($443 × ($1,000/$1,080)).
Example 4. If Phil's Fine Cars later resells the car repossessed from Alice in Example 3 in this subsection, it must collect and remit retail sales tax, and pay retailing B&O tax on the sale to a new buyer. The payment of the retail sales tax and retailing B&O tax on the sale of the repossessed car does not affect Phil's tax liability regarding the reported bad debt deduction from the original transaction. Here, Phil resells the car for its $700 recovery value to a new buyer, Jim. Phil will collect and report $56 of retail sales tax on the sale ($700 × 8%), and report $700 in gross income under the retailing B&O tax classification.
Example 5. Phil's Fine Cars repossessed a car from Bob. Phil's estimate of the car's recovery value upon repossession for bad debt reporting purposes was $1,500. Phil reports a bad debt deduction based on this $1,500 value, the outstanding debt balance, and any payments Bob made. Later, Phil makes repairs and improvements to the car and resells it to Ron for $2,500. In order for Phil to know if he needs to adjust his prior bad debt reporting he must determine if his original estimate of $1,500 recovery value upon repossession was correct.
Phil made the following repair and maintenance expenditures after recovering the car from Bob, and before reselling it to Ron:
Post Repossession Expense:
Reduction of selling price?
Replace engine:
$350
Yes, increases value
Replace windshield:
$70
Yes, increases value
Replace filter:
$20
No, maintenance
Replace wipers:
$45
No, maintenance
Change oil filter:
$50
No, maintenance
Repair transmission:
$200
Yes, increases value
Detailing/cleaning:
$75
No, maintenance
Replace tires:
$130
Yes, increases value
Total expenses that increased value of the car: $750
Total expenses for maintenance: $190
Phil has repair and improvement costs of $750 that qualify to reduce the selling price to determine the car's recovery value before any repairs and improvements. After reducing the $750 of qualifying expenses from the $2,500 resale price to Ron, the recovery value of the car at the time of repossession is $1,750. Because the $1,750 recovery value is greater than Phil's bad debt reporting estimate of $1,500, Phil must adjust his bad debt reporting for the bad debt relating to the repossession from Bob. Phil must reduce his bad debt deduction previously taken by the $250 in increased recovery value ($1,750-$1,500).
If Phil's qualifying repair expenses had been $1,750, then the recovery value of the car repossessed from Bob would only have been $750 ($2,500 resale price - $1,750 repairs). The lower actual recovery value increases the amount of bad debt, which allows for a larger bad debt deduction than had been originally reported by Phil.
(6) Assigned debt and private label credit cards.
(a) Assigned debt. RCW 82.08.037 and 82.12.037 limit who can claim a bad debt deduction for retail sales or use tax. Only the original seller in the transaction that generated the bad debt, or a certified service provider (CSP) as defined in RCW 82.32.020 used by the seller, is entitled to claim a bad debt deduction. If the original seller in the transaction that generated the bad debt has sold or assigned the debt instrument to a third party with recourse back to the seller, the original seller may claim a bad debt deduction only if the debt instrument is reassigned by the third party back to the original seller. Alternatively, if the original seller has sold or assigned the debt instrument to a third party without recourse back to the seller, the original seller may not claim a bad debt deduction. Where the seller uses a CSP to administer its retail sales tax, the CSP may claim, on behalf of the seller, the bad debt deduction allowed.
Example 6. Immediately after Phil's Fine Cars sells a car, it assigns the contract to Finance Company ABC without recourse back to Phil. Phil receives face value for the contract from Finance Company ABC. If the buyer fails to make payments, Finance Company ABC may not claim a bad debt deduction because it is not the original seller. Phil is also unable to claim a bad debt deduction because Finance Company ABC purchased the contract without recourse back to the seller.
(b) Private label credit cards. A seller is not eligible for a bad debt deduction, credit, or refund for customers failing to pay credit card invoices if the seller:
• Contracts with a third party, such as a financial institution, to provide a private label credit card program;
• The third party becomes the exclusive owner of the credit card accounts.
Example 7. Mountaintop Ski Equipment (Mountaintop) is a sporting equipment retailing chain store. Mountaintop contracts with ABC Financial Institution (ABC) to issue Mountaintop private label credit cards. ABC has the authority to accept or reject an applicant's credit card application. After Mountaintop transmits the credit card sales records to ABC, ABC pays Mountaintop the proceeds of the sales including the retail sales tax less any applicable service fees. Mountaintop reports and remits the retail sales tax to the department. If a customer using the Mountaintop credit card fails to pay ABC the outstanding amount on the credit card invoice, Mountaintop is not entitled to a bad debt deduction because it has no bad debt loss when a customer defaults on a debt to ABC.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-14-042, § 458-20-196, filed 6/28/18, effective 7/29/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.037, and 82.12.037. WSR 10-21-012, § 458-20-196, filed 10/7/10, effective 11/7/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 06-01-005, § 458-20-196, filed 12/8/05, effective 1/8/06. Statutory Authority: RCW 82.32.300, 82.01.060(1), and 34.05.230. WSR 05-04-048, § 458-20-196, filed 1/27/05, effective 2/27/05. Statutory Authority: RCW 82.32.300. WSR 83-07-032 (Order ET 83-15), § 458-20-196, filed 3/15/83; Order ET 70-3, § 458-20-196 (Rule 196), filed 5/29/70, effective 7/1/70.]


PDF458-20-197

When tax liability arises.

(1) Gross proceeds of sales and gross income shall be included in the excise tax return for the period in which the value proceeds or accrues to the taxpayer. For the purpose of determining tax liability of persons making sales of tangible personal property, a sale takes place when the goods sold are delivered to the buyer in this state. With respect to leases or rentals of tangible personal property, liability for retail sales tax arises as of the time the rental payments fall due (see WAC 458-20-211).
(2) Accrual basis.
(a) When excise tax returns are made upon the accrual basis, value accrues to a taxpayer at the time:
(i) The taxpayer becomes legally entitled to receive the consideration, or,
(ii) In accord with the system of accounting regularly employed, enters as a charge against the purchaser, customer, or client the amount of the consideration agreed upon, whether payable immediately or at a definitely determined future time.
(b) Amounts actually received do not constitute value accruing to the taxpayer in the period in which received if the value accrues to the taxpayer during another period. It is immaterial if the act or service for which the consideration accrues is performed or rendered, in whole or in part, during a period other than the one for which excise tax return is made. The controlling factor is the time when the taxpayer is entitled to receive, or takes credit for, the consideration.
(3) Cash receipts basis.
(a) When returns are made upon cash receipts and disbursements basis, value proceeds to a taxpayer at the time the taxpayer receives the payment, either actually or constructively. It is immaterial that the contract is performed, in whole or in part, during a period other than the one in which payment is received.
(b) See: WAC 458-20-199 for limitation as to persons who may report on the cash receipts basis.
(4) Special application, contractors.
Value accrues for a building or construction contractor who maintains his accounting records on the accrual basis, as of the time the contractor becomes entitled to compensation under the contract.
(a) If by the terms of the contract the taxpayer becomes entitled to compensation upon estimates as the work progresses, value, to the extent of such estimates, accrues as of the time that each estimate is made and the balance at the time of the completion of the work or of the final estimate.
(b) If by the terms of the contract the taxpayer becomes entitled to compensation only upon the completion of the work, value accrues as of the earlier of the completion of the work, or, any use of the facilities being constructed, or, 60 days after the facility is substantially complete.
(i) Example: A contractor agrees to build two buildings for a buyer. Under the terms of the contract, payment is to be made only upon completion of both buildings. One building is substantially completed and occupied on April 15, 1991, the other building is substantially completed on May 15, 1991 and occupied on July 1, 1991. The work on both buildings is completed under the contract on June 15, 1991. Value accrues for the first building on April 15, 1991, the date it was used. Value accrues for the remainder of the contract on June 15, 1991, the date the work was completed.
(ii) Example: A contractor agrees to build a building for a buyer. Under the terms of the contract, the buyer is to make payment for the building only upon completion of the building. The building is completed, except for minor alterations, and available for planned occupancy on August 15, 1990. However, because of a contract dispute between the buyer and his tenant for the building, the buyer is unable to pay the contractor until February 25, 1991 when the building is finally occupied. The building is completed under the contract on November 15, 1990. Value accrues on the building for sales tax and B&O tax purposes on October 14, 1990, 60 days after August 15, 1990, the date the building was substantially complete.
(5) Warehouse operators. In the case of warehouse operators value proceeds or accrues to the taxpayer as follows:
(a) When the taxpayer is reporting upon the accrual basis, value accrues at the time the charge is entered against the owner of the goods stored in accordance with the terms of the contract between the parties and the regular system of accounting employed by the taxpayer.
(i) Value accrues when the charge is entered whether the consideration for storage is at a fixed rate per unit per month or other period, or, at a flat charge regardless of the length of time, or, whether payable periodically or at the time of withdrawal.
(ii) Thus, where a warehouse operator, keeping books on accrual basis, customarily enters as a charge to the owner of the goods and a credit to storage income the full amount of a flat storage charge as of the time the goods are received, even though the time for payment is deferred until withdrawal of the goods, value accrues as of the time the goods are received. However, if the warehouse operator customarily does not enter such charge until the time of withdrawal, value accrues as of such later date.
(b) When the taxpayer is reporting upon a cash receipts basis, value proceeds at the time the payment for storage is received.
(c) Exception for grain warehouse operators. Persons operating grain warehouses, licensed under chapter 22.09 RCW, may report the value proceeding or accruing from their grain warehouse operations on either a cash receipts or accrual basis. RCW 82.04.090.
For effect of rate changes, see WAC 458-20-235 (Effect of rate changes on prior contracts and sales agreements).
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 07-17-111, § 458-20-197, filed 8/17/07, effective 9/17/07. Statutory Authority: RCW 82.32.300. WSR 90-10-082, § 458-20-197, filed 5/2/90, effective 6/2/90; Order ET 70-3, § 458-20-197 (Rule 197), filed 5/29/70, effective 7/1/70.]


PDF458-20-198

Installment sales, method of reporting.

(1) Introduction. This rule explains the tax-reporting responsibilities of persons making installment sales of tangible personal property under the business and occupation (B&O), retail sales, and use taxes.
(2) How is income from installment sales of tangible personal property reported? The seller must report the full selling price of installment sales of tangible personal property in the tax-reporting period during which the sale is made. This is true even when the buyer pays the tax to the seller in installments over time.
(a) Leases not taxable as installment sales. A lease under WAC 458-20-211 (Leases or rentals of tangible personal property, bailments) is not taxable as an installment sale.
(b) Interest income. Persons who receive interest or finance charges from an installment sale must pay B&O tax under the service and other business activities classification on receipt of these amounts. Retail sales and use taxes do not generally apply to these amounts. Refer to WAC 458-20-109 (Finance charges, carrying charges, interest, penalties) for further information.
(c) Assignment of rights to receive payments. A seller may sell or assign the right to receive payments on an installment sale to another business. The assignee should not report any sales or use taxes on such payments because the seller is responsible for remitting the full amount of sales tax. For information on how to report a buyer's default on an installment obligation, refer to WAC 458-20-196 (Bad debts).
[Statutory Authority: RCW 82.32.300, 82.01.060(1), and 34.05.230. WSR 05-04-048, § 458-20-198, filed 1/27/05, effective 2/27/05. Statutory Authority: RCW 82.32.300. WSR 83-07-032 (Order ET 83-15), § 458-20-198, filed 3/15/83; Order ET 70-3, § 458-20-198 (Rule 198), filed 5/29/70, effective 7/1/70.]


PDF458-20-199

Accounting methods.

(1) Introduction. In computing tax liability under the business and occupation tax and the retail sales tax, one of the following accounting methods must be used. This is true for all businesses, whether their activity involves the sale of tangible personal property or the rendering of services. (See WAC 458-20-197 for an explanation of when tax liability arises under the accrual method versus the cash receipts method.)
(2) Method one, cash basis. A taxpayer may file excise tax returns in each reporting period with figures based upon cash receipts only if the taxpayer's books of account are regularly kept on a cash receipts basis. (See RCW 82.04.090.) A taxpayer whose books of account recognize income at the time a sale is made or a service is rendered, regardless of when payment is received, is keeping its records on an accrual basis and must report and pay tax on the accrual basis. For those taxpayers who maintain formal accounting records, the department of revenue will generally look to the revenue accounts of the general ledger of the taxpayer and to the method of accounting used for reporting of federal income taxes to determine when the income is recognized. However, all records of the taxpayer will be considered by the department in determining whether the records are being kept on an accrual basis, particularly for those taxpayers who do not maintain formal records such as a general ledger.
The fact that a taxpayer makes sales "on account" and has records to identify the accounts receivable does not preclude the taxpayer from reporting on a cash receipts basis. Taxpayers can have accounts receivable and still report on the cash basis, provided the accounting records, such as the general ledger or federal income tax returns, do not record the sales on account as income until the cash is actually received. If a taxpayer keeps a general ledger on an accrual basis and federal income tax returns on a cash basis, the taxpayer may elect to report state tax returns on either the cash basis or the accrual basis. However, once a reporting basis is selected, the reporting basis may not be changed without authorization from the department unless the method for reporting federal taxes changes or the method used in keeping the records changes. A taxpayer who maintains its records throughout the year on a cash basis, including a general ledger, and elects to make a worksheet adjustment at year-end to report federal taxes on an accrual basis, will be permitted to report state taxes on a cash basis.
(3) Method two, accrual basis. A taxpayer who does not regularly keep books of account on a cash receipts basis must file returns with figures based on the accrual method. These taxpayers must report the gross proceeds from all cash sales made in the tax reporting period in which the sales are made, together with the total amount of charge sales during such period. The law does not require a taxpayer to use a particular accounting system. However, the taxpayer must report based on the system of accounting used by the business, regardless of the taxpayer's reasons for selecting a particular accounting system. It will be presumed that a taxpayer who is permitted under federal law or regulations to report its federal income taxes on a cash basis and does do so is maintaining the records on a cash basis. A taxpayer who maintains a general ledger on an accrual basis and files federal tax returns on an accrual basis must also report state tax returns on an accrual basis.
(a) Taxpayers who make installment sales or leases of tangible personal property must use the accrual method when they compute their tax liability. (See RCW 82.08.090, WAC 458-20-198 and 458-20-211.)
(b) In the case of rentals or leases, the income is considered to have accrued to the seller in the tax reporting period in which the seller is entitled to receive the rental or lease payment.
(4) Constructive receipt. "Constructive receipt" means income that a cash basis taxpayer is entitled to receive, but will not receive because of an action taken by the taxpayer. Constructive receipts are taxable in the tax reporting period in which the taxpayer gives up the entitlement to actual future receipt of the income. The following examples show how this applies to a cash basis taxpayer.
(a) XYZ has $10,000 in accounts receivable which XYZ expects to collect over the next six months. XYZ elects to sell these accounts receivable for eighty percent of their face value. Even though the taxpayer only receives $8,000 from the sale of the accounts receivable, XYZ is taxable on the full $10,000 because it has taken constructive receipt of the full $10,000 by taking an action to give up entitlement to the $2,000.
(b) XYZ has $1,500 in accounts receivable from customers who are delinquent in making payment. XYZ turns these accounts receivable over to a collection agency with the understanding that the collection agency may keep half of whatever is collected. The collection agency over the next month collects $500 and keeps $250 of this amount for its services. XYZ is taxable on the full $500 collected by the collection agency. XYZ has constructive receipt of this amount and the $250 retained by the collection agency is a cost of doing business to the taxpayer.
(c) XYZ is involved in a bankruptcy proceeding. The receipt of cash from accounts receivable will be placed in an escrow account. These funds will be used to pay creditors and a portion of these amounts will be given to the taxpayer. The full amount of the accounts receivable collected and going into the escrow is taxable income to XYZ. XYZ has received the full benefit of the cash received from the accounts receivable through payment of XYZ's creditors.
[Statutory Authority: RCW 82.32.300. WSR 96-12-024, § 458-20-199, filed 5/30/96, effective 6/30/96; WSR 92-03-026, § 458-20-199, filed 1/8/92, effective 2/8/92; WSR 83-07-032 (Order ET 83-15), § 458-20-199, filed 3/15/83; Order ET 70-3, § 458-20-199 (Rule 199), filed 5/29/70, effective 7/1/70.]


PDF458-20-200

Leased departments.

(1) Any person leasing departments of the business conducted may include in its tax returns the business done and sales made by the lessee where such lessor keeps the books for the lessee and makes collection on the latter's account: Provided, however, That each lessee must apply for and obtain from the department of revenue a certificate of registration, as provided under WAC 458-20-101. The lessee will remain liable for its tax liability if the lessor fails to make the proper return or fails to pay taxes due.
(2) Business and occupation tax and retail sales tax. Any taxpayer making returns for any leased department shall report the total tax liability thereof under both the business and occupation tax and the retail sales tax, including therein all cash and charge sales. The leased department in such case is not entitled to the taxable minimum provided in WAC 458-20-104.
(a) Where the lessor receives a flat monthly rental or a percentage of sales as rental for a leased department, such income is presumed to be from the rental of real estate and is not taxable. In a determination of whether an occupancy is a rental of real estate, all the facts and circumstances, including the actual relationship of the parties, are to be considered (see: WAC 458-20-118). Written agreements, while not required, are preferred and are given considerable weight in deciding the nature of the occupancy. While the fact that the written agreement may identify the occupancy as a "lease" is not controlling, agreements which contain the following provisions support the presumption that the occupancy is a rental of real estate:
i. The occupant is granted exclusive possession and control of the space.
ii. The occupancy is for a time certain which is more than 30 days, i.e. month to month, yearly, etc.
iii. The parties are required to notify each other in the event of termination of the occupancy.
(b) If the lessor provides any clerical, credit, accounting, janitorial, or other services to the lessee, the lessor must report the income from these services under the service B&O tax classification. The amounts for providing these services must be segregated from the amounts received from the rental of real estate. In the absence of a reasonable segregation, it will be presumed that the entire income is for providing these services.
(3) Examples. The following examples identify a number of facts and then state a conclusion as to whether the situation is a rental of real estate. These examples should be used only as a general guide. The tax status of each occupancy must be determined after a review of the agreement and all of the facts and circumstances.
(a) A retailer enters into a written occupancy agreement for rental of space within a mall for a one year term. The agreement can be terminated upon thirtieth days written notice of either party, subject to some penalty provisions for early termination. The agreement provides that the retailer can decorate the store and arrange the inventory in any manner desired by the retailer so long as the facility does not create a safety hazard to the mall or other tenants and is consistent with the overall decor of the mall. The mall owner may enter the premises of the retailer during nonbusiness hours only with the consent of the retailer except for emergencies where physical property is at risk. The retailer's area is separated from other lessees by walls with the exception of the front area which is open to the mall common area and is used as the entrance by potential customers and the retailer. The retailer does have a movable partition that can be locked and is used to close off the entrance from the mall common area. The agreement calls for the retailer to be open for business at all times during the hours stipulated by the mall.
This is a rental of real estate with the rental term being for a fixed period. The agreement and the facts and circumstances have established a rental of real estate. The retailer has exclusive possession and control over a specific area as indicated by the control the retailer has over the premises, even to the exclusion of the mall owner. The restriction which requires the retailer to maintain the same business hours as other lessees does not make this a license to use real estate. The lessor can exclude from the B&O tax that portion of the income which is from the rental of the real estate. The lessor must identify and pay a B&O tax on the portion of the income which is from providing services such as security, janitorial, or accounting.
(b) A hairdresser enters into an oral occupancy agreement with the operator of a hair salon for the use of a work station. The hairdresser has use of a specific work station during specific hours of every day. A particular work station may be used by more than one hairdresser during a particular month or even during a given day. This work station can not be closed off from other areas within the shop. The hairdresser must obtain advance permission from the owner to make any changes to the work area. This hairdresser also shares a sink, telephone, and other facilities with others in the shop.
This occupancy is not a rental of real estate. The hairdresser does not have exclusive possession and control over the premises to the exclusion of others as is indicated by the requirement that the hairdresser must obtain approval for any changes in the work area. This is further indicated by hairdressers use of a specific work station only during specific hours of every day with multiple users of the same work station. The work station could not be closed off from other areas of the shop, but this in itself is not determinative of whether this is a rental of real estate or a license to use. The presence of walls or the lack of walls is not controlling. The fact that the agreement uses the term "lease" is also not controlling. This is a "license to use" taxable under the service B&O tax classification.
(c) Department store agrees to sell household paint for a paint supplier. The paint supplier checks on the inventory on a monthly basis and provides additional paint as needed. The department store handles stocking of shelves and all aspects of the sale. The department store makes a charge to the paint supplier based on the space required to maintain the inventory. By agreement of the parties, the department store agrees to report the retailing and retail sales tax on paint sales.
This is not a leased department or a rental of real estate. The income is merely tied to the amount of space being used. However, the income is a commission from the sale of merchandise for the paint supplier and held on consignment. The retailing tax is the liability of the paint supplier and is paid by the department store only by agreement. The commission is taxable under the service B&O tax classification. See WAC 458-20-159.
[Statutory Authority: RCW 82.32.300. WSR 91-02-057, § 458-20-200, filed 12/28/90, effective 1/28/91; Order ET 70-3, § 458-20-200 (Rule 200), filed 5/29/70, effective 7/1/70.]


PDF458-20-201

Interdepartmental charges.

The term "interdepartmental charges" means amounts credited to the sales account or other gross income account of a taxpayer for goods, materials or services furnished by one department or branch of a business organization to another department or branch of the same business concern or firm.
Tax may be due upon interdepartmental charges covering transfers of goods from a central location to two or more retail outlets. See WAC 458-20-231, Tax on internal distributions. Tax is also due upon the value of products extracted or manufactured by one branch or department of a business for commercial or industrial use of another branch or department of the same business. See WAC 458-20-134. In other cases amounts representing interdepartmental charges may be excluded in computing tax due. This does not permit the exclusion or deduction of charges against or income derived from an affiliated corporation or other affiliated association.
Municipal corporations are entitled to an exclusion of interdepartmental charges in computing tax whether or not the charges represent an actual transfer of money or merely a bookkeeping entry (see WAC 458-20-189).
[Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-201, filed 3/30/83; Order ET 70-3, § 458-20-201 (Rule 201), filed 5/29/70, effective 7/1/70.]


PDF458-20-202

Pool purchases.

The term "pool purchase" means the joint purchase by two or more persons, engaging in independent business activities, of commodities in carload or truck load quantities for the purpose of obtaining a purchase price or freight rate which is less than when purchased or delivered in smaller quantities.
The term "principal member" means that member of the pool to whom the goods are charged by the vendor of the commodities purchased.
In computing tax liability of the principal member under chapter 82.04 RCW, there may be deducted from gross proceeds of sales the amount received by him from other members of the pool of their proportionate share of the cost thereof of the commodities purchased.
This deduction is allowed only when all of the following conditions are met:
(1) The amount received is included in gross proceeds of sales.
(2) The pool purchase agreement was entered into prior to the time of placing the order for the commodities purchased.
(3) The pool purchase agreement provides that each member shall accept a specific portion of the shipment.
(4) Division of the shipment is made prior to warehousing of the commodities by a member of the pool.
In no event will a "pool purchase" deduction be allowed when an agreement relative to the amount of the share to be distributed to any member is made after the date of the purchase order, or where one member of a pool pays an amount for his portion in excess of the proportionate amount paid by another member.
Revised June 1, 1970.
[Order ET 70-3, § 458-20-202 (Rule 202), filed 5/29/70, effective 7/1/70.]


PDF458-20-203

Corporations, Massachusetts trusts.

Each separately organized corporation is a "person" within the meaning of the law, notwithstanding its affiliation with or relation to any other corporation through stock ownership by a parent corporation by the same group of individuals.
Each corporation shall file a separate return and include therein the tax liability accruing to such corporation. This applies to each corporation in an affiliated group, as the law makes no provision for filing of consolidated returns by affiliated corporations or for the elimination of intercompany transactions from the measure of tax.
Each unincorporated association organized under the Massachusetts Trust Act of 1959 (chapter 23.90 RCW) is likewise taxable in the same way as are separate corporations.
Revised June 20, 1959.
[Order ET 70-3, § 458-20-203 (Rule 203), filed 5/29/70, effective 7/1/70.]


PDF458-20-204

Outdoor advertising and advertising display services.

The term "outdoor advertising" means the business of rendering an advertising service to others by posting or painting advertising copy upon billboards owned or controlled by the outdoor advertiser.
The term "advertising display service" means the business of installing and maintaining advertising displays upon property of others, when title to the property used in the display is retained by the person engaged in such business.
Business and Occupation Tax
Service and other business activities. Taxable under the service and other business activities classification upon the gross income from advertising services.
Retail Sales Tax
Persons engaged in the business of outdoor advertising or advertising display services are performing an advertising service, and are not required to collect the retail sales tax. Persons purchasing or producing tangible personal property for use in the performance of advertising services are required to pay the retail sales tax upon purchasing such property, or the use tax upon the value of the property produced and used in the performance of such services.
Revised May 1, 1943.
[Order ET 70-3, § 458-20-204 (Rule 204), filed 5/29/70, effective 7/1/70.]


PDF458-20-205

Sales of utility services by building companies.

When building companies, apartment house owners or other real estate owners or lessors furnish utility services such as heat and electrical energy to their own tenants of office buildings, apartment houses and storerooms under circumstances indicating it is a part of the normal and customary landlord-tenant relationship and the charge made therefor is the cost of this utility service to the owner or lessor prorated among his tenants based upon the use or consumption of such services, the income derived therefrom is construed to be incidental to and a part of gross income from the renting or leasing of real estate and not subject to the provisions of the business and occupation tax. This is true whether the charge therefor is included in a lump sum rental or is billed separately. However, when the furnishing of utility services is not in accordance with the foregoing, the income derived therefrom is considered to be a separate business activity and is taxable under the appropriate chapter of the Revenue Act.
Revised June 1, 1970.
[Order ET 70-3, § 458-20-205 (Rule 205), filed 5/29/70, effective 7/1/70.]


PDF458-20-207

Legal, arbitration, and mediation services.

(1) Introduction. This rule explains the taxability of amounts received for legal, arbitration, and mediation services.
(2) Definitions.
(a) "Arbitration" means the process by which the parties to a dispute submit to the hearing and judgment of an impartial person or group appointed by mutual consent or statute.
(b) "Arbitration services" means services relating to the resolution of a dispute submitted to arbitration.
(c) "Attorney" means an active member of a state Bar Association engaged in the practice of law. The term also includes a professional service corporation incorporated under chapter 18.100 RCW, a professional limited liability company formed under chapter 18.190 RCW, or a partnership, provided the ownership of these business entities are properly restricted to attorneys and organized primarily for engaging in the practice of law.
(d) "Legal services" means services relating to or concerned with the law. Such services include, but are not limited to, representation by an attorney (or other person, when permitted) in an administrative or legal proceeding, legal drafting, paralegal services, legal research services, arbitration, mediation, and court reporting services.
(e) "Mediation" means the process by which the parties to a dispute or negotiations agree to have an intermediary hear their differences and/or positions and facilitate and/or make suggestions concerning an agreement and/or the resolution of their dispute.
(3) Business and occupation tax. Gross income from legal, arbitration, or mediation services is subject to the service and other activities classification.
(a) Gross income. The gross income of the business generally includes the amount of compensation paid for legal, arbitration, or mediation services and amounts attributable to providing those services (i.e., charges for tangible personal property directly used or consumed in supplying legal, arbitration, or mediation services). Reimbursed general overhead costs are generally included in the gross income of the business even though indirectly related to litigation. Any reimbursed costs (not directly related to litigation) for which the attorney assumes personal liability for payment are also included in gross income.
(b) Overhead costs. Amounts received (or, for taxpayers reporting under the accrual accounting method, accrued) to compensate for overhead costs are fully subject to tax. Such overhead costs are taxable even though they may be separately stated on the billings or expressly denominated as costs of the client. Examples of such overhead costs include, but are not limited to:
(i) Photocopy or other reproduction charges, except charges paid to the provider, or the agent of the provider, for the official or original copy of a record, or other document, provided for litigation;
(ii) Long distance telephone tolls;
(iii) Secretarial expenses;
(iv) Office rent;
(v) Office supplies;
(vi) Travel, meals and lodging;
(vii) Utilities, including facsimile telephone charges; and
(viii) Postage, unless paid for service of legal papers as a direct cost of litigation.
(c) Excluded amounts. The following amounts are excluded from gross income if complete and accurate records are maintained of these amounts.
(i) Client trust accounts. The gross income of the business does not include amounts held in trust for the client.
(ii) Litigation expenses. Attorneys are bound by the rules of professional conduct. RPC 1.8(e) prohibits an attorney from financing the expenses of contemplated or pending litigation unless the client remains ultimately liable for these expenses. This means that an attorney normally acts solely as the agent for the client when financing litigation. Accordingly, amounts received from a client for the direct expenses of litigation do not constitute gross income to the attorney. Amounts received (or, for taxpayers reporting under the accrual accounting method, accrued) to compensate for the following direct litigation expenses are not included in gross income:
(A) Filing fees and court costs;
(B) Process server and messenger fees;
(C) Court reporter fees;
(D) Expert witness fees; and
(E) Costs of associate counsel.
A cash basis taxpayer cannot exclude or deduct amounts of unreimbursed litigation expenses. For example, an attorney advances all the litigation expenses for a contingency fee case. The case is ultimately resolved against the attorney's client and the expenses are not repaid because of the client's bankruptcy. The attorney cannot then deduct these expenses as a bad debt or otherwise exclude them against other income earned by the attorney.
(iii) Expense advances and reimbursements. Sometimes in the regular course of business an attorney may receive amounts from a client for expenses of third-party providers or other costs incurred in connection with a legal matter other than litigation. Such amounts are excluded from the business and occupation tax only if the attorney has no obligation for payment other than as agent for the client or equivalent commitment for their payment (see WAC 458-20-111, Advances and reimbursements). Generally, such amounts will be for third-party service providers (for example, accountants, appraisers, architects, artists, drafters, economists, engineers, investigators, physicians, etc.). However, these costs could also include client expenses for registration, licensing or maintenance fees, title and other insurance premiums, and escrow fees paid to third-party escrow agents. These costs are excludable only when the attorney does not have any personal liability to the third-party provider for their payment.
(iv) Records requirement. In order to support the exclusion from taxable gross income of any of the foregoing expenses, the attorney must maintain records which indicate the amount of the payment received from the client, the name of the client, the name of the person to whom the attorney has made payment, and a description of the item for which payment was made. If the foregoing expenses are incurred outside the context of litigation or contemplated litigation, the attorney must maintain records which indicate the amount of the payment received, the name of the client, and the person to whom the attorney makes payment. In addition, the attorney must provide the person to whom payment is made with written notice that:
(A) Payment is made, or will be made on behalf of a named client; and
(B) The attorney assumes no liability for payment, other than as agent for the named client.
(d) Multiple business activities. Attorneys and other persons engaged in providing legal, arbitration, and mediation services sometimes engage in other business activities which are classified under a different tax classification (i.e., escrow services). In some circumstances, income from these other business activities will be subject to tax under a different tax classification.
(i) Independent business activities. If the other activities engaged in by the person are independent from the legal, arbitration, or mediation services provided to the client, these activities are taxed based on the tax classification that applies to each of those other activities, provided these other activities are separately accounted for and/or itemized as a separate amount in billings or invoices to the client. Failure to separately account and/or itemize for such activities will result in classification of all activities under the service and other activities classification.
(ii) Combined business activities. If the other activities are related to the legal, arbitration, or mediation services provided to the client, the primary activity provided the client in each taxable period will determine the tax classification. Generally, the activity will be considered as related when there is some interaction between the two activities to reach an ultimate goal (i.e., a law firm which provides legal advice and brokers the financing of a business arrangement). There are a number of elements which may be examined to determine whether a sufficient relationship between the multiple activities exist. Some elements considered are the timing for the selection and provision of services, the relationship between the contracting parties, the procedure used in the selection process, the dependence of the relationship between the two or more activities, the relationship of the prices between the two activities, and the means of payment selected for the activities.
(iii) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(A) A law firm has an escrow department. This escrow department is run by employees who are not attorneys (but the supervising employee is a limited practice officer who has experience as a certified escrow agent), has a separate phone number, separate bank account, separate trust account, separate computer system, and maintains its own accounting system. Contracts for the escrow services state that the law firm is being retained as an independent escrow agent and not to represent any person involved in the transaction. Further, the contract states that the law firm shall not offer legal advice upon the transaction. The escrow department of this law firm would be considered an independent business activity and be taxed separately under the retailing classification for escrow businesses (see WAC 458-20-156, Abstract, title insurance, and escrow business).
(B) A law firm limits its practice to real estate. It primarily provides escrow services and real estate closings. Even though this firm has chosen to limit its practice, it is the nature and the character of its activities which will determine the primary activity for each closing. When a closing includes the preparation, selection, or drafting of the deed between the purchaser and seller, drafting legal documents to obtain clear title, and/or the preparation, selection or drafting of the promissory notes, deeds of trust, mortgages, and agreements modifying these documents, it will be presumed that the primary activity performed for the client is providing these legal services.
(I) The law firm closed a real estate transaction performing all the escrow services. Except for the escrow services provided, the firm represented the buyer in the closing. Although an attorney from the firm reviewed and approved the legal documents provided by the seller, the attorney did not prepare any legal documents for the transaction. Since the firm was representing a specific client in this real estate closing, the escrow services are considered incidental to the legal services provided. Accordingly, the firm will report the income from this transaction under the service and other activities classification.
(II) The firm was engaged by both parties in a real estate transaction to handle a real estate closing. An attorney for the firm selected and prepared the earnest money escrow agreement, the purchase and sales agreement, the closing agreement, and the deeds for the transfer. Title was clear and did not require any additional drafting. The firm also entered into an escrow agreement with both parties and held in escrow the buyer's deposit and the seller's deed.Since an attorney for the law firm was required to select, analyze, and review the legal documents in this transaction, the escrow activity will be considered incidental. This closing is reported under the service and other activities classification for legal services.
(III) A certified escrow agency, owned by a principal qualified under APR 12 (the limited practice rule for limited practice officers), provides both escrow and the limited legal services allowed under APR 12 to its clients. The escrow company itemizes the services provided. APR 12(d) allows a limited practice officer to select, prepare and complete documents in a form previously approved by the board for use in closing a loan, extension of credit, sale or other transfer of real or personal property. The nature of this limited license prevents an escrow company using limited practice officers from ever engaging in legal services as a primary activity in a real estate closing. Accordingly, the escrow company will report the income from escrow and closings under the retail sales classification (see WAC 458-20-156, Abstract, title insurance, and escrow business).
(IV) The same facts as above, but the escrow company hires employees who are attorneys to provide the allowable limited legal services. The result is the same. Under RPC 5.4, an attorney is prohibited from sharing legal fees with a nonlawyer and, under RPC 5.5, cannot assist a person who is not a member of the Bar Association in the performance of an activity that constitutes the unauthorized practice of law, and under RPC 7.1 a lawyer cannot make false or misleading communications about the lawyer or the lawyer's services. Accordingly, an attorney hired by an escrow company would not be providing legal services to the escrow companies' clients except to the extent authorized for a limited practice officer. Since only limited legal services can be offered, the escrow company would continue to report all fees from both the escrow and closing services under the retail sales tax classification.
(4) Retail sales tax. Sales of tangible personal property to attorneys for use in rendering professional services are retail sales upon which the retail sales tax must be collected. Such sales include, among others, sales of office furniture and equipment, stationery, office supplies, law books, and reference materials.
(5) Use tax.
(a) The use tax applies upon the use of articles purchased or manufactured for use upon which retail sales tax has not been paid or collected. This includes, but is not limited to, the following:
(i) Materials used and consumed while rendering legal, arbitration, or mediation services; and
(ii) Office supplies and office equipment purchased by the firm for its own use.
(b) The use tax also applies to all purchases of tangible personal property acquired without payment of retail sales tax and resold to clients but not separately stated from legal services rendered on the agency's billing.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 04-13-091, § 458-20-207, filed 6/18/04, effective 7/19/04. Statutory Authority: RCW 82.32.300. WSR 99-13-092, § 458-20-207, filed 6/14/99, effective 7/15/99. Statutory Authority: RCW 82.32.300 and 34.05.410. WSR 95-15-013, § 458-20-207, filed 7/7/95, effective 8/7/95. Statutory Authority: RCW 82.32.300. WSR 85-20-012 (Order ET 85-4), § 458-20-207, filed 9/20/85; Order ET 70-3, § 458-20-207 (Rule 207), filed 5/29/70, effective 7/1/70.]


PDF458-20-208

Exemptions for wholesale sales of new motor vehicles between new car dealers and for accommodation sales.

(1) Introduction. This rule discusses the business and occupation (B&O) tax exemptions for certain wholesale sales of new motor vehicles between new car dealers. The rule also discusses the B&O tax exemption for accommodation sales and clarifies the applicability of the accommodation sale exemption to exchanges of fungible products, such as gasoline and oil.
(2) Wholesale sales of new motor vehicles by new car dealers. Effective July 1, 2001, RCW 82.04.422 provides a B&O tax exemption for wholesale sales of new motor vehicles by new car dealers to other new car dealers. This exemption does not apply to amounts derived by a manufacturer, distributor, or factory branch as defined in chapter 46.70 RCW.
New car dealers will in most cases find the statutory requirements of this exemption to be less restrictive than those of the accommodation sales exemption discussed in subsection (3) of this rule. Unlike the exemption for accommodations sales, there is no restriction on the amount that the selling dealer can charge the buying dealer, nor is there any requirement that the sale be made to fill an existing order from a customer. While these circumstances may be present in a particular transaction, there is no need to use or rely upon the B&O tax exemption for accommodation sales when the requirements for the exemption for wholesale sales between new car dealers are met. The exemption for wholesale sales of new motor vehicles between new car dealers provided by RCW 82.04.422 is subject to the following conditions.
(a) New motor vehicle. The property sold must be a new motor vehicle. For the purposes of this rule, "new motor vehicle" means every motor vehicle that is self-propelled and is required to be registered and titled under Title 46 RCW, has not been previously titled to a retail purchaser, and is not a "used motor vehicle" as defined under RCW 46.04.660. RCW 46.70.011. Examples of motor vehicles include passenger cars, trucks, motorcycles, and motor homes.
(b) Wholesale sale between new car dealers selling the same make of new motor vehicles. The sale must be a wholesale sale and must occur between new car dealers selling the same make of vehicle. For purposes of determining whether the exemption applies to transactions involving trades, the trade of each new motor vehicle is considered a separate sale.
(i) Example 1. A new car dealer sells a new light pick-up truck, Make A, to another new car dealer. The purchasing dealer also sells new Make A passenger vehicles. This sale qualifies for the exemption.
(ii) Example 2. New Car Dealer ABC and New Car Dealer XYZ both sell new motor vehicles by Make A and Make X. New Car Dealer ABC sells Make A passenger vehicle to Dealer XYZ. Dealer XYZ sells Make X passenger vehicle to Dealer ABC. Both dealers regularly engage in the business of selling both new motor vehicle makes. Both sales qualify for the exemption.
(iii) Example 3. A new car dealer sells a new passenger vehicle, Make X, to another new car dealer. The purchasing dealer is not regularly engaged in the business of selling new Make X vehicles. This sale does not qualify for the exemption.
(iv) Example 4. New Car Dealer DEF sells new motor vehicles by Make A and Make X. New Car Dealer LMN sells new motor vehicles by Make A and Make Y. New Car Dealer DEF sells Make A passenger truck to New Car Dealer LMN. New Car Dealer LMN sells Make Y passenger truck to New Car Dealer DEF. Both dealers regularly engage in the business of selling Make A new motor vehicles while only New Car Dealer DEF engages in the business of selling Make Y. The sale of new motor vehicle Make A by Dealer DEF qualifies for the exemption while the sale of Make Y by Dealer LMN does not.
(c) Documentation. A person claiming the B&O tax exemption under RCW 82.04.422 for a wholesale sale of a new motor vehicle must maintain sufficient documentation to verify the exemption. The documentation should identify:
(i) The buyer's name and address;
(ii) The seller's name and address;
(iii) The buyer's UBI/tax registration number;
(iv) The make, model, and serial number of the motor vehicle;
(v) The date of purchase;
(vi) That the buyer and seller both regularly engage in making sales of the same make of new motor vehicle; and
(vii) The buyer's signature and title.
(3) Accommodation sales. RCW 82.04.425 provides a B&O tax exemption for wholesale sales of tangible personal property by persons who regularly engage in making sales of the type of property so sold to other persons who similarly engage in the business of selling such property.
The following conditions must be satisfied for the exemption to apply.
(a) Amount paid by buyer may not exceed amount paid by seller. The amount the buyer pays to the seller may not exceed the amount the seller paid to the seller's vendor in the acquisition of the property. Thus, a seller who manufactured the property sold cannot claim the exemption because the property has not been acquired from a vendor.
(i) Expenses associated with preparing property for sale. A seller may add reasonable expenses for preparing the property for sale, such as actual freight or delivery costs incurred by the seller and billed as such to the buyer. Questions concerning whether the exemption is available when other costs are included should be submitted to the department for determination at:
Department of Revenue
Taxpayer Services
P.O. Box 47478
Olympia, WA 98504-7478
(ii) What is the effect of holdbacks or discounts on amount paid? The amount paid by the seller may not be reduced by the amount of any manufacturer's holdbacks or discounts received after an article has been sold to adjust inventory levels even though the seller may retain such holdbacks or discounts.
For the following examples, presume an equipment dealer receives two tractors from the manufacturer on June 1st. The manufacturer's sales invoice indicates an invoice price of $16,600 and a holdback of $500 for each tractor. The dealer is entitled to receive the holdback on July 1st, thirty days after being billed for the tractors by the manufacturer.
(A) Example 1. The equipment dealer sells one of the tractors to another equipment dealer on June 10th. The amount paid by the selling dealer in the acquisition of the vehicle is $16,600.
(B) Example 2. The equipment dealer sells the other tractor to another equipment dealer on July 18th. The amount paid by the selling dealer in the acquisition of the vehicle is $16,100.
(b) Sale is an accommodation to fill an existing order. The sale must occur as an accommodation to allow the buyer to fill a bona fide existing order of a customer or occur within fourteen days to reimburse in-kind a previous accommodation sale by the buyer to the seller. A bona fide existing order is present if there is a commitment by the buyer's customer to purchase the property. The buyer must retain records demonstrating the customer's commitment to purchase, such as a written agreement or deposit.
For example, Recreational Vehicle Dealer A purchases a fifth-wheel trailer from Recreational Vehicle Dealer B as an accommodation. Ten days later, Dealer A sells a travel trailer to Dealer B as reimbursement in-kind of the previous accommodation sale. For Dealer A to claim the B&O tax exemption for the sale of the travel trailer to Dealer B, Dealer A must keep sufficient records to document a bona fide existing customer order for the fifth-wheel trailer purchased from Dealer B.
(c) Documentation. A person claiming the exemption for an accommodation sale must maintain sufficient documentation to verify the exemption. In addition to the documentation noted above establishing, where pertinent, the existence of a bona fide existing customer order, this documentation must include:
(i) The buyer's name and address;
(ii) The seller's name and address;
(iii) The buyer's UBI/tax registration number;
(iv) Description of the property purchased, including make, model, and serial numbers as appropriate;
(v) The date of purchase and the purchase price;
(vi) A statement by the buyer as to whether the purchase is to fill a bona fide existing order or to reimburse a previous in-kind accommodation sale, including information identifying the previous accommodation sale; and
(vii) The buyer's signature and title.
(4) Exchanges of fungible products. Persons engaged in the selling and distributing of fungible products often enter into exchange agreements. An exchange is a sale regardless of whether it results in a profit because a transfer of the ownership of, title to, or possession of property for valuable consideration occurs. RCW 82.04.040. Exchanges are subject to the B&O tax unless otherwise exempt by law.
(a) What is a fungible product? Fungible products are products that lose their physical identity to the point that they cannot be distinguished from like-kind items when commingled. Examples of fungible products include gasoline, bulk oil products, grains, logs, wood chips, fruits, and vegetables.
(b) What is an exchange? Under typical exchange agreements, a person is required to furnish products to another person selling and distributing the same products, sometimes receiving payment in-kind or with a substitute product at a later date. Exchange agreements may require the person to arrange for direct delivery from his or her vendor to the third party distributor. In some cases, actual title and/or possession of the product may pass directly from the vendor to the third-party distributor.
Persons exchanging fungible products often do so on a regular and continuing basis to cover shortages occurring because of a lack of storage or production facilities, and/or to effect savings in transportation costs. Exchanges may be carried as loans on the books of account (in which case the exchanges are often referred to as "intercompany loans"). Products acquired via an exchange may or may not be carried as regular inventory on the books of account.
(c) May an exchange of fungible products qualify as an accommodation sale? The fact that the product sold is a fungible product does not preclude a claim that the sale is exempt as an accommodation sale. However, such a claim will be recognized only if the statutory requirements of RCW 82.04.425 are met.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 04-17-025, § 458-20-208, filed 8/9/04, effective 9/9/04. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 34.05.230. WSR 03-07-066, § 458-20-208, filed 3/17/03, effective 4/17/03; Order ET 70-3, § 458-20-208 (Rule 208), filed 5/29/70, effective 7/1/70.]


PDF458-20-209

Farming for hire and horticultural services performed for farmers.

(1) Introduction. This rule provides tax reporting information for persons performing horticultural services for farmers. Persons providing horticultural services to persons other than farmers should refer to WAC 458-20-226 (Landscape and horticultural services). Farmers and persons making sales to farmers may also want to refer to the following rules:
(a) WAC 458-20-210 (Sales of tangible personal property for farming—Sales of agricultural products by farmers); and
(b) WAC 458-20-239 (Sales to nonresidents of farm machinery or implements, and related services).
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Farmer" means any person engaged in the business of growing, raising, or producing, upon the person's own lands or upon the lands in which the person has a present right of possession, any agricultural product to be sold. "Farmer" does not include a person growing, raising, or producing such products for the person's own consumption; a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard or a slaughter or packing house; or a person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213.
(b) "Agricultural product" means any product of plant cultivation or animal husbandry including, but not limited to: A product of horticulture, grain cultivation, vermiculture, viticulture, or aquaculture as defined in RCW 15.85.020; plantation Christmas trees; short-rotation hardwoods as defined in RCW 84.33.035; turf; or any animal including, but not limited to, an animal that is a private sector cultured aquatic product as defined in RCW 15.85.020, or a bird, or insect, or the substances obtained from such an animal. "Agricultural product" does not include animals defined as pet animals under RCW 16.70.020. Effective June 12, 2014, "agricultural product" may not be construed to include cannabis. Cannabis is any product with a THC concentration greater than .3 percent. RCW 82.04.213.
(c) "Horticultural services" include services related to the cultivation of vegetables, fruits, grains, field crops, ornamental floriculture, and nursery products.
(i) The term "horticultural services" includes, but is not limited to, the following:
(A) Soil preparation services such as plowing or weed control before planting;
(B) Crop cultivation services such as planting, thinning, pruning, or spraying; and
(C) Crop harvesting services such as threshing grain, mowing and baling hay, or picking fruit.
(ii) Effective June 12, 2014, horticultural services does not include services related to the cultivation of cannabis. Cannabis is any product with a THC concentration greater than .3 percent.
(3) Business and occupation (B&O) tax. Persons performing horticultural services for farmers are generally subject to the service and other business activities B&O tax upon the gross proceeds. However, if the person providing horticultural services also sells tangible personal property for a separate and distinct charge, the charge made for the tangible personal property will be subject to either the wholesaling or retailing B&O tax, depending on the nature of the sale. Persons making sales of tangible personal property to farmers should refer to WAC 458-20-210 to determine whether the wholesaling or retailing tax applies, and under what circumstances retail sales tax must be collected.
(a) A farmer who occasionally assists another farmer in planting or harvesting a crop is generally not considered to be engaged in the business of performing horticultural services. These activities are generally considered to be casual and incidental to the farming activity. For example, a farmer owning baling equipment which is used primarily for baling hay produced by the farmer, but who may occasionally accommodate neighboring farmers by baling small quantities of hay produced by them, is not considered to be in business with respect thereto.
(b) The extent to which horticultural services are performed for others is determinative of whether or not they are considered taxable business activities. Persons who advertise or hold themselves out to the public as being available to perform farming for hire will be considered as being engaged in business. For example, a person who regularly engages in baling hay or threshing grain for others is engaged in business and taxable upon the gross proceeds derived therefrom, irrespective of the amount of such business or that this person also does some farming of his or her own land.
(c) In cases where doubt exists in determining whether or not a person is engaged in the business of performing horticultural services, all pertinent information should be submitted to the department of revenue (department) for a specific ruling. The department may be contacted using the website dor.wa.gov and selecting "contact us"; or by telephone at 360-705-6705.
(4) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.
(a) Purchases of machinery, machinery parts and repair, tools, and cleaning materials by persons performing horticultural services are subject to retail sales tax.
(b) Persons taxable under the service and other business activities B&O tax classification are defined as consumers of anything they use in performing their services. (Refer to RCW 82.04.190.) As such, these persons are required to pay retail sales or use tax upon the purchase of all items used in performing the service, such as fertilizers, spray materials, and baling wire, which are not sold separate and apart from the service they perform.
(5) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(a) John Doe is a wheat farmer owning threshing equipment which is generally used only for threshing his own wheat. Occasionally a neighbor's threshing equipment may break down and John will use his own equipment to assist the neighbor in completing the neighbor's wheat harvest. While John receives payment for providing the threshing assistance, this activity is considered to be a casual and isolated sale. John does not hold himself out as being in the business of performing farming (threshing) for hire. John Doe is not considered to be engaging in taxable business activities. The amounts John Doe receives for assisting in the harvest of his neighbors' wheat is not subject to tax.
(b) X Spraying applies fertilizer to orchards owned by Farmer A. The sales invoice provided to Farmer A by X Spraying reflects a "lump sum" amount with no segregation of charges for the fertilizer and the application. When reporting its tax liability, X Spraying would report the total charge under the service B&O tax classification. X Spraying must also remit retail sales or use tax upon the purchase of the fertilizer. The entire amount charged by X Spraying is for horticultural services, and X Spraying is considered the consumer of the fertilizer.
(c) Z Flying aerial sprays pesticides on crops owned by Farmer B. The sales invoice Z Flying provides to Farmer B segregates the charge for the pesticides and the charge for the application. When reporting its tax liability, Z Flying would report the charge for the application under the service B&O tax classification. The charge for the sale of the spray materials is subject to the wholesaling B&O tax provided it is properly documented by a reseller permit. Reseller permits replaced resale certificates effective January 1, 2010. For additional information on reseller permits see WAC 458-20-102. Z Flying's purchase of the pesticides is a purchase for resale and not subject to the retail sales tax. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by Z Flying for five years from the date of last use or December 31, 2014, whichever first occurs.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-209, filed 6/21/23, effective 7/22/23; WSR 22-24-096, § 458-20-209, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-01-007, § 458-20-209, filed 12/4/14, effective 1/4/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-209, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 94-07-050, § 458-20-209, filed 3/10/94, effective 4/10/94; WSR 83-08-026 (Order ET 83-1), § 458-20-209, filed 3/30/83; Order ET 70-3, § 458-20-209 (Rule 209), filed 5/29/70, effective 7/1/70.]


PDF458-20-210

Sales of tangible personal property for farming—Sales of agricultural products by farmers.

(1) Introduction. This rule explains the application of business and occupation (B&O), retail sales, and use taxes to the sale and/or use of feed, seed, fertilizer, spray materials, and other tangible personal property for farming. This rule also explains the application of B&O, retail sales, and litter taxes to the sale of agricultural products by farmers. Farmers should refer to WAC 458-20-101 (Tax registration and tax reporting) to determine whether they must obtain a tax registration endorsement or a temporary registration certificate from the department of revenue (department).
(a) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(b) Other rules that may be relevant. Farmers and persons making sales to farmers may also want to refer to rules in the following list for additional information:
(i) WAC 458-20-178 Use tax and the use of tangible personal property;
(ii) WAC 458-20-209 Farming for hire and horticultural services performed for farmers;
(iii) WAC 458-20-222 Veterinarians;
(iv) WAC 458-20-239 Sales to nonresidents of farm machinery or implements, and related services;
(v) WAC 458-20-243 Litter tax; and
(vi) WAC 458-20-262 Retail sales and use tax exemptions for farmworker housing.
(2) Who is a farmer? A "farmer" is any person engaged in the business of growing, raising, or producing, on the person's own lands or on the lands in which the person has a present right of possession, any agricultural product to be sold. Effective July 1, 2015, a "farmer" also includes eligible apiarists that grow, raise, or produce honey bee products for sale, or provide bee pollination services. A "farmer" does not include a person growing, raising, or producing agricultural products for the person's own consumption; a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard, slaughterhouse, or packing house; or a person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213.
(3) What is an agricultural product? An "agricultural product" is any product of plant cultivation or animal husbandry including, but not limited to: A product of horticulture, grain cultivation, vermiculture, viticulture, or aquaculture as defined in RCW 15.85.020; plantation Christmas trees; short-rotation hardwoods as defined in RCW 84.33.035; turf; or any animal, including, but not limited to, an animal that is a private sector cultured aquatic product as defined in RCW 15.85.020, a bird, an insect, or the substances obtained from such animals. Effective July 1, 2015, "agricultural product" includes honey bee products. An "agricultural product" does not include animals defined under RCW 16.70.020 as "pet animals." Effective June 12, 2014, RCW 82.04.213 excludes cannabis from the definition of "agricultural product." Cannabis is any product with a THC concentration greater than .3 percent. RCW 82.04.213.
(4) Who is an eligible apiarist? An "eligible apiarist" is a person who owns or keeps one or more bee colonies and who grows, raises, or produces honey bee products for sale at wholesale and is registered under RCW 15.60.021.
(5) What are honey bee products? "Honey bee products" are queen honey bees, packaged honey bees, honey, pollen, bees wax, propolis, or other substances obtained from honey bees. "Honey bee products" do not include manufactured substances or articles. RCW 82.04.213.
(6) What is cannabis? "Cannabis" is any product with a THC concentration greater than .3 percent. For additional information on cannabis see RCW 69.50.101.
(7) Sales to farmers. Persons making sales of tangible personal property to farmers are generally subject to wholesaling or retailing B&O tax, as the case may be, on the gross proceeds of sales. Sales of some services performed for farmers, such as installing or repairing tangible personal property, are retail sales and subject to retailing B&O tax on the gross proceeds of such sales. Persons making retail sales must collect retail sales tax from the buyer, unless the sale is specifically exempt by law. Refer to subsection (9) of this rule for information about specific sales tax exemptions available for sales to farmers.
(a) Documenting wholesale sales. A seller must take and retain from the buyer a copy of the buyer's reseller permit, or a completed "Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions" to document the wholesale nature of any transaction.
(b) Buyer's responsibility when the seller does not collect retail sales tax on a retail sale. If the seller does not collect retail sales tax on a retail sale, the buyer must pay the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department, unless the sale is specifically exempt by law. The excise tax return does not have a separate line for reporting deferred sales tax. Consequently, deferred sales tax liability should be reported on the use tax line of the buyer's excise tax return. If a deferred sales tax or use tax liability is incurred by a farmer who is not required to obtain a tax registration endorsement from the department, the farmer must report the tax on a "Consumer Use Tax Return" and remit the appropriate tax to the department. For detailed information regarding use tax see WAC 458-20-178.
The Consumer Use Tax Return may be obtained by calling the department's telephone information center at 360-705-6705. The return may also be obtained from the department's website at dor.wa.gov.
(c) Feed, seed, seedlings, fertilizer, spray materials, and agents for enhanced pollination. Sales to farmers of feed, seed, seedlings, fertilizer, spray materials, and agents for enhanced pollination, including insects such as bees, to be used for the purpose of producing an agricultural product, whether for wholesale or retail sale, are wholesale sales.
However, when these items are sold to consumers for purposes other than producing agricultural products for sale, the sales are retail sales. For example, sales of feed to riding clubs, racetrack operators, boarders, or similar persons who do not resell the feed at a specific charge are retail sales. Sales of feed for feeding pets or work animals, or for raising animals for the purpose of producing agricultural products for personal consumption are also retail sales. Sales of seed, fertilizer, and spray materials for use on lawns and gardens, or for any other personal use, are likewise retail sales.
(i) What is feed? "Feed" is any substance used as food to sustain or improve animals, birds, fish, bees, or other insects, including whole and processed grains or mixtures thereof, hay and forages or meals made therefrom, mill feeds and feeding concentrates, stock salt, hay salt, sugar, pollen patties, bone meal, fish meal, cod liver oil, double purpose limestone grit, oyster shell, and other similar substances. Food additives that are given for their beneficial growth or weight effects are "feed."
Hormones or similar products that do not make a direct nutritional or energy contribution to the body are not "feed," nor are products used as medicines.
(ii) What is seed? "Seed" is the propagative portions of plants commonly used for seeding or planting whether true seed, bulbs, plants, seed-like fruits, seedlings, or tubers. For purposes of this rule, "seed" does not include seeds or propagative portions of plants used to grow cannabis.
(iii) What is fertilizer? "Fertilizer" is any substance containing one or more recognized plant nutrients and is used for its plant nutrient content and/or is designated for use in promoting plant growth. "Fertilizer" includes limes, gypsum, and manipulated animal and vegetable manures. There is no requirement that fertilizers be applied directly to the soil.
(iv) What are spray materials? "Spray materials" are any substance or mixture of substances in liquid, powder, granular, dry flowable, or gaseous form, which is intended to prevent, destroy, control, repel, or mitigate any insect, rodent, nematode, mite, mollusk, fungus, weed, and any other form of plant or animal life normally considered to be a pest. The term includes treated materials, such as grains, that are intended to destroy, control, or repel such pests. "Spray materials" also include substances that act as plant regulators, defoliants, desiccants, or spray adjuvants.
(v) Examples.
(A) Example 1. Sue grows vegetables for retail sale at a local market. Sue purchases fertilizers and spray materials that she applies to the vegetable plants. She also purchases feed for poultry that she raises to produce eggs for her personal consumption. Because the vegetables are an agricultural product produced for sale, retail sales tax does not apply to Sue's purchases of fertilizers and spray materials, provided she gives the seller a copy of her reseller permit, or a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions. Retail sales tax applies to her purchases of poultry feed, as the poultry is raised to produce eggs for Sue's personal consumption.
(B) Example 2. WG Vineyards (WG) grows grapes that it uses to manufacture wine for sale. WG purchases pesticides and fertilizers that are applied to its vineyards. WG may purchase these pesticides and fertilizers at wholesale, provided WG gives the seller a copy of their reseller permit, or a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions.
(C) Example 3. Seed Co. contracts with farmers to raise seed. Seed Co. provides the seed and agrees to purchase the crop if it meets specified standards. The contracts provide that ownership of the crop is retained by Seed Co., and the risk of crop loss is borne by the farmers. The farmers must pay for the seed whether or not the crop meets the specified standard. The transfer of the possession of the seed to each farmer is a wholesale sale, provided Seed Co. obtains a copy of their reseller permit, or a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions from that farmer.
(d) Chemical sprays or washes. Sales of chemical sprays or washes, whether to farmers or other persons, for the purpose of post-harvest treatment of fruit for the prevention of scald, fungus, mold, or decay are wholesale sales.
(e) Farming equipment. Sales to farmers of farming equipment such as machinery, machinery parts and repair, tools, and cleaning materials are retail sales and subject to retailing B&O and retail sales taxes, unless specifically exempt by law. Refer to subsections (7)(i) and (9) of this rule for information about sales tax exemptions available to farmers.
(f) Packing materials and containers. Sales of packing materials and containers, or tangible personal property that will become part of a container, to a farmer who will sell the property to be contained therein are wholesale sales, provided the packing materials and containers are not put to intervening use by the farmer. Thus, sales to farmers of binder twine for binding bales of hay that will be sold or wrappers for fruit and vegetables to be sold are subject to wholesaling B&O tax. However, sales of packing materials and containers to a farmer who will use the items as a consumer are retail sales and subject to retailing B&O and retail sales taxes. Thus, sales of binder twine to a farmer for binding bales of hay that will be used to feed the farmer's livestock are retail sales.
(g) Purchases for dual purposes. A buyer normally engaged in both consuming and reselling certain types of tangible personal property who is unable to determine at the time of purchase whether the particular property purchased will be consumed or resold must purchase according to the general nature of his or her business. RCW 82.08.130. If the buyer principally consumes the articles in question, the buyer should not give a copy of its reseller permit for any part of the purchase. If the buyer principally resells the articles, the buyer may provide a copy of its reseller permit for the entire purchase. For the purposes of this subsection, the term "principally" means greater than 50 percent.
If a buyer makes a purchase for dual purposes and does not give a copy of their reseller permit for any of the purchase and thereafter resells some of the articles purchased, the buyer may claim a "taxable amount for tax paid at source" deduction. For additional information regarding purchases for dual purposes and the "taxable amount for tax paid at source" deduction see WAC 458-20-102.
(i) Potential deferred sales tax liability. If the buyer gives a copy of its reseller permit for all purchases and thereafter consumes some of the articles purchased, the buyer is liable for deferred sales tax and must remit the tax directly to the department. Refer to (b) of this subsection, WAC 458-20-102 and 458-20-178 for more information regarding deferred sales tax and use tax.
(ii) Example 4. A farmer purchases binder twine for binding bales of hay. Some of the hay will be sold and some will be used to feed the farmer's livestock. More than 50 percent of the binder twine is used for binding bales of hay that will be sold. Because the farmer principally uses the binder twine for binding bales of hay that will be sold, the farmer may provide a copy of their reseller permit, or a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions to the seller for the entire purchase. The farmer is liable for deferred sales tax on the binder twine used for binding bales of hay that are used to feed the farmer's livestock and must remit the tax directly to the department.
(h) "Fruit bin rentals" by fruit packers. Fruit packers often itemize their charges to farmers for various services related to the packing and storage of fruit. An example is a charge for the bins that the packer uses in the receiving, sorting, inspecting, and storing of fruit (commonly referred to as "bin rentals"). The packer delivers the bins to the grower, who fills them with fruit for eventual storage in the packer's warehouse. Charges by fruit packers to farmers for such bin rentals do not constitute the rental of tangible personal property to the farmer where the bins are under the control of the packer for use in the receiving, sorting, inspecting, and storing of fruit. These charges are income to the packer related to the receipt or storage of fruit. The packer, as the consumer of the bins, is subject to retail sales or use tax on the purchase or use of the bins. For information regarding the taxability of fruit packing by cooperative marketing associations and independent dealers acting as agents for others in the sales of fruit and produce see WAC 458-20-214.
(i) Machinery and equipment used directly in a manufacturing operation. Machinery and equipment used directly in a manufacturing operation by a manufacturer or processor for hire is exempt from sales and use taxes provided that all requirements for the exemptions are met. RCW 82.08.02565 and 82.12.02565. These exemptions are commonly referred to as the M&E exemption. Farmers who use agricultural products that they have grown, raised, or produced as ingredients in a manufacturing process may be entitled to the M&E exemption on the acquisition of machinery and equipment used directly in their manufacturing operation. For more information on the M&E exemption see WAC 458-20-13601.
(8) Sales by farmers. Farmers are not subject to B&O tax on wholesale sales of agricultural products. Effective July 1, 2015, bee pollination services provided to farmers by eligible apiarists also qualify for the exemption provided by RCW 82.04.330. Farmers who manufacture products using agricultural products that they have grown, raised, or produced should refer to (b) of this subsection for tax-reporting information.
Farmers are subject to retailing B&O tax on retail sales of agricultural products and retailing or wholesaling B&O tax on sales of nonagricultural products, as the case may be, unless specifically exempt by law. Also, B&O tax applies to sales of agricultural products that the seller has not grown, raised, or produced on the seller's own land or on land in which the seller has a present right of possession, whether these products are sold at wholesale or retail. Likewise, B&O tax applies to sales of animals or substances derived from animals in connection with the business of operating a stockyard, slaughterhouse, or packing house. Farmers may be eligible to claim a small business B&O tax credit if the amount of B&O tax liability in a reporting period is under a certain amount. For more information about the small business B&O tax credit see WAC 458-20-104.
(a) Litter tax. The gross proceeds of sales of certain products, including food for human or pet consumption, are subject to litter tax. RCW 82.19.020. Litter tax does not apply to sales of agricultural products that are exempt from B&O tax under RCW 82.04.330. RCW 82.19.050. Thus, farmers are not subject to litter tax on wholesale sales of agricultural products but are liable for litter tax on the gross proceeds of retail sales of agricultural products that constitute food for human or pet consumption. In addition, farmers that manufacture products for use and consumption within this state (e.g., a farmer who produces wine from grapes that the farmer has grown) may be liable for litter tax measured by the value of the products manufactured. For more information about the litter tax see chapter 82.19 RCW and WAC 458-20-243.
Example 5. RD Orchards (RD) grows apples at its orchards. Most apples are sold at wholesale, but RD operates a seasonal roadside fruit stand from which it sells apples at retail. The wholesale sales of apples are exempt from both B&O and litter taxes. The retail sales of apples are subject to retailing B&O and litter taxes but are exempt from sales tax because the apples are sold as a food product for human consumption. Refer to subsection (9)(d) of this rule for more information about the retail sales tax exemption applicable to sales of food products for human consumption.
(b) Farmers using agricultural products in a manufacturing process. The B&O tax exemption provided by RCW 82.04.330 does not apply to any person selling manufactured substances or articles. Thus, farmers who manufacture products using agricultural products that they have grown, raised, or produced are subject to manufacturing B&O tax on the value of products manufactured. Farmers who sell their manufactured products at retail or wholesale in the state of Washington are also generally subject to the retailing or wholesaling B&O tax, as the case may be. In such cases, a multiple activities tax credit (MATC) may be available. Refer to WAC 458-20-136 (Manufacturing, processing for hire, fabricating) and WAC 458-20-19301 (Multiple activities tax credits), respectively, for more information about the manufacturing B&O tax and the MATC.
(i) Manufacturing fresh fruits and vegetables. RCW 82.04.4266 provides a B&O tax exemption to persons manufacturing fresh fruits or vegetables by canning, preserving, freezing, processing, or dehydrating fresh fruits or vegetables. For purposes of this rule, "fruits" and "vegetables" does not include cannabis.
Wholesale sales of fresh fruits or vegetables canned, preserved, frozen, processed, or dehydrated by the seller and sold to purchasers who transport the goods out of this state in the ordinary course of business are also eligible for this exemption. A seller must keep and preserve records for the period required by RCW 82.32.070 establishing that the purchaser transported the goods out of Washington state.
(A) A person claiming the exemption must file a complete annual tax performance report with the department under RCW 82.32.534. In addition, persons claiming this tax preference must report the amount of the exemption on their monthly or quarterly excise tax return. For more information on reporting requirements for this tax preference see RCW 82.32.808.
(B) RCW 82.04.4266 is scheduled to expire July 1, 2035, at which time the preferential B&O tax rate under RCW 82.04.260 will apply.
(ii) Manufacturing dairy products. RCW 82.04.4268 provides a B&O tax exemption to persons manufacturing dairy products, not including any cannabis-infused product, that as of September 20, 2001, are identified in 21 C.F.R., chapter 1, parts 131, 133, and 135. These products include milk, buttermilk, cream, yogurt, cheese, and ice cream, and also include by-products from the manufacturing of dairy products such as whey and casein.
The exemption also applies to persons selling manufactured dairy products to purchasers who transport the goods out of Washington state in the ordinary course of business and, until July 1, 2025, to purchasers who use such dairy products as an ingredient or component in the manufacturing of a dairy product in Washington state. Unlike the exemption for certain wholesale sales of fresh fruits or vegetables (see (b)(i) of this subsection), the exemption for sales of qualifying dairy products does not require that the sales be made at wholesale.
A seller must keep and preserve records for the period required by RCW 82.32.070 establishing that the purchaser transported the goods out of Washington state or the goods were sold to a manufacturer for use as an ingredient or component in the manufacturing of a dairy product in Washington state.
(A) A person claiming the exemption must file a complete annual tax performance report with the department under RCW 82.32.534. In addition, persons claiming this tax preference must report the amount of the exemption on their monthly or quarterly excise tax return. For more information on reporting requirements for this tax preference see RCW 82.32.808.
(B) RCW 82.04.4268 is generally scheduled to expire July 1, 2035, at which time the preferential B&O tax rate under RCW 82.04.260 will apply. The exemption for sales of dairy products to purchasers who use such dairy products as an ingredient or component in the manufacturing of a dairy product in Washington state expires July 1, 2025.
(c) Raising cattle for wholesale sale. RCW 82.04.330 provides a B&O tax exemption to persons who raise cattle for wholesale sale provided that the cattle are held for at least 60 days prior to the sale. Persons who hold cattle for fewer than 60 days before reselling the cattle are not considered to be engaging in the normal activities of growing, raising, or producing livestock for sale.
Example 6. A feedlot operation purchases cattle and feeds them until they attain a good market condition. The cattle are then sold at wholesale. The feedlot operator is exempt from B&O tax on wholesale sales of cattle if it held the cattle for at least 60 days while they were prepared for market. However, the feedlot operator is subject to wholesaling B&O tax on wholesale sales of cattle held for fewer than 60 days prior to the sale.
(d) B&O tax exemptions available to farmers. In addition to the exemption for wholesale sales of agricultural products, several other B&O tax exemptions available to farmers are discussed in this subsection.
(i) Growing, raising, or producing agricultural products owned by other persons. RCW 82.04.330 exempts amounts received by a farmer for growing, raising, or producing agricultural products owned by others, such as custom feed operations.
Example 7. A farmer is engaged in the business of raising cattle owned by others (commonly referred to as "custom feeding"). After the cattle attain a good market condition, the owner sells them. Amounts received by the farmer for custom feeding are exempt from B&O tax under RCW 82.04.330, provided that the farmer held the cattle for at least 60 days. Farmers are not considered to be engaging in the activity of raising cattle for sale unless the cattle are held for at least 60 days while the cattle are prepared for market. (See (c) of this subsection.)
(ii) Processed hops shipped outside Washington for first use. RCW 82.04.337 exempts amounts received by hop growers or dealers for hops shipped outside the state of Washington for first use, if those hops have been processed into extract, pellets, or powder in this state. However, the processor or warehouser of such products is not exempt on amounts charged for processing or warehousing such products.
(iii) Sales of hatching eggs or poultry. RCW 82.04.410 exempts amounts received for the sale of hatching eggs or poultry by farmers producing hatching eggs or poultry, when these agricultural products are for use in the production for sale of poultry or poultry products.
(9) Retail sales tax and use tax exemptions. This subsection provides information about a number of retail sales tax and corresponding use tax exemptions available to farmers and persons buying tangible personal property at retail from farmers. Some exemptions require the buyer to provide the seller with an exemption certificate. Refer to subsection (10) of this rule for additional information regarding exemption certificates.
(a) Pollen. RCW 82.08.0277 and 82.12.0273 exempt the sale and use of pollen from retail sales and use taxes.
(b) Semen. RCW 82.08.0272 and 82.12.0267 exempt the sale and use of semen used in the artificial insemination of livestock from retail sales and use taxes.
(c) Feed for livestock at public livestock markets. RCW 82.08.0296 and 82.12.0296 exempt the sale and use of feed to be consumed by livestock at a public livestock market from retail sales and use taxes.
(d) Food products. RCW 82.08.0293 and 82.12.0293 exempt the sale and use of food products for human consumption from retail sales and use taxes. These exemptions also apply to the sale or use of livestock for personal consumption as food. For more information about food products that qualify for this exemption see WAC 458-20-244.
(e) Auction sales of farm property. RCW 82.08.0257 and 82.12.0258 exempt from retail sales and use taxes tangible personal property, including household goods, which has been used in conducting a farm activity, if the property is purchased from a farmer, as defined in RCW 82.04.213, at an auction sale held or conducted by an auctioneer on a farm. Effective June 12, 2014, these exemptions do not apply to personal property used by a person in the production of cannabis.
(f) Poultry. RCW 82.08.0267 and 82.12.0262 exempt from retail sales and use taxes the sale and use of poultry used in the production for sale of poultry or poultry products.
Example 8. A poultry hatchery produces poultry from eggs. The resulting poultry are sold to egg producers. These sales are exempt from retail sales tax under RCW 82.08.0267. (They are also exempt from B&O tax. See subsection (8)(d)(iii) of this rule.)
(g) Leases of irrigation equipment. RCW 82.08.0288 and 82.12.0283 exempt the lease or use of irrigation equipment from retail sales and use taxes, but only if:
(i) The lessor purchased the irrigation equipment for the purpose of irrigating land controlled by the lessor;
(ii) The lessor has paid retail sales or use tax upon the irrigation equipment;
(iii) The irrigation equipment is attached to the land in whole or in part;
(iv) Effective June 12, 2014, the irrigation equipment is not used in the production of cannabis; and
(v) The irrigation equipment is leased to the lessee as an incidental part of the lease of the underlying land and is used solely on such land.
(h) Beef and dairy cattle. RCW 82.08.0259 and 82.12.0261 exempt the sale and use of beef and dairy cattle, to be used by a farmer in producing an agricultural product, from retail sales and use taxes.
Example 9. John operates a farm where he raises beef and dairy cattle for sale. He also raises other livestock for sale including hogs, sheep, and goats. John's sales of beef and dairy cattle for use on a farm are exempt from retail sales tax. However, John must collect retail sales tax on all retail sales of sheep, goats, and hogs unless the sales qualify for either the food products exemption described in (d) of this subsection, or the exemption for sales of livestock for breeding purposes described in this subsection (9)(i) of this rule.
(i) Livestock for breeding purposes. RCW 82.08.0259 and 82.12.0261 exempt the sale or use of livestock, as defined in RCW 16.36.005, for breeding purposes where the animals are registered in a nationally recognized breed association from retail sales and use taxes.
Example 10. ABC Farms raises and sells quarter horses registered in the American Quarter Horse Association (AQHA). Quarter horses are generally recognized as a definite breed of horse, and the AQHA is a nationally recognized breed association. Therefore, ABC Farms is not required to collect sales tax on retail sales of quarter horses for breeding purposes, provided it receives and retains a completed exemption certificate from the buyer.
(j) Bedding materials for chickens. RCW 82.08.920 and 82.12.920 exempt from retail sales and use taxes the sale to and use of bedding materials by farmers to accumulate and facilitate the removal of chicken manure, provided the farmer is raising chickens that are sold as agricultural products.
(i) What are bedding materials? "Bedding materials" are wood shavings, straw, sawdust, shredded paper, and other similar materials.
(ii) Example 11. Farmer raises chickens for use in producing eggs for sale. When the chickens are no longer useful for producing eggs, Farmer sells them to food processors for soup and stew meat. Farmer purchases bedding materials used to accumulate and facilitate the removal of chicken manure. The purchases of bedding materials by Farmer are exempt from retail sales tax as long as Farmer provides the seller with a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions. See subsection (10) of this rule for where to find an exemption certificate. The seller must retain a copy of the exemption certificate for its records.
The exemption merely requires that the chickens be sold as agricultural products. It is immaterial that Farmer primarily raises the chickens to produce eggs.
(k) Propane or natural gas used to heat structures housing chickens. RCW 82.08.910 and 82.12.910 exempt from retail sales and use taxes the sale to and use of propane or natural gas by farmers to heat structures used to house chickens. The propane or natural gas must be used exclusively to heat the structures, and the structures must be used exclusively to house chickens that are sold as agricultural products.
(i) What are "structures"? "Structures" are barns, sheds, and other similar buildings in which chickens are housed.
(ii) Example 12. Farmer purchases natural gas that is used to heat structures housing chickens. The natural gas is used exclusively to heat the structures, and the structures are used exclusively to house chickens. The chickens are used to produce eggs. When the chickens are no longer useful for producing eggs, Farmer sells the chickens to food processors for soup and stew meat. The purchase of natural gas by Farmer is exempt from retail sales tax as long as Farmer provides the seller with a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions. See subsection (10) of this rule for where to find an exemption certificate. The seller must retain a copy of the exemption certificate for its records.
The exemption merely requires that the chickens be sold as agricultural products. It is immaterial that Farmer primarily houses these chickens to produce eggs.
(iii) Example 13. Farmer purchases natural gas that is used to heat structures used in the incubation of chicken eggs and structures used for washing, packing, and storing eggs. The natural gas used to heat these structures is not exempt from retail sales tax because the structures are not used exclusively to house chickens that are sold as agricultural products.
(l) Diesel, biodiesel, and aircraft fuel for farm fuel users. RCW 82.08.865 and 82.12.865 exempt from retail sales and use taxes the sale and use of diesel fuel, biodiesel fuel, and aircraft fuel, to farm fuel users for agricultural purposes. The exemptions apply to a fuel blend if all of the component fuels of the blend would otherwise be exempt if the component fuels were sold as separate products. The buyer must provide the seller with a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions. See subsection (10) of this rule for where to find an exemption certificate. The seller must retain a copy of the exemption certificate for its records.
(i) The exemptions apply to nonhighway uses for production of agricultural products and for providing horticultural services to farmers. Horticultural services include:
(A) Soil preparation services;
(B) Crop cultivation services;
(C) Crop harvesting services.
(ii) The exemptions do not apply to uses other than for agricultural purposes. Agricultural purposes do not include:
(A) Heating space for human habitation or water for human consumption; or
(B) Transporting on public roads individuals, agricultural products, farm machinery or equipment, or other tangible personal property, except when the transportation is incidental to transportation on private property and the fuel used for such transportation is not subject to tax under chapter 82.38 RCW.
(m) Nutrient management equipment and facilities. RCW 82.08.890 and 82.12.890 provide retail sales and use tax exemptions for the sale to or use by eligible persons of:
(i) Qualifying livestock nutrient management equipment;
(ii) Labor and services rendered in respect to installing, repairing, cleaning, altering, or improving qualifying livestock nutrient management equipment; and
(iii) Labor and services rendered in respect to repairing, cleaning, altering, or improving qualifying livestock nutrient management facilities, or to tangible personal property that becomes an ingredient or component of qualifying livestock nutrient management facilities in the course of repairing, cleaning, altering, or improving such facilities.
(iv) Nonqualifying labor and services. This subsection (9)(m)(iii) of this rule does not include the sale of or charge made for labor and services rendered in respect to the constructing of new, or replacing previously existing, qualifying livestock nutrient management facilities, or tangible personal property that becomes an ingredient or component of qualifying livestock nutrient management facilities during the course of constructing new, or replacing previously existing qualifying livestock nutrient management facilities.
(v) Nutrient management plan must be certified or approved. The exemptions provided by RCW 82.08.890 and 82.12.890 apply to sales made after the livestock nutrient management plan is:
(A) Certified under chapter 90.64 RCW;
(B) Approved as part of the permit issued under chapter 90.48 RCW; or
(C) Approved by a conservation district and who qualifies for the exemption provided under RCW 82.08.855. A Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions should be completed and provided to the seller. In lieu of the exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement. The seller must retain a copy of the certificate or the data elements for the seller's files.
(vi) Definitions. For the purpose of these exemptions, the following definitions apply:
(A) "Animal feeding operation" means a lot or facility, other than an aquatic animal production facility, where the following conditions are met:
• Animals, other than aquatic animals, have been, are, or will be stabled or confined and fed or maintained for a total of 45 days or more in any 12-month period; and
• Crops, vegetation, forage growth, or post-harvest residues are not sustained in the normal growing season over any portion of the lot or facility.
(B) "Conservation district" means a subdivision of state government organized under chapter 89.08 RCW.
(C) "Eligible person" means a person:
• Licensed to produce milk under chapter 15.36 RCW who has a certified dairy nutrient management plan, as required by chapter 90.64 RCW; or
• Who owns an animal feeding operation and has a permit issued under chapter 90.48 RCW; or
• Who owns an animal feeding operation and has a nutrient management plan approved by a conservation district as meeting natural resource conservation service field office technical guide standards and who qualifies for the exemption provided under RCW 82.08.855.
(D) "Handling and treatment of livestock manure" means the activities of collecting, storing, moving, or transporting livestock manure, separating livestock manure solids from liquids, or applying livestock manure to the agricultural lands of an eligible person other than through the use of pivot or linear type traveling irrigation systems.
(E) "Permit" means either a state waste discharge permit or a National Pollutant Discharge Elimination System permit, or both.
(F) "Qualifying livestock nutrient management equipment" means the tangible personal property listed below for exclusive use in the handling and treatment of livestock manure, including repair and replacement parts for the same equipment:
Aerators
Agitators
Augers
Conveyers
Gutter cleaners
Hard-hose reel traveler irrigation systems
Lagoon and pond liners and floating covers
Loaders
Manure composting devices
Manure spreaders
Manure tank wagons
Manure vacuum tanks
Poultry house cleaners
Poultry house flame sterilizers
Poultry house washers
Poultry litter saver machines
Pipes
Pumps
Scrapers
Separators
Slurry injectors and hoses
Wheelbarrows, shovels, and pitchforks.
(G) "Qualifying livestock nutrient management facilities" means the exclusive use in the handling and treatment of livestock manure of the facilities listed below:
Flush systems
Lagoons
Liquid livestock manure storage structures, such as concrete tanks or glass-lined steel tanks
Structures used solely for dry storage of manure, including roofed stacking facilities.
(n) Anaerobic digesters (effective July 1, 2018).
(i) RCW 82.08.900 and 82.12.900 provide retail sales and use tax exemptions for purchases and uses by eligible persons:
(A) In respect to equipment necessary to process biogas from a landfill into marketable coproducts including, but not limited to, biogas conditioning, compression, and electrical generation equipment, or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving equipment necessary to process biogas from a landfill into marketable coproducts; and
(B) Establishing or operating anaerobic digesters or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving an anaerobic digester. The exemptions include sales of tangible personal property that becomes an ingredient or component of the anaerobic digester. Anaerobic digester means a facility that processes organic material into biogas and digestate using microorganisms in a decomposition process within a closed, oxygen-free container as well as the equipment necessary to process biogas or digestate produced by an anaerobic digester into marketable coproducts including, but not limited to, biogas conditioning, compression, nutrient recovery, and electrical generation equipment.
(ii) Records retention and exemption certificate. Persons claiming the exemptions under RCW 82.08.900 and 82.12.900 must keep records necessary for the department to verify eligibility. Sellers may make tax exempt sales only if the buyer provides the seller with a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions, and the seller retains a copy of the certificate for its files. See subsection (10) of this rule for where to find an exemption certificate.
(o)(i) Anaerobic digesters (effective until January 1, 2029). RCW 82.08.900 and 82.12.900 provide retail sales and use tax exemptions for purchases and uses by eligible persons establishing or operating anaerobic digesters or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving an anaerobic digester. The exemptions include sales of tangible personal property that becomes an ingredient or component of the anaerobic digester. The anaerobic digester must be used primarily (more than 50 percent measured by volume or weight) to treat livestock manure. Anaerobic digester is a facility that processes manure from livestock into biogas and dried manure using microorganisms in a decomposition process within a closed, oxygen-free container.
(ii) Records retention and exemption certificate. Persons claiming the exemptions under RCW 82.08.900 and 82.12.900 must keep records necessary for the department to verify eligibility. Sellers may make tax exempt sales only if the buyer provides the seller with a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions, and the seller retains a copy of the certificate for its files. See subsection (10) of this rule for where to find an exemption certificate.
(p) Animal pharmaceuticals. RCW 82.08.880 and 82.12.880 exempt from retail sales and use taxes the sale of and use of certain animal pharmaceuticals when sold to, or used by, farmers or veterinarians. To qualify for the exemption, the animal pharmaceutical must be administered to an animal raised by a farmer for the purpose of producing an agricultural product for sale. In addition, the animal pharmaceutical must be approved by the United States Department of Agriculture (USDA) or the United States Food and Drug Administration (FDA).
(i) Who is a veterinarian? A "veterinarian" means a person who is licensed to practice veterinary medicine, surgery, or dentistry under chapter 18.92 RCW.
(ii) How can I determine whether the FDA or USDA has approved an animal pharmaceutical? The FDA and USDA have an established approval process set forth in federal regulations. The FDA maintains a list of all approved animal pharmaceuticals called the "Green Book." The USDA maintains a list of approved biotechnology products called the "Veterinary Biologics Product Catalogue." Pharmaceuticals that are not on either of these lists have not been approved and are not eligible for the exemption.
(iii) Example 17. Dairy Farmer purchases sterilizing agents. The sterilizing agents are applied to the equipment and facilities where Dairy Farmer's cows are milked. Dairy Farmer also purchases teat dips, antiseptic udder washes, and salves that are not listed in either the FDA's Green Book of approved animal pharmaceuticals or the USDA's Veterinary Biologics Product Catalogue of approved biotechnology products. The purchases of sterilizing agents are not exempt as animal pharmaceuticals because the sterilizing agents are not administered to animals. The teat dips, antiseptic udder washes, and salves are likewise not exempt because they have not been approved by the FDA or USDA.
(iv) What type of animal must the pharmaceutical be administered to? As explained above, the exemptions are limited to the sale and use of animal pharmaceuticals administered to an animal that is raised by a farmer for the purpose of producing an agricultural product for sale. The conditions under which a farmer may purchase and use tax-exempt animal pharmaceuticals are similar to those under which a farmer may purchase and use feed at wholesale. Both types of purchases and uses require that the particular product be sold to or used by a farmer (or a veterinarian in the case of animal pharmaceuticals), and that the product be given or administered to an animal raised by a farmer for the purpose of producing an agricultural product for sale.
(v) Examples of animals raised for the purpose of producing agricultural products for sale. For purposes of the exemptions, the following is a nonexclusive list of examples of animals that are being raised for the purpose of producing an agricultural product for sale, presuming all other requirements for the exemption are met:
(A) Horses, cattle, or other livestock raised by a farmer for sale;
(B) Cattle raised by a farmer for the purpose of slaughtering, if the resulting products are sold;
(C) Milk cows raised and/or used by a dairy farmer for the purpose of producing milk for sale;
(D) Horses raised by a farmer for the purpose of producing foals for sale;
(E) Sheep raised by a farmer for the purpose of producing wool for sale; and
(F) "Private sector cultured aquatic products" as defined by RCW 15.85.020 (e.g., salmon, catfish, and mussels) raised by an aquatic farmer for the purpose of sale.
(vi) Examples of animals that are not raised for the purpose of producing agricultural products for sale. For purposes of the exemptions, the following nonexclusive list of examples do not qualify because the animals are not being raised for the purpose of producing an agricultural product for sale:
(A) Cattle raised for the purpose of slaughtering if the resulting products are not produced for sale;
(B) Sheep and other livestock raised as pets;
(C) Dogs or cats, whether raised as pets or for sale. Dogs and cats are pet animals; therefore, they are not considered to be agricultural products. (See subsection (3) of this rule); and
(D) Horses raised for the purpose of racing, showing, riding, and jumping. However, if at some future time the horses are no longer raised for racing, showing, riding, or jumping and are instead being raised by a farmer for the purpose of producing foals for sale, the exemption will apply if all other requirements for the exemption are met.
(vii) Do products that are used to administer animal pharmaceuticals qualify for the exemption? Sales and uses of products that are used to administer animal pharmaceuticals (e.g., syringes) do not qualify for the exemptions, even if they are later used to administer a tax-exempt animal pharmaceutical. However, sales and uses of tax-exempt animal pharmaceuticals contained in a product used to administer the animal pharmaceutical (e.g., a dose of a tax-exempt pharmaceutical contained in a syringe or cotton applicator) qualify for the exemption.
(q) Replacement parts for qualifying farm machinery and equipment. RCW 82.08.855 and 82.12.855 exempt from retail sales and use taxes sales to and uses by eligible farmers of replacement parts for qualifying farm machinery and equipment. Also included are: Labor and services rendered during the installation of repair parts; and labor and services rendered during repair as long as no tangible personal property is installed, incorporated, or placed in, or becomes an ingredient or component of the qualifying equipment other than replacement parts.
(i) The following definitions apply to this subsection:
(A) "Eligible farmer" as defined in RCW 82.08.855(4).
(B) "Qualifying farm machinery and equipment" means machinery and equipment used primarily by an eligible farmer for growing, raising, or producing agricultural products, and effective July 1, 2015, providing bee pollination services, or both.
(C) "Qualifying farm machinery and equipment" does not include:
• Vehicles as defined in RCW 46.04.670, other than farm tractors as defined in RCW 46.04.180, farm vehicles and other farm implements. "Farm implements" means machinery or equipment manufactured, designed, or reconstructed for agricultural purposes and used primarily by an eligible farmer to grow, raise, or produce agricultural products, but does not include lawn tractors and all-terrain vehicles;
• Aircraft;
• Hand tools and hand-powered tools; and
• Property with a useful life of less than one year.
(D) "Replacement parts" means those parts that replace an existing part, or which are essential to maintain the working condition, of a piece of qualifying farm machinery or equipment. Paint, fuel, oil, hydraulic fluids, antifreeze, and similar items are not replacement parts except when installed, incorporated, or placed in qualifying farm machinery and equipment during the course of installing replacement parts as defined here or making repairs as described above in (p) of this subsection.
(ii) Records retention and exemption certificate.
Persons claiming the exemptions must keep records necessary for the department to verify eligibility. Sellers making tax-exempt sales must obtain, and retain in its files, a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions from the farmer. In lieu of the exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement.
(10) Sales tax exemption certificates. As indicated in subsection (9) of this rule, certain sales of tangible personal property and retail services either to or by farmers are exempt from retail sales tax. A person claiming an exemption must keep records necessary for the department to verify eligibility for each claimed exemption. A person claiming an exemption under subsection (9) of this rule may complete and use the department's Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions. Refer to the department's website at dor.wa.gov for the exemption certificate. In lieu of an exemption certificate, a seller may capture the relevant data elements as provided under the streamlined sales and use tax agreement as allowed under RCW 82.08.050. Sellers must retain a copy of the exemption certificate or the data elements in their files. Without proper documentation, sellers are liable for payment of the retail sales tax on sales claimed as exempt.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 24-04-005, § 458-20-210, filed 1/24/24, effective 2/24/24. Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-210, filed 6/21/23, effective 7/22/23; WSR 22-24-096, § 458-20-210, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 19-02-057, § 458-20-210, filed 12/27/18, effective 1/27/19. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-210, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), 2015 3rd sp.s. c 6 part XI and 2015 c 86 § 202. WSR 16-03-002, § 458-20-210, filed 1/6/16, effective 2/6/16. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-01-007, § 458-20-210, filed 12/4/14, effective 1/4/15; WSR 14-14-091, § 458-20-210, filed 6/30/14, effective 7/31/14. Statutory Authority: RCW 82.01.060(2), 82.32.300, and 34.05.230. WSR 03-18-024, § 458-20-210, filed 8/25/03, effective 9/25/03. Statutory Authority: RCW 82.32.300. WSR 94-07-048, § 458-20-210, filed 3/10/94, effective 4/10/94; WSR 86-21-085 (Order ET 86-18), § 458-20-210, filed 10/17/86; WSR 86-07-005 (Order ET 86-3), § 458-20-210, filed 3/6/86; WSR 83-08-026 (Order ET 83-1), § 458-20-210, filed 3/30/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-210, filed 6/27/78; Order ET 70-3, § 458-20-210 (Rule 210), filed 5/29/70, effective 7/1/70.]


PDF458-20-211

Leases or rentals of tangible personal property, bailments.

(1) Introduction. This section explains how persons are taxable who rent or lease tangible personal property or rent equipment with an operator. It explains that some activities performed by operated equipment may be taxable under classifications other than retail sales if the operator and equipment perform activities as a prime contractor or subcontractor and these activities are specifically classified under other tax classifications by the revenue act. Readers may want to refer to rules in the following list:
(a) WAC 458-20-102 Reseller permits.
(b) WAC 458-20-13501 Timber harvest operations.
(c) WAC 458-20-170 Constructing and repairing of new or existing buildings or other structures upon real property.
(d) WAC 458-20-17001 Government contracting—Construction, installations, or improvements to government real property.
(e) WAC 458-20-171 Building, repairing or improving streets, roads, etc., which are owned by a municipal corporation or political subdivision of the state or by the United States and which are used primarily for foot or vehicular traffic.
(f) WAC 458-20-180 Motor carriers.
(g) WAC 458-20-198 Installment sales, method of reporting.
(h) WAC 458-20-209 Farming for hire and horticultural services performed for farmers.
(2) Definitions.
(a) The terms "leasing" and "renting" are used interchangeably and refer generally to the act of granting to another the right of possession to and use of tangible personal property for a consideration. When "lease," "leasing," "lessee," or "lessor" are used in this section, these terms are intended to include rentals as well, even if not specifically stated.
Persons may not claim to be leasing or renting equipment to themselves since they are not granting to another the right of possession.
(b) The term "bailment" refers to the act of granting to another the temporary right of possession to and use of tangible personal property for a stated purpose without consideration to the grantor.
(c) The term "subcontractor" refers to a person who has entered into a contract for the performance of an act with the person who has already contracted for its performance. A subcontractor is generally responsible for performing the work to contract specification and determines how the work will be performed. In purchasing subcontract services, the customer is primarily purchasing the knowledge, skills, and expertise of the contractor to perform the task, as distinguished from the operation of the equipment.
(d) The term "rental of equipment with operator" means the provision of equipment with an operator to a lessee to perform work under the specific direction of the lessee. In such cases the lessor is generally not responsible for performing work to contract specification and does not determine how the work will be performed.
(e)(i) The term "true object test" as it relates to this section means the analysis of a transaction involving the rental of equipment with an operator, to determine if the lessee is simply purchasing the use of the equipment or purchasing the knowledge, skills, and expertise of the operator beyond those needed to operate the equipment. Even if it is determined that the customer is purchasing the knowledge, skills, and expertise of the operator, the transaction may still be a retail sale if the activity is specifically included by statute within the definition of a retail sale. This test can also be applied to rentals of tangible personal property without an operator, where the lessor performs some service in connection with the rental property. See examples 5 and 6.
(ii) The "true object test" described in this section is distinguished from the "true object test" described in RCW 82.08.190 for bundled transactions of two or more products. See example 15.
(iii) The "true object test" described in this section is also distinguished from transactions involving two or more products where one or more of the products is real property or a service to real property. See example 10.
(f) The term "true lease" (often referred to as an "operating lease") refers to the act of leasing property to another for consideration with the property under the dominion and control of the lessee for the term of the lease with the intent that the property will revert back to the lessor at the conclusion of the lease.
(g) The term "financing lease" (often referred to as a "capital lease") typically involves the lease of property for a stated period of time with ownership transferring to the "lessee" at the conclusion of the lease for a nominal or minimal payment. The transaction is structured as a lease, but retains some elements of an installment sale. Financing leases will generally be taxed as if they are installment sales. The presence of some or all of the following factors indicates a financing lease with the transaction treated as an installment sale:
(i) The lessee is given an option to purchase the equipment, and, if so, the option price is nominal (sometimes referred to as a "bargain purchase option");
(ii) The lessee acquires equity in the equipment;
(iii) The lessee is required to bear the entire risk of loss;
(iv) The lessee pays all the charges and taxes imposed on ownership;
(v) There is a provision for acceleration of rent payments; and
(vi) The property was purchased specifically for lease to this lessee.
(3) A true lease, rental, or bailment of personal property does not arise unless the lessee or bailee, or employees or independent operators hired by the lessee or bailee actually takes possession of the property and exercises dominion and control over it. Where the owner/lessor of the equipment or the owner's/lessor's employees or agents maintain dominion and control over the personal property and actually operate it, the owner/lessor has not generally relinquished sufficient control over the property to give rise to a true lease, rental, or bailment of the property.
(4)(a) RCW 82.04.050 excludes from the definition "retail sale" any purchases for the purpose of resale, "as tangible personal property." Persons who use equipment in performing services either as prime contractors or as subcontractors are not purchasing the equipment for purposes of reselling the equipment as tangible personal property. These contractors must pay retail sales tax or use tax at the time the equipment is acquired and are not eligible to use a reseller permit for the purchase.
(b) Persons renting operated equipment to others may purchase the equipment without payment of retail sales tax only when the equipment is rented as tangible personal property. This can be demonstrated only when:
(i) The agreement between the parties is designated as an outright lease or rental, without reservations; and
(ii) The lessee acquires the right of possession, dominion, and control of the equipment, even to the exclusion of the lessor.
This last requirement is a factual question and the burden of proof is upon the owner/operator of the equipment to establish that the degree of control has been relinquished necessary to constitute a lessor-lessee relationship. Weight will be given to such factors as who has physical, operating control of the equipment; who is responsible for its maintenance, fueling, repair, storage, insurance (risk of loss or damage), safety and security of operation, and whether the operator is a loaned employee. If control of these factors is left with the owner/operator, then as a matter of fact, there has not been a relinquishing of control of the equipment to the degree necessary to create a lessor-lessee relationship for the rental of tangible personal property. This is true, even though the customer exercises some constructive control over such matters as when and where the equipment is used in connection with the construction work being performed, i.e., the contractor controls the job site.
(5) Business and occupation (B&O) tax.
(a) Outright rentals of bare (unoperated) equipment or other tangible personal property as well as leases of operated equipment are generally subject to the retailing B&O tax.
(i) When a lessor purchases equipment for bare rental or lease, the seller of the equipment is making a wholesale sale to the lessor and is required to obtain a reseller permit from the lessor to document the wholesale nature of any sale, as provided in WAC 458-20-102 (Reseller permits).
(ii) Under unique circumstances when equipment is rented by a lessee for use as a rental to other lessees without intervening use, the original rental is subject to wholesaling B&O tax and the subsequent rental is subject to the retailing B&O tax. The original seller is required to obtain a reseller permit (WAC 458-20-102) to substantiate the wholesale nature of the transaction.
(iii) Persons who purchase equipment for use as prime contractors or subcontractors are considered consumers of the equipment, as the contractor, not their customers, actually use the equipment. Sales of equipment and tools to prime contractors and subcontractors are generally subject to retailing B&O tax, unless purchased for resale without any use on the part of the purchaser.
(b) Persons who provide equipment or other tangible personal property and, in addition, operate the equipment or supply an employee to operate the same for a charge, without relinquishing substantial dominion and control to the customer, are providing a service that is classified as a retail sale unless the nature of the activity is specifically classified under another tax classification. Where a specific tax classification applies to the activity, the income is subject to B&O tax (or public utility tax (PUT)) according to the classification of the activities performed by the equipment operator. In the case of building construction, it is presumed that the rental of equipment with an operator to a contractor is a retail sale unless the operator is responsible for performing construction to contract specifications and assumes control over how the work will be performed.
(c) Under some circumstances, the rental or lease of tangible personal property is subject to the "retailing of interstate transportation equipment" B&O tax classification. This classification applies if the sale is exempt from retail sales tax because of the specific tax exemptions provided in RCW 82.08.0261, 82.08.0262, or 82.08.0263. These exemptions apply primarily to sales to private or common carriers who are engaged in interstate or foreign commerce.
(6) Retail sales tax. Persons who rent or lease tangible personal property to consumers are required to collect retail sales tax measured by the selling price of the rentals as of the time the rental payments become due. See RCW 82.08.010.
(a) RCW 82.04.050 excludes from the definition of the term "retail sale," purchases for the purpose of resale in the regular course of business without intervening use "as tangible personal property." Thus, the retail sales tax does not apply to sales of tangible personal property to persons who purchase the same solely for the purpose of renting or leasing such property without operators in the regular course of business. However, the retail sales tax applies upon sales to persons who provide such property with operators for a charge, without relinquishing substantial dominion and control, or who intend to make some use of the property other than or in addition to renting or leasing it.
(b) For state tax purposes, financing leases are treated as installment sales. The retail sales tax applies to the full selling price. Refer to WAC 458-20-198.
(7) Use tax or deferred retail sales tax. Consumers who rent or lease tangible personal property from others and who have not paid retail sales tax to their lessors are liable for retail sales tax or use tax on the amount of the rental payments as of the time the payments fall due unless an exemption from the tax applies. In cases where rental payments do not represent a reasonable rental value for the article, the taxable value shall be determined according to the rental charges made by other sellers of similar articles of like quality and character. This may include using the rate of return as a percentage of the capitalized value that lessors of the particular type of property are generally using in rate setting.
In some cases, lessors may lease articles wherein the lease payments do not include property taxes or insurance. These leases are often referred to as "net leases" with the insurance and property taxes paid directly by the lessee. If the lessor is the party insured and the party legally liable for payment of the taxes, the payments made directly by the lessee must be treated as additional consideration to the lessor and subject to retailing B&O tax and retail sales tax.
(a) Bailment. The value of tangible personal property held or used under bailment is subject to use tax if the property was purchased or acquired under conditions whereby the retail sales tax was not paid by the bailor. Tax liability is that of the bailor, or of the bailee if the bailor has not paid the tax. The measure of the use tax to the bailor is the fair market value of the article at the time the article was first put to use in Washington. The measure of the use tax to the bailee for articles acquired by bailment is the reasonable rental value, determined as nearly as possible according to the rental price at the place of use of similar products of like quality and character. In the absence of rental prices for similar products, the reasonable rental value may be computed by prorating the retail selling price over the period of possession by a bailee and payable in monthly installments. No further use tax is due upon property acquired by bailment after use tax has been paid by the bailee or any previous bailee upon the full original value of the article.
(b) Use tax does not apply to use by a bailee of any article of tangible personal property which is entirely consumed in the course of research, development, experimental, and testing activities conducted by the user, providing the acquisition or use of such articles by the bailor are exempt from retail sales tax or use tax. (RCW 82.12.0265.)
(8) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances. In some situations it may be difficult to determine if the transaction is a retail equipment rental with operator. If in doubt as to whether a particular rental with an operator is a retail sale, taxpayers should contact the department for a tax ruling.
Example 1. ABC Contracting, Inc. (prime contractor) is hired by XYZ Property Rentals, Inc. (end consumer) to construct a retail shopping complex, including construction of an on-site parking lot adjacent to the shopping complex. ABC hires DEF Subcontracting, Inc. (subcontractor) to pave the parking lot. DEF will use its own equipment to complete the project, including equipment to pour, roll, and level the asphalt. As part of its contract with ABC, DEF is liable for meeting the contractual specifications set by XYZ (end consumer). At the time of purchase, ABC provides DEF with a reseller permit in lieu of paying retail sales tax.
In this scenario, DEF's business activity is classified as a construction service, rather than a rental of equipment with an operator, the charges for which are subject to wholesaling B&O tax, as construction services are eligible for resale in this case. This conclusion is supported by the fact that DEF is responsible for the actual performance of the construction activities, not merely the provision of equipment with an operator, which might also include services limited solely to the operation of the equipment.
Example 2. ABC Contracting, Inc. (prime contractor) enters into a contract with the city of Olympia, Washington, to construct a publicly owned road to specification. The contract includes separately stated charges for ABC's use of its own equipment and equipment operators to construct the publicly owned road. ABC's activities are assumed to meet the requirements of the public road construction B&O tax classification.
In this scenario, ABC's business activity is classified as a public road construction service, the charges for which, including charges for equipment and operators, are subject to the public road construction B&O tax. Additionally, ABC may be subject to deferred retail sales or use tax, if it has not previously reported and paid retail sales or use tax on its purchase of the equipment used to provide the public road construction services at issue in this scenario.
Example 3. GHI Crane Operators, Inc. is hired by UVW Terminal, Inc. to load storage containers onto a vessel. Under the terms of its contract with UVW, GHI will use its own crane and operator to load the storage containers onto the vessel. Additionally, GHI will use its own discretion in properly loading the vessel according to its experience in stevedoring. GHI's activities are assumed to meet the requirements of the stevedoring B&O tax classification.
In this scenario, GHI's business activity is classified as a stevedoring service, the charges for which are subject to stevedoring B&O tax. Additionally, GHI may be subject to deferred retail sales tax or use tax, if it has not previously reported and paid tax on its purchase of the crane used to provide stevedoring services.
Example 4. JKL Trucking, Inc. contracts with MNO Builders, Inc. to lease to MNO several motor carrier vehicles that are operated by JKL employees. The vehicles are used to haul construction materials from MNO's headquarters in Yakima, Washington, to a construction site in Vancouver, Washington, over state highways. JKL's activities are assumed to meet the requirements of the motor transportation PUT classification.
In this scenario, JKL's business activity is classified as a motor transportation service, the charges for which are subject to motor transportation PUT.
Example 5. ZYX Construction Co. contracts with WVU Rental Co. for the rental of scaffolding. WVU's technicians set up, move, and dismantle the equipment. After assembly, ZYX assumes dominion and control over the use of the scaffolding until it is dismantled by WVU upon conclusion of the construction project.
In this scenario, WVU's business activity is classified as a rental of tangible personal property without an operator, the charges for which are subject to retailing B&O and retail sales tax. As the consumer of the scaffolding, ZYX is not eligible to use a reseller permit in lieu of paying retail sales tax.
Example 6. ABC Crane Co. is hired by DEF Builders Co. to supply a crane and operator to lift air conditioning equipment from the ground and hold it in place on the roof of a six-story building while DEF employees bolt the unit down. ABC's operator will retain control over the crane. ABC has no responsibility to attach wiring, plumbing, or otherwise make the unit operational.
In this scenario, ABC's business activity is classified as a rental of equipment with an operator, the charges for which are subject to retailing B&O and retail sales tax. RCW 82.04.050(9). This is demonstrated by the fact that ABC is not responsible for the performance of any services, other than those necessary to operate the crane.
Additionally, ABC may be subject to retail sales tax or use tax on its use of the crane, if it has not already paid the tax at the time ABC initially acquired or used the crane in Washington.
Example 7. ABC Crane Co. (ABC) is hired by DEF Builders Co. (DEF), the prime contractor, to install a neon sign on the side of a new six-story building DEF is constructing. At the time of purchase, DEF provides ABC with a reseller permit in lieu of paying retail sales tax. ABC is responsible for making certain that the sign is correctly fastened to the side of the building and in accordance with the contract specifications established between DEF and the property owner.
In this scenario, ABC's business activity is classified as a construction service, the charges for which are generally subject to retailing B&O and retail sales tax. RCW 82.04.050(2). However, in this scenario the charges are subject to wholesaling B&O tax, as construction services are eligible for resale, and ABC received a reseller permit from DEF, who is reselling construction services to the property owner.
Example 8. ABC Crane Co. is an Oregon business. ABC purchases a crane in Oregon for $75,000, which it will rent to customers. ABC's employees will operate the crane and ABC will retain dominion and control over the crane at all times. In the first two years following ABC's purchase of the crane, all rentals occur in Oregon. In the third year, ABC moves its operations to Washington, and begins renting the crane with an operator to Washington customers.
In this scenario, ABC owes use tax upon its first use of the crane as a consumer. This occurred in the third year of ownership when ABC first used the crane as a consumer in Washington. The measure of the tax is the retail market value of the crane at the time ABC puts it to use. At that time, the comparable retail value of the crane is determined to be $50,000, which is the measure of the use tax.
Example 9. DEF Builders Co. (prime contractor) is hired to construct an apartment complex. DEF is performing a significant portion of the construction services associated with the project on its own behalf, including construction of the building's foundation. After constructing forms for the apartment's foundation, DEF contracts with XYZ Concrete Co. to pump premixed concrete from a ready mix truck (located at the construction site) into the forms. XYZ operates its own pumping equipment, however, DEF controls the flow and placement of the concrete, directing XYZ's operator to start and stop the pump. The premixed concrete is not provided by XYZ. DEF is responsible for finishing the concrete.
In this scenario, XYZ is providing stand-alone concrete pumping services, and its business activity is classified as a rental of equipment with an operator, the charges for which are subject to retailing B&O and retail sales tax. Additionally, XYZ's activity is not eligible for resale, as DEF is considered the consumer of the operated rental equipment.
Example 10. DEF Builders Co. (prime contractor) is hired to construct an apartment complex. DEF is performing a significant portion of the construction services associated with the project on its own behalf, including construction of the building's foundation. After constructing forms for the apartment's foundation, DEF contracts with XYZ Concrete Co. to provide premixed concrete and to pump for the pour. XYZ operates its own pumping equipment, however, DEF controls the flow and placement of the concrete, directing XYZ's operator to start and stop the pump. At the time of its purchase, DEF provides XYZ with a reseller permit in lieu of paying retail sales tax.
In this scenario, where the taxpayer is providing both the concrete materials and the concrete pumping equipment and pumping services, XYZ's activity is classified according to subsection (2)(e)(iii) of this rule. In this case, the transaction's true object (or primary purpose) is the sale of premixed concrete. The sale of tangible personal property (concrete) for resale is subject to wholesaling B&O tax.
Example 11. DEF Builders Co. (prime contractor) is hired to construct an apartment complex. DEF hires subcontractors to perform a significant portion of the construction services associated with the project, including construction of the building's foundation. DEF contracts with XYZ Concrete Co. to pour and finish the building's concrete foundation, including construction of forms to pour the foundation. XYZ operates its own pumping equipment, in addition to providing on-site contractors who will manage the flow and placement of the pumped concrete. After the pour, XYZ is responsible for finishing the concrete. XYZ's contract with DEF requires the finished foundation meet the contract specifications entered into between DEF and its customer, the building owner.
In this scenario, XYZ's business activity is classified as the sale of subcontracted construction services, the charges for which are subject to wholesaling B&O tax, provided XYZ received a reseller permit from DEF.
Example 12. Farm Services, Inc. specializes in the cutting and baling of hay for farmers. Farm Services contracts with PQR Farms, Inc. (farmer) to cut and bale PQR's hay. The hay, after being cut and baled, is sold by PQR.
In this instance, Farm Services' business activity is a farming for hire service, the proceeds from which are subject to service and other business activities B&O tax. See WAC 458-20-209.
Example 13. Helicopter, Inc. contracts with Logs, Inc. to move logs from where they have been cut in the woods to a landing approximately one mile away where the logs will be sorted, loaded on trucks, and transported to a mill. Total control over the helicopter operation rests with Helicopter, Inc.
In this scenario, Helicopter, Inc.'s business activity is classified as an extracting for hire service, the proceeds from which are subject to extracting for hire B&O tax. This is not a rental of equipment with an operator, nor is it considered as an air transportation service as the activity is directly part of the timber extracting and harvesting activity. See WAC 458-20-13501.
Example 14. ABC Sound Productions Co. contracts with DEF Entertainers, Inc. (entertainment promoter) to provide lighting, amplifying equipment, and speakers for a performance run and operated by DEF. As part of its contract with DEF, ABC's employees operate all of the equipment provided. DEF will oversee and direct the operators as to the specific use of the equipment.
In this scenario, ABC's business activity is classified as a rental of equipment with an operator, the proceeds from which are subject to retailing B&O tax and retail sales tax. In applying the true object test, DEF is primarily purchasing the use of lighting and sound equipment. DEF maintains the authority to specify the color, location, and degree of lighting and also changes and modifications to the level of sound amplification during the performance. ABC's services are solely limited to the operation of the equipment itself.
Example 15. Fun Snacks, LLC is in the business of renting popcorn and cotton candy machines with an operator. Fun Snacks does not sell cotton candy or popcorn to individual customers attending an event, but rather charges a flat rate to event organizers in which attendees of the event consume either product for no additional charge. Fun Snacks is hired by Little Farm, Inc. to provide a cotton candy machine with an operator for a fall festival organized and operated by Little Farm. Little Farm staff will operate concessions at the event and will oversee the flavor and quantity of cotton candy made by the operator of the machine. Fun Snacks charges a flat rate of $500 to Little Farm which includes the rental equipment, operator, and cotton candy ingredients and supplies.
In this scenario, Fun Snacks is selling a bundled transaction, subject to the "true object test" contemplated in RCW 82.08.190. Because one or more of the products included in the transaction are subject to retail sales tax, the rental of equipment with an operator and cotton candy ingredients and supplies, the total charge of $500 is subject to retailing B&O tax and retail sales tax.
Example 16. John Doe purchases a vessel that he will rent to others as a bare boat rental. The rentals will be arranged through an agent at GHI Marina. GHI receives a commission based on any usage of the vessel, including usage by John Doe. The rental of the boat is a retail sale when the boat is rented to others. The usage of the boat by John Doe is not a rental. Since John Doe will be using the boat at times for his own use, he may not purchase the boat for resale. As a result, John Doe is subject to retail sales tax or use tax on his initial acquisition or use of the vessel in Washington.
[Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 21-07-140, § 458-20-211, filed 3/24/21, effective 4/24/21. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-211, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.08.010(1). WSR 96-03-139, § 458-20-211, filed 1/24/96, effective 2/24/96. Statutory Authority: RCW 82.32.300. WSR 87-17-015 (Order 87-4), § 458-20-211, filed 8/11/87; WSR 83-08-026 (Order ET 83-1), § 458-20-211, filed 3/30/83; Order ET 71-1, § 458-20-211, filed 7/22/71; Order ET 70-3, § 458-20-211 (Rule 211), filed 5/29/70, effective 7/1/70.]


PDF458-20-214

Cooperative marketing associations and independent dealers acting as agents of others with respect to the sale of fruit and produce.

(1) Persons engaged in the business of buying and selling fruit or produce, as agents of others, are taxable under the provisions of the business and occupation tax and the retail sales tax as provided in this section. Tax is due on the business activities of such persons, irrespective of whether the business is conducted as a cooperative marketing association or as an independent produce agent.
(2) Persons who derive income from receiving, washing, sorting, packing, or otherwise preparing for sale, perishable horticultural products for others are also subject to business and occupation tax, except when such activities are performed for the growers of such products (RCW 82.04.4287.)
(3) Business and occupation tax.
(a) Retailing. Taxable with respect to the sale of ladders, picking bags, and similar equipment to consumers.
(b) Wholesaling. Taxable with respect to:
(i) The sale of boxes, nails, labels and similar supplies sold to growers for their use in packing fruit and produce for sale;
(ii) The sale of insecticides used as spray for fruits and produce;
(c) Warehousing. Taxable with respect to gross income from cold storage warehousing, but not including the rental of cold storage lockers. See also WAC 458-20-182.
(d) Service and other business activities. Taxable with respect to:
(i) Commissions for buying or selling;
(ii) Charges made for interest, no deduction being allowed for interest paid;
(iii) Charges for handling;
(iv) Charges for receiving, washing, sorting, and packing of fresh perishable horticultural products and the material and supplies used therein, when performed for persons other than the growers thereof;
(v) Rentals of cold storage lockers; and
(vi) Other miscellaneous charges, including analysis fees, but excepting actual charges made for foreign brokerage and bona fide charges for receiving, washing, sorting and packing fresh perishable horticultural crops and the materials and supplies used therein when performed for the grower, either as agent or independent contractor.
(4) Where a seller performs packing services for the grower and furnishes the materials and supplies used therein, the amount of the charge therefor is deductible, even though the boxes and other packing material are loaned or charged to the grower prior to the time the fruit or produce is received for packing, provided that the boxes and packing materials are returned by the grower to the seller for use in packing fruit and produce for the grower.
(5) Retail sales tax.
(a) The retail sales tax applies to sales of ladders, picking bags, and other equipment sold to consumers, whether sold by associations to members, or by agents to their principals.
(b) Retail sales tax does not apply to sales of materials and supplies directly used by cooperative marketing associations, agents, or independent contractors for the purpose of packing fresh perishable horticultural products for the growers thereof. "Growers" are those persons described as exempt orchardists or farmers under RCW 82.04.330.
(c) Sales of food products are not subject to retail sales tax. See WAC 458-20-244.
(6) Use tax.
(a) The use tax applies upon the use by consumers of any article of tangible personal property which is subject to retail sales tax as noted above, but upon which retail sales tax has not been paid for any reason.
[Statutory Authority: RCW 82.32.300. WSR 88-20-014 (Order 88-6), § 458-20-214, filed 9/27/88; WSR 83-08-026 (Order ET 83-1), § 458-20-214, filed 3/30/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-07-045 (Order ET 78-4), § 458-20-214, filed 6/27/78; Order ET 70-3, § 458-20-214 (Rule 214), filed 5/29/70, effective 7/1/70.]


PDF458-20-216

Successors, quitting business.

(1) Introduction. RCW 82.32.140 requires a taxpayer to remit any outstanding tax liability to the department of revenue (department) within ten days of quitting business. If this tax is not paid by the taxpayer, any successor to the taxpayer becomes liable for the outstanding tax. This rule explains under what circumstances a person is considered a successor to a person quitting business. It explains the successor's responsibility for payment of an outstanding tax liability owed by the taxpayer quitting business, whether that liability is known at the time of purchase or not. This rule also provides examples illustrating when successorship does or does not apply.
(2) Who is a "successor"?
(a) "Successor" on or after July 1, 2003.
(i) RCW 82.04.180 provides that a "successor" is:
(A) Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of the taxpayer's business, more than fifty percent of the fair market value of either the (I) tangible assets or (II) intangible assets of the taxpayer;
(B) Any surviving corporation of a statutory merger; or
(C) Any person obligated to fulfill the terms of a contract as a surety or guarantor of a defaulting contractor, in which case the person is deemed a successor only to tax liability arising out of that contract.
(ii) A person, however, is not a "successor" if the person acquires more than fifty percent of the fair market value of the tangible or intangible assets of the taxpayer through insolvency proceedings, regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement.
(b) "Successor" prior to July 1, 2003.
(i) For the periods prior to July 1, 2003, a "successor" is:
(A) Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of business, a major part of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment, whether he or she operates the business or not. RCW 82.04.180. A person acquires a "major part" of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment if he or she acquired more than fifty percent of the fair market value of such property at the time of the sale or conveyance;
(B) Any person obligated to fulfill the terms of a contract as a surety or guarantor of a defaulting contractor, in which case the person is deemed a successor only to tax liability arising out of that contract.
(ii) A person, however, is not a "successor" if the person acquires a major part of a taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment through insolvency proceedings, regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement.
(c) Surviving corporation of statutory merger taken effect prior to July 1, 2003. A surviving corporation of a statutory merger that takes effect prior to July 1, 2003, is liable for the full tax liability of the nonsurviving corporation, plus any interest or penalties due, under RCW 23B.11.060 or similar laws in other jurisdictions.
(3) What are tangible and intangible assets for purposes of this rule?
(a) Tangible assets. "Tangible assets" include, but are not limited to, materials, supplies, merchandise, inventory, equipment, or other tangible personal property.
(b) Intangible assets. "Intangible assets" include, but are not limited to, all moneys and credits including mortgages, notes, accounts, certificates of deposit; tax certificates; judgments; state, county and municipal bonds; bonds of the United States and of foreign countries; bonds, stocks, or shares of private corporations; personal service contracts; trademarks; trade names; brand names; patents; copyrights; trade secrets; franchise agreements; licenses; permits; core deposits of financial institutions; noncompete agreements; business name; telephone numbers and internet addresses; customer or patient lists; favorable contracts and financing agreements; reputation; exceptional management; prestige; good name; integrity of a business; or other intangible personal property.
(4) What are taxpayer's responsibilitiesfor outstanding tax liability? Whenever a taxpayer quits business, or sells out, exchanges, or otherwise disposes of more than fifty percent of the tangible or intangible assets of the business, any tax administered by the department and for which the taxpayer is liable is immediately due and payable. The taxpayer must, within ten days, complete a tax return and pay the tax due. RCW 82.32.140.
(5) What are successor's responsibilities for taxpayer's outstanding tax liability?
(a) Withholding tax or obtaining documentation that no tax is due from taxpayer. A successor must withhold from the purchase price a sum sufficient to pay any tax due from the taxpayer until the taxpayer produces either a statement of tax status from the department showing payment in full of any tax due or a certificate from the department that no tax is due. If the tax is not paid by the taxpayer within ten days from the date of sale, exchange, or disposal of the business, the successor will become liable for the payment of the full amount of tax. A successor as defined in RCW 82.04.180 is not liable for interest or penalties associated with the taxpayer's tax liability. RCW 82.32.140.
(b) Payment of successor liability is payment against purchase price. The payment of the taxpayer's tax liability by the successor is deemed a payment upon the purchase price. If the sum of the payment to the department plus any payments made, directly or indirectly, to the taxpayer is greater in amount than the purchase price, the amount of the difference becomes a debt due the successor from the taxpayer. RCW 82.32.140.
(c) Limitation on successor's responsibility for taxpayer's outstanding tax liability. Effective July 1, 2003, if the fair market value of the assets acquired by a successor is less than fifty thousand dollars, the successor's liability for payment of the unpaid tax is limited to the fair market value of the assets acquired from the taxpayer. The burden of establishing the fair market value of the assets acquired is on the successor.
(6) Can a successor avoid responsibility for taxpayer's outstanding tax liability?
(a) What must a successor do to avoid responsibility for tax due by a taxpayer? A successor is not liable for any tax due from the taxpayer if the successor provides written notice of the acquisition to the department and within six months of receiving the written notice, the department has not issued a tax assessment against the taxpayer and mailed a copy of a notice of tax due to the successor. RCW 82.32.140. The six-month period begins upon the department's receipt of the written notice, or the date the person becomes a successor, whichever is later.
If there are circumstances that prohibit an audit from being completed within six months of the department receiving a proper written notice, the successor and the department may execute a Liability of Successor Waiver Agreement (Form Rev 31 0068) to extend the time in which the department may issue a tax assessment, and the successor will remain liable for the taxes. In lieu of executing such agreement, the department may issue a protective assessment under RCW 82.32.100 if the records cannot be made available for examination in a timely manner.
(b) How does a successor notify to the department of the acquisition of a taxpayer? Written notice of the acquisition must be made on a form prescribed by the department, or it must contain substantially the same information. The written notice must be provided by mailing to the Department of Revenue, Attn: Successorship Notices, P.O. Box 47476, Olympia, Washington 98504-7476.The written notice is available on the department's internet website at www.dor.wa.gov under forms. The written notice must contain the following information:
(i) The (predecessor) taxpayer's name, business name, address, and UBI number;
(ii) The successor's name, business name, address, and UBI number;
(iii) The date of the acquisition;
(iv) Whether or not the successor acquired more than fifty percent of the tangible or intangible assets of the (predecessor) taxpayer;
(v) A description of the assets acquired and their estimated fair market value;
(vi) The total costs of acquisition; and
(vii) How the person became a successor (i.e., asset purchase, merger, guarantor of a defaulting contractor, etc.).
(7) Disclosure. The department is not prohibited from disclosing to a person against whom the department has asserted liability as a successor under RCW 82.32.140 return or tax information pertaining to the specific business of the taxpayer to which the person has succeeded. RCW 82.32.330. For example, a successor is liable under RCW 82.32.140 for payment of an outstanding tax liability of the predecessor taxpayer. The department is only authorized to provide the successor return or tax information related to that outstanding tax liability.
(8) Tax deferrals not terminated. A tax deferral granted to a (predecessor) taxpayer may be transferred to the successor if the successor meets the eligibility requirements for the remaining periods of the deferral and the parties agree in writing that the successor will assume liability for the tax deferral. RCW 82.60.060, 82.63.045, 82.68.050 and 82.69.050. If the deferral is transferred, the successor of the investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral. If the deferral is not transferred, the successor's liability for deferred tax is limited to the deferred taxes due at the time of the transfer. Refer to WAC 458-20-24001 and 458-20-24001A (Sales and use tax deferral—Manufacturing and research/development activities in distressed areas), 458-20-24002 (Sales and use tax deferral—New manufacturing and research/development facilities), and 458-20-24003 (Tax incentives for high technology businesses) for further reference regarding successors of deferral investment projects.
(9) Examples. The following factual situations illustrate the application of successorship. These factual situations should be used only as a general guide. The successorship status of each situation depends on all the facts and circumstances. Assume all the examples below occur on or after July 1, 2003.
(a) Example 1. Taxpayer quits business and sells all equipment and inventory to one purchaser. The taxpayer may be either solvent or insolvent at the time of sale. The purchaser is a successor.
(b) Example 2. Taxpayer quits business, selling all of its intangible assets consisting of customer lists and a covenant not to compete. The purchaser is a successor.
(c) Example 3. Taxpayer sells its entire business, including all equipment (60% of its tangible assets) to Purchaser A, and all inventory (40% of its tangible assets) to Purchaser B. Purchaser A is a successor. Purchaser B is not a successor.
(d) Example 4. Taxpayer sells its entire business, including all assets as follows to three purchasers on January 1, 2004:
purchaser a
purchaser b
purchaser c
Inventory of $200,000
Equipment of $100,000
Receivable of $45,000
Purchaser A is a successor because it has acquired more than 50% of the fair market value, of the tangible assets of the taxpayer. Purchaser B is not a successor because it has acquired less than 50% of the fair market value of the tangible assets of the taxpayer. Purchaser C is a successor because it has acquired more than 50% of the intangible assets of the taxpayer. Purchaser C's tax liability is limited to $45,000 because the fair market value of the assets acquired is less than $50,000.
(i) On February 1, 2004, Purchaser C provides a proper written notice to the department regarding its purchase from the taxpayer. Purchaser A does not provide any written notice to the department regarding its purchase from the taxpayer. On September 30, 2004, the department issues a tax assessment to the taxpayer for $100,000 in taxes owed, plus penalties and interest. A copy of the tax assessment is also mailed to Purchaser A as a successor to the taxpayer. Purchaser A is liable for the $100,000 in taxes owed by the taxpayer since it did not provide a proper written notice to the department. Purchaser C is not liable for the $100,000 in taxes because it provided a proper written notice, and the department did not issue an assessment within six months of receiving the notice.
(ii) Same facts as in the previous example except the department issues its tax assessment on July 15, 2004, and mails a copy of the tax assessment to both Purchasers A and C as successors. Both Purchasers A and C are liable as successors for the taxes owed by the taxpayer. However, Purchaser C's liability is limited to $45,000 in taxes since the fair market value of the assets it acquired was less than $50,000.
(e) Example 5. Taxpayer obtains a loan from a financial institution to purchase equipment and inventory. The financial institution secures the loan by taking a security interest in the equipment and inventory. Taxpayer quits business, leaving the equipment and inventory behind. The financial institution repossesses these items. The financial institution is not a successor.
(f) Example 6. Taxpayer purchases all equipment and inventory under a line of credit extended by a bank and guaranteed by a third party. The third party perfects a security interest in the equipment and inventory. Taxpayer quits business, surrendering the equipment and inventory to the third party guarantor. The third party guarantor is not a successor.
(g) Example 7. Taxpayer leaves business, including equipment, materials, and inventory, which the landlord holds for unpaid rent. The landlord forecloses the landlord's lien using the summary foreclosure provisions of RCW 60.10.030, or holds a foreclosure sale by the sheriff, or accepts a bill of sale in satisfaction of the landlord's lien for rent created by RCW 60.72.010. The landlord is not a successor.
(h) Example 8. Taxpayer purchases all equipment and inventory under a security agreement.
(i) If the property is repossessed by the vendor, the vendor is not a successor.
(ii) If the taxpayer sells his or her equity under the security agreement to a third person, the third person is a successor.
(iii) If the equipment and inventory is not repossessed and the vendor buys back the interest of the taxpayer without following the summary foreclosure provisions of RCW 60.10.030, the vendor is a successor.
(i) Example 9. Taxpayer dies or becomes bankrupt, goes into receivership, or makes an assignment for the benefit of creditors. The executor, administrator, trustee, receiver, or assignee is not a successor but stands in the place of the taxpayer and is responsible for payment of tax out of the proceeds derived upon disposition of the assets. A purchaser from the executor, administrator, trustee, receiver, or assignee is not a successor, unless under the terms of the purchase agreement the purchaser assumes and agrees to pay taxes and/or lien claims.
(j) Example 10. Taxpayer is a contractor and is required to post a bond to insure completion of the contract. Taxpayer defaults on the contract and the bonding company completes it. The bonding company is a successor to the contractor to the extent of the contractor's liability for that particular contract and is also liable for taxes incurred in the completion of the contract.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-14-107, § 458-20-216, filed 6/30/05, effective 7/31/05. Statutory Authority: RCW 82.32.300. WSR 99-08-034, § 458-20-216, filed 3/31/99, effective 5/1/99; Order ET 70-3, § 458-20-216 (Rule 216), filed 5/29/70, effective 7/1/70.]


PDF458-20-217

Lien for taxes.

(1) Introduction. This rule provides an overview of the administrative collection remedies and procedures available to the department of revenue (department) to collect unpaid and overdue tax liabilities. It discusses tax liens and the liens that apply to probate, insolvency, assignments for the benefit of creditors, bankruptcy and public improvement contracts. The rule also explains the personal liability of persons in control of collected but unpaid sales tax, spirits taxes, and heavy equipment rental tax. Although the department may use judicial remedies to collect unpaid tax, most of the department's collection actions are enforced through the administrative collection remedies discussed in this rule.
(2) Tax liens. The department is not required to obtain a judgment in court to have a tax lien. A tax lien is created when a warrant issued under RCW 82.32.210 is filed with a superior court clerk who enters it into the judgment docket. A copy of the warrant may be filed in any county in this state in which the department believes the taxpayer has real and/or personal property. The department is not required to give a taxpayer notice prior to filing a tax warrant. Peters v Sjoholm, 95 Wn.2d 871, 877, 631 P.2d 937 (1981) appeal dismissed, cert. denied 455 U.S. 914 (1982). The tax lien is an encumbrance on property. The department may enforce a tax lien by administrative levy, seizure or through judicial collection remedies.
(a) Attachment of lien. The filed warrant becomes a specific lien upon all personal property used in the conduct of the business and a general lien against all other real and personal property owned by the taxpayer against whom the warrant was issued.
(i) The specific lien attaches to all goods, wares, merchandise, fixtures, equipment or other personal property used in the conduct of the business of the taxpayer. Other personal property includes both tangible and intangible property. For example, the specific lien attaches to business assets such as accounts receivable, chattel paper, royalties, licenses and franchises. The specific lien also attaches to property used in the business which is owned by persons other than the taxpayer who have a beneficial interest, direct or indirect, in the operation of the business. (See subsection (3) of this rule for what constitutes a beneficial interest.) The lien is perfected on the date it is filed with the superior court clerk. The lien does not attach to property used in the business that was transferred prior to the filing of the warrant. It does attach to all property existing at the time the warrant is filed as well as property acquired after the filing of the warrant. No sale or transfer of such personal property affects the lien.
(ii) The general lien attaches to all real and personal nonbusiness property such as the taxpayer's home and nonexempt personal vehicles.
(b) Lien priorities. The department does not need to levy or seize property to perfect its lien. The lien is perfected when the warrant is filed. The tax lien is superior to liens that vest after the warrant is filed.
(i) The lien for taxes is superior to bona fide interests of third persons that vested prior to the filing of the warrant if such persons have a beneficial interest in the business.
(ii) The lien for taxes is also superior to any interest of third persons that vested prior to the warrant if the interest is a mortgage of real or personal property or any other credit transaction that results in the mortgagee or the holder of the security acting as the trustee for unsecured creditors of the taxpayer mentioned in the warrant.
(iii) In most cases, to have a vested or perfected security interest in personal property, the secured party must file a UCC financing statement indicating its security interest. RCW 62A.9-301. See RCW 62A.9-302 for the exceptions to this general rule. The financing statement must be filed prior to the filing of the tax warrant for the lien to be superior to the department's lien.
(c) Period of lien. A filed tax warrant creates a lien that is enforceable for the same period as a judgment in a civil case that is docketed with the clerk of the superior court. RCW 82.32.210(4). A judgment lien expires 10 years from the date of filing. RCW 4.56.310. The department may extend the lien for an additional 10 years by filing a petition for an order extending the judgment with the clerk of the superior court. The petition must be filed within 90 days of the expiration of the original 10-year period. RCW 6.17.020.
(3) Persons who have a beneficial interest in a business. A third party who receives part of the profit, a benefit, or an advantage resulting from a contract or lease with the business has a beneficial interest in the operation of the business. A party whose only interest in the business is securing the payment of debt or receiving regular rental payments on equipment does not have a beneficial interest. Also, the mere loaning of money by a financial institution to a business and securing that debt with a UCC filing does not constitute a beneficial interest in the business. Rather, a party who owns property used by a delinquent taxpayer must also have a beneficial interest in the operation of that business before the lien will attach to the party's property. The definition of the term "beneficial interest" for purposes of determining lien priorities is not the same as the definition used for tax free transfers described in WAC 458-20-106.
(a) Third party. A third party is simply a party other than the taxpayer. For example, if the taxpayer is a corporation, an officer or shareholder of that corporation is a "third party" with a beneficial interest in the operation of the business. If the corporate insider has a security interest in property used by the business, the tax lien will be superior even if the corporate insider's lien was filed before the department's lien.
(b) Beneficial interest of lessor. In some cases a lessor or franchisor will have a beneficial interest in the leased or franchised business. For example, an oil company that leases a gas station and other equipment to an operator and requires the operator to sell its products is a third party with a beneficial interest in the business. Factors which support a finding of a beneficial interest in a business include the following:
(i) The business operator is required to pay the lessor or franchisor a percentage of gross receipts as rent;
(ii) The lessor or franchisor requires the business operator to use its trade name and restricts the type of business that may be operated on the premises;
(iii) The lease places restrictions on advertising and hours of operation; and/or
(iv) The lease requires the operator to sell the lessor's products.
(c) A third party who has a beneficial interest in a business with a filed lien is not personally liable for the amounts owing. Instead, the amount of tax, interest and penalties as reflected in the warrant becomes a specific lien upon the third party's property that is used in the business.
(4) Notice and order to withhold and deliver. A tax lien is sufficient to support the issuance of a writ of garnishment authorized by chapter 6.27 RCW. RCW 82.32.210(4). A tax lien also allows the department to issue a notice and order to withhold and deliver. A notice and order to withhold and deliver (order) is an administrative garnishment used by the department to obtain property of a taxpayer from a third party such as a bank or employer. See RCW 82.32.235. The department may issue an order when it has reason to believe that a party is in the possession of property that is or shall become due, owing or belonging to any taxpayer against whom a warrant has been filed.
(a) Service of order. The department may serve an order to withhold and deliver to any person, or to any political subdivision or department of the state. The order may be served by the sheriff or deputy sheriff of the county where service is made, by any authorized representative of the department, or by certified mail.
(b) Requirement to answer order. A person upon whom service has been made is required to answer the order in writing within 20 days of service of the order. The date of mailing or date of personal service is not included when calculating the due date of the answer. All answers must be true and made under oath. If an answer states that it cannot presently be ascertained whether any property is or shall become due, owing, or belonging to such taxpayer, the person served must answer when such fact can be ascertained. RCW 82.32.235.
(i) If the person served with an order possesses property of the taxpayer subject to the claim of the department, the party must deliver the property to the department or its duly authorized representative upon demand. If the indebtedness involved has not been finally determined, the department will hold the property in trust to apply to the indebtedness involved or for return without interest in accordance with the final determination of liability or nonliability. In the alternative, the department must be furnished a satisfactory bond conditioned upon final determination of liability. RCW 82.32.235.
(ii) If the party upon whom service has been made fails to answer an order to withhold and deliver within the time prescribed, the court may enter a default judgment against the party for the full amount claimed owing in the order plus costs. RCW 82.32.235.
(c) Continuing levy. A notice and order to withhold and deliver constitutes a continuing levy until released by the department. RCW 82.32.237.
(d) Assets that may be attached. Both tangible assets, as a vehicle, and intangible assets may be attached. Examples of intangible assets that may be attached by an order to withhold and deliver include, but are not limited to, checking or savings accounts; accounts receivable; refunds or deposits; contract payments; wages and commissions, including bonuses; liquor license deposits; rental income; dealer reserve accounts held by service stations or auto dealers; and funds held in escrow pending sale of a business. Certain insurance proceeds are subject to attachment such as the cash surrender value of a policy. The department may attach funds in a joint account that are owned by the delinquent taxpayer. Funds in a joint account with the right of survivorship are owned by the depositors in proportion to the amount deposited by each. RCW 30.22.090. The joint tenants have the burden to prove the separate ownership.
(e) Assets exempt from attachment. Examples of assets which are not attachable include Social Security, railroad retirement, welfare, and unemployment benefits payable by the federal or state government.
(5) Levy upon real and/or personal property. The department may issue an order of execution, pursuant to a filed warrant, directing the sheriff of the county in which the warrant was filed to levy upon and sell the real and/or personal property of the taxpayer in that county. RCW 82.32.220. If the department has reason to believe that a taxpayer has personal property in the taxpayer's possession that is not otherwise exempt from process or execution, the department may obtain a warrant to search for and seize the property. A search warrant is obtained from a superior or district court judge in the county in which the property is located. See RCW 82.32.245.
(6) Probate, insolvency, assignment for the benefit of creditors or bankruptcy. In all of these cases or conditions, the claim of the state for unpaid taxes and increases and penalties thereon, is a lien upon all real and personal property of the taxpayer. RCW 82.32.240. All administrators, executors, guardians, receivers, trustees in bankruptcy, or assignees for the benefit of creditors are required to notify the department of such administration, receivership, or assignment within 60 days from the date of their appointment and qualification. In cases of insolvency, this includes the duty of the person who is winding down the business to notify the department.
(a) The state does not have to take any action to perfect its lien. The lien attaches the date of the assignment for the benefit of creditors or of the initiation of the probate or bankruptcy. In cases of insolvency, the lien attaches at the time the business becomes insolvent. The lien, however, does not affect the validity or priority of any earlier lien that may have attached in favor of the state under any other provision of the Revenue Act.
(b) Any administrator, executor, guardian, receiver, or assignee for the benefit of creditors who does not notify the department as provided above is personally liable for payment of the taxes and all increases and penalties thereon. The personal liability is limited to the value of the property subject to administration that otherwise would have been available to pay the unpaid liability.
(c) In probate cases in which a surviving spouse or surviving domestic partner is separately liable for unpaid taxes and increases and penalties thereon, the department does not need to file a probate claim to protect the state's interest against the surviving spouse or surviving domestic partner. The department may collect from the separate property of the surviving spouse or surviving domestic partner and any assets formerly community property or property of the domestic partnership which become the property of the surviving spouse or the surviving domestic partner. If the deceased spouse or deceased domestic partner and/or the community or domestic partnership also was liable for the tax debt, the claim also could be asserted in the administration of the estate of the deceased spouse or deceased domestic partner.
(7) Lien on retained percentage of public improvement contracts. Every public entity engaging a contractor under a public improvement project of $35,000 or more, shall retain five percent of the total contract price, including all change orders, modifications, etc. This retainage is a trust fund held for the benefit of the department and other statutory claimants. In lieu of contract retainage, the public entity may require a bond. All taxes, increases, and penalties due or to become due under Title 82 RCW from a contractor or the contractor's successors or assignees with respect to a public improvement contract of $35,000 or more shall be a lien upon the amount of the retained percentage withheld by the disbursing officer under such contract. RCW 60.28.040.
(a) Priorities. The employees of a contractor or the contractor's successors or assignees who have not been paid the prevailing wage under the public improvement contract have a first priority lien against the bond or retainage. The department's lien for taxes, increases, and penalties due or to become due under such contract is prior to all other liens. The amount of all other taxes, increases and penalties due from the contractor is a lien upon the balance of the retained percentage after all other statutory lien claims have been paid. RCW 60.28.040.
(b) Release of funds. Upon final acceptance by the public entity or completion of the contract, the disbursing officer shall contact the department for its consent to release the funds. The officer cannot make any payment from the retained percentage until the department has certified that all taxes, increases, and penalties due have been paid or are readily collectible without recourse to the state's lien on the retained percentage. RCW 60.28.050 and 60.28.051.
(8) Personal liability for unpaid trust funds. The retail sales tax, all spirits taxes under RCW 82.08.150, and the heavy equipment rental tax under chapter 82.51 RCW are to be held in trust. RCW 82.08.050 and 82.51.010. As a trust fund, the retail sales tax, spirits taxes, and the heavy equipment rental tax are not to be used to pay other corporate or personal debts.
Whenever the department has issued a warrant under RCW 82.32.210 for the collection of unpaid retail sales tax funds, spirits taxes funds, or heavy equipment rental tax funds collected and held in trust under RCW 82.08.050 from a limited liability business entity and that entity is terminated, dissolved, abandoned, or insolvent, RCW 82.32.145 authorizes the department to impose personal liability against any or all of the responsible individuals. For a responsible individual who is the current or a former chief executive or chief financial officer, personal liability may be imposed regardless of fault or whether the individual was or should have been aware of the unpaid retail sales tax, spirits taxes, or heavy equipment rental tax liability. Collection authority and procedures prescribed in chapter 82.32 RCW apply to the collection of personal liability assessments.
(a) Responsible individual.
(i) A responsible individual includes any current or former officer, manager, member, partner, or trustee of a limited liability business entity with an unpaid tax warrant issued by the department.
(A) "Officer" means any officer or assistant officer of a corporation, including the president, vice president, secretary, and treasurer.
(B) "Manager" has the same meaning as in RCW 25.15.005.
(C) "Member" has the same meaning as in RCW 25.15.005, except that the term only includes members of member-managed limited liability companies.
(ii) "Responsible individual" also includes any current or former employee or other individual, but only if the individual had the responsibility or duty to remit payment of the limited liability business entity's unpaid trust fund tax liability reflected in a tax warrant issued by the department.
(A) A responsible individual may have "control and supervision" of collected retail sales tax, spirits taxes, or heavy equipment rental tax, or the responsibility to report the tax under corporate bylaws, job description, or other proper delegation of authority. The delegation of authority may be established by written documentation or by conduct.
(B) Except for the current or a former chief executive or chief financial officer of a limited liability business entity, a responsible individual must have significant but not necessarily exclusive control or supervision of the trust funds. Neither a sales clerk who only collects the tax from the customer nor an employee who only deposits the funds in the bank has significant supervision or control of the retail sales tax, spirits taxes, or heavy equipment rental tax. An employee who has the responsibility to collect, account for, and deposit trust funds does have significant supervision or control of the tax.
(C) A person is not required to be a corporate officer or have a proprietary interest in the business to be a responsible individual.
(D) A member of the board of directors, a shareholder, or an officer may have trust fund liability if that person has the authority and discretion to determine which corporate debts should be paid and approves the payment of corporate debts out of the collected retail sales tax, spirits taxes, or heavy equipment rental tax trust funds.
(E) More than one person may have personal liability for the trust funds if the requirements for liability are present for each person.
(iii) Whenever a limited liability business entity with an unpaid tax warrant issued against it by the department has one or more limited liability business entities as a member, manager, or partner, "responsible individual" also includes any current and former officers, members, or managers of the limited liability business entity or entities or of any other limited liability business entity involved directly in the management of the limited liability business entity with an unpaid tax warrant issued against it by the department.
(b) Chief executive or chief financial officer.
(i) For a responsible individual who is the current or a former chief executive or chief financial officer of a limited liability business entity, liability under this rule applies regardless of fault or whether the individual was or should have been aware of the unpaid retail sales tax, spirits taxes, or heavy equipment rental tax liability of the limited liability business entity. There is no "willfully fails to pay" requirement for chief executive officers and chief financial officers.
(ii) A responsible individual who is the current or a former chief executive or chief financial officer is liable under this rule only for retail sales tax, spirits taxes, or heavy equipment rental tax liability accrued during the period that he or she was the chief executive or chief financial officer. However, if the responsible individual had the responsibility or duty to remit payment of the limited liability business entity's retail sales tax, spirits taxes, or heavy equipment rental tax to the department during any period of time that the person was not the chief executive or chief financial officer, that individual is also liable for retail sales tax, spirits taxes, or heavy equipment rental tax liability that became due during the period that he or she had the duty to remit payment of the limited liability business entity's taxes to the department but was not the chief executive or chief financial officer.
(iii) "Chief executive" means: The president of a corporation; or for other entities or organizations other than corporations or if a corporation does not have a president as one of its officers, the highest ranking executive manager or administrator in charge of the management of the company or organization.
(iv) "Chief financial officer" means: The treasurer of a corporation; or for entities or organizations other than corporations or if a corporation does not have a treasurer as one of its officers, the highest senior manager who is responsible for overseeing the financial activities of the entire company or organization.
(c) Other responsible individuals.
(i) For any other responsible individual, liability under this rule applies only if he or she willfully fails to pay or to cause to be paid to the department the retail sales tax, spirits taxes, or the heavy equipment rental tax due from the limited liability business entity.
(A) "Willfully fails to pay or to cause to be paid" means that the failure was the result of an intentional, conscious, and voluntary course of action. Intent to defraud or bad motive is not required. For example, using collected retail sales tax, spirits taxes, or heavy equipment rental tax to pay other corporate obligations is a willful failure to pay the trust funds to the state.
(B) Depositing retail sales tax, spirits taxes, or heavy equipment rental tax funds in a bank account knowing that the bank might use the funds to off-set amounts owing to it is engaging in a voluntary course of action. It is a willful failure to pay if the bank exercises its right of set-off which results in insufficient funds to pay the corporate retail sales tax, spirits taxes, or heavy equipment rental tax that were collected and deposited in the account. To avoid personal liability in such a case, the responsible individual can set aside the collected retail sales tax, spirits taxes, or heavy equipment rental tax and not commingle it with other funds that are subject to attachment or set-off.
(C) If the failure to pay the trust funds to the state was due to reasons beyond an individual's control, the failure to pay is not willful. For example, if evidence is provided that the trust funds were unknowingly stolen or embezzled by another employee, the failure to pay is not considered willful. To find that a failure to pay the trust funds to the state was due to reasons beyond an individual's control, the facts must show both that the circumstances caused the failure to pay the tax and that the circumstances were beyond the individual's control.
(D) If a responsible individual instructs an employee or hires a third party to remit the collected retail sales tax, spirits taxes, or heavy equipment rental tax, the responsible individual is not relieved of personal liability for the tax if the tax is not paid.
(ii) Responsible individuals other than a current or former chief executive or chief financial officer of the limited liability business entity are liable under this rule only for retail sales tax, spirits taxes, or heavy equipment rental tax liability that became due during the period he or she had the responsibility or duty to remit payment of the limited liability business entity's taxes to the department.
(d) Limited liability business entity.
(i) A "limited liability business entity" is a type of business entity that generally shields its owners from personal liability for the debts, obligations, and liabilities of the entity, or a business entity that is managed or owned in whole or in part by an entity that generally shields its owners from personal liability for the debts, obligations, and liabilities of the entity. Limited liability business entities include corporations, limited liability companies, limited liability partnerships, trusts, general partnerships and joint ventures in which one or more of the partners or parties are also limited liability business entities, and limited partnerships in which one or more of the general partners are also limited liability business entities.
(ii) Whenever the department has issued a warrant under RCW 82.32.210 for the collection of unpaid retail sales tax, spirits taxes, or heavy equipment rental tax funds collected and held in trust under RCW 82.08.050 from a limited liability business entity and that business entity has been terminated, dissolved, or abandoned, or is insolvent, the department may pursue collection of the entity's unpaid trust fund taxes, including penalties and interest on those taxes, against any or all of the responsible individuals.
(e) Requirements for liability. In order for a responsible individual to be held personally liable for collected and unpaid retail sales tax, spirits taxes, or heavy equipment rental tax:
(i) The tax must be the liability of a limited liability business entity.
(ii) The limited liability business entity must be terminated, dissolved, abandoned, or insolvent. Insolvent means the condition that results when the sum of the entity's debts exceeds the fair market value of its assets. The department may presume that an entity is insolvent if the entity refuses to disclose to the department the nature of its assets and liabilities.
(f) Extent of liability. Trust fund liability includes the collected but unpaid retail sales tax, spirits taxes, or heavy equipment rental tax, as well as the interest and penalties due on the tax.
(g) Except for the current or a former chief executive or chief financial officer of a limited liability business entity, an individual is only liable for trust funds collected during the period he or she had the requisite control, supervision, responsibility, or duty to remit the tax, plus interest and penalties on those taxes.
(h) Review of personal liability assessment. Any person who receives a personal liability assessment is encouraged to request a supervisory conference if the person disagrees with the assessment. The request for the conference should be made to the department representative that issued the assessment or the representative's supervisor at the department's field office. A supervisory conference provides an opportunity to resolve issues with the assessment without further action. If unable to resolve the issue, the person receiving the assessment is entitled to administrative and judicial appeal procedures. RCW 82.32.145(4). See also RCW 82.32.160, 82.32.170, 82.32.180, 82.32.190, and 82.32.200.
While encouraged to request a supervisory conference, any person receiving a personal liability assessment may elect to forego the supervisory conference and proceed directly with an administrative review of the assessment. Refer to WAC 458-20-100 for information about the department's informal administrative reviews, including how to timely file a petition for review.
(9) Notice of lien. Under RCW 82.32.212, the department may issue a notice of lien to secure payment of a tax warrant issued under RCW 82.32.210. The notice of lien is an alternative to filing a lien under RCW 82.32.210. The notice of lien is against any real property in which the taxpayer has an ownership interest.
(a) To file a notice of lien the amount of the tax warrant at issue must exceed $25,000. The department must determine that issuing the notice of tax lien would best protect the state's interest in collecting the amount due on the warrant.
(b) The notice of tax lien is recorded with a county auditor in lieu of filing a warrant with the clerk of a county superior court. A general lien authorized in RCW 82.32.210 can be filed (or refiled) if the department determines that filing or refiling the warrant is in the best interest of collecting the amount due on the tax warrant, or the warrant remains unpaid six months after the notice of lien is issued.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 22-16-059, § 458-20-217, filed 7/28/22, effective 8/28/22. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-217, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.050, 82.08.150, 82.32.145, 82.32.210, and 82.32.212. WSR 14-22-023, § 458-20-217, filed 10/27/14, effective 11/27/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 08-16-073, § 458-20-217, filed 7/31/08, effective 8/31/08. Statutory Authority: RCW 82.32.300. WSR 02-15-158, § 458-20-217, filed 7/23/02, effective 8/23/02; WSR 00-16-016, § 458-20-217, filed 7/21/00, effective 8/21/00; WSR 88-01-050 (Order 87-9), § 458-20-217, filed 12/15/87; Order ET 71-1, § 458-20-217, filed 7/22/71; Order ET 70-3, § 458-20-217 (Rule 217), filed 5/29/70, effective 7/1/70.]


PDF458-20-21701

Enhanced collection tools.

(1) Introduction. This section explains procedures for electronic notice and order to withhold and deliver service, and mitigation options for financial institutions required to respond to service by the department of revenue (department). This new service option is in addition to other forms of service authorized in RCW 82.32.235 and described in WAC 458-20-217(4). Electronic service under this rule will be referred to as "E-Withhold."
(2) What is E-Withhold? E-Withhold is a data-driven effort to identify assets that may satisfy unpaid tax lien liabilities. RCW 82.32.235 provides thirty days for financial institutions to respond to E-Withhold service. The department will perform an additional review/validation after the initial response is received from a financial institution to ensure accuracy before directing a financial institution to withhold and remit funds.
The department has developed detailed instructions for E-Withholds, which include information about file formats, response codes, payment references, access to the secured file transfer service, and other details needed by financial institutions. This information can be viewed at dor.wa.gov/E-Withhold.
(3) Who can be served by E-Withhold? E-Withhold service applies to "financial institutions." Financial institutions are defined as banks, trust companies, mutual savings banks, savings and loan associations, or credit unions authorized to do business and accept deposits in this state under state or federal law.
(4) How will E-Withholds be served? The department will serve a list of all or a portion of all properly filed and unsatisfied tax warrants (the E-Withhold list) to financial institutions by secured file transfer (SFT) service. Tax warrants with established and maintained payment agreements, or taxpayers under federal bankruptcy protection at the time the list is created will not be included. The department will not serve an E-Withhold list to a financial institution more than once per calendar month. The department will send an email notification to a financial institution when service has occurred, and also send a courtesy copy via U.S. mail. The department will maintain contact information for each financial institution for E-Withhold service and processing issues. Financial institutions should notify the department of changes to contact information using the email address referenced in subsection (7) of this section.
(5) What is included on an E-Withhold list? A list will contain information provided on a manually issued notice and order to withhold and deliver plus tax identification numbers provided to the department by taxpayers. Financial institutions served via E-Withhold must ensure that the data provided remains confidential and secure per RCW 82.32.330.
Assets subject to E-Withhold include, but are not limited to:
• Checking, saving, or share accounts;
• Time or certificates of deposit;
• Investment or brokerage accounts;
• Contents of safe deposit boxes;
• Credit card receipts; and
• Contract collections.
Examples of assets exempt from E-Withhold are described in WAC 458-20-217(4).
(6) When are funds withheld and due to the department? Funds withheld through E-Withhold must be remitted by the thirty-first day after official service. For example, if official service occurs on May 15th, the financial institution must remit the withheld funds by June 15th. Official service occurs when the E-Withhold list is placed into the financial institution's designated SFT folder. The SFT service records a date and time stamp for actions occurring on it.
The department has established response steps and dates between official service and final remittance in order to verify/validate potential withholding. These response steps and dates are provided in the E-Withhold procedures document at dor.wa.gov/E-Withhold. Instructions for the contents of safe deposit boxes are also included in the procedures document at dor.wa.gov/E-Withhold.
(7) What if a financial institution can't meet E-Withhold procedural requirements? When a financial institution faces significant issues in meeting any of the requirements of this rule or the operational procedures referenced in subsection (2) of this section, it must submit a written request to the department for special handling. The request must identify the condition(s) creating the challenge(s). The department will work with financial institutions on a case-by-case basis to develop a mitigation plan that will achieve the desired outcome of locating and recovering assets to pay filed tax liens.
Criteria the department will consider when analyzing ways to mitigate impact include:
• A financial institution's lack of staff or technical inability to respond to electronic service; and
• Membership limits or restrictions that significantly reduce the potential of locating assets for some or most of the delinquent taxpayers, geographic remoteness from large numbers of taxpayers.
Requests for a mitigation plan or other E-Withhold questions should be sent via:
Email to: dorewithholds@dor.wa.gov
U.S. mail to:
Department of Revenue
Attn: Compliance Division - CRRT
P.O. Box 14699
Tumwater, WA 98511-4699
[Statutory Authority: RCW 82.01.060 and 82.32.235. WSR 10-07-035, § 458-20-21701, filed 3/10/10, effective 4/10/10.]


PDF458-20-218

Advertising agencies.

(1) Introduction. This rule explains how Washington's business and occupation (B&O) tax, retail sales tax, and use tax is applied to advertising agencies under various scenarios.
(a) References to related rules. The department of revenue (department) has adopted other rules to which readers may want to refer:
(i) WAC 458-20-102 Reseller permits;
(ii) WAC 458-20-111 Advances and reimbursements;
(iii) WAC 458-20-134 Commercial or industrial use;
(iv) WAC 458-20-136 Manufacturing, processing for hire, fabricating;
(v) WAC 458-20-141 Duplicating activities and mailing bureaus;
(vi) WAC 458-20-144 Printing industry;
(vii) WAC 458-20-193 Interstate sales of tangible personal property;
(viii) WAC 458-20-15503 Digital products; and
(ix) WAC 458-20-19301 Multiple activities tax credits.
(b) Examples. This rule includes a number of examples that identify a set of facts and then state a conclusion. These examples are only a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) Definitions. The following definitions apply throughout this rule:
(a) "Advertising agency" means a business primarily engaged in providing advertising services and may be involved in other related activities such as the buying, selling, or producing of tangible personal property for or on behalf of clients, or for the agency to use in connection with providing advertising services.
(b) "Advertising services" means all services directly related to the creation, preparation, production, or the dissemination of advertisements. Advertising services include layout, art direction, graphic design, mechanical preparation, production supervision, placement, and rendering advice to a client concerning the best methods of advertising that client's products or services. Advertising services also include providing online referrals, search engine marketing and lead generation optimization, web campaign planning, the acquisition of advertising space in various media outlets such as the internet, television, radio, newspaper, and magazines, and the monitoring and evaluation of the effectiveness of an advertising campaign.
(3) Business and occupation tax. Generally, advertising agencies are subject to business and occupation (B&O) tax on all gross income and commissions, including amounts received to pay media outlets, unless the amounts are valid advances and reimbursements under WAC 458-20-111.
(a) Service and other activities. Gross income received by advertising agencies is subject to service and other activities B&O tax on the following nonexclusive list of advertising services:
(i) Procuring advertising space or time in a media outlet for a client. A media outlet includes, but is not limited to, television and radio stations, newspapers, magazines, and websites.
(ii) Consultation, creating advertising campaigns, and graphic design services.
(iii) Copy writing, editing, layout, and coordinating of advertising material.
(iv) Receiving commissions for purchasing articles as agents on behalf of clients.
(v) Sales of advertising products that are incidental to the advertising services rendered, unless the charges are separately itemized when invoiced to the client. Refer to (b) of this subsection for the taxability of such charges that are separately itemized.
(b) Retailing and wholesaling activities. Advertising agencies that sell tangible personal property or provide retail services to the end user are subject to retailing B&O tax on their gross proceeds of sale. In addition, sales of advertising products that are incidental to the advertising services rendered, but that are separately itemized when invoiced to the client, are also subject to retailing B&O tax. With regard to advertising agencies engaged in wholesaling activities, sales for resale are subject to wholesaling B&O tax if the advertising agency obtains a reseller permit from the buyer as provided by WAC 458-20-102.
Example 1. Advertising Agency provides various advertising services to its client, Sports Co., including the design of advertising campaigns and sales of brochures it purchases from a third-party printing company. It charges $100,000 for its design of advertising campaigns plus $10,000 for its sales of brochures to Sports Co. The price of the brochures is separately stated from the other services provided on Sports Co.'s invoice. Because the price of the brochures is separately stated, the $10,000 that Advertising Agency receives from its sale of brochures to Sports Co. is not subject to the service and other activities B&O tax classification. Instead, these sales are subject to retailing B&O and retail sales tax. The $100,000 Advertising Agency receives for its design of advertising campaigns is subject to service and other activities B&O tax. Had Advertising Agency not separately stated the $10,000 from its sale of brochures on the invoice to Sports Co., then the total amount received for the design of advertising campaigns and the sale of brochures would be subject to service and other activities B&O tax if the sale of the brochures are incidental to the advertising services provided.
(c) Manufacturing activities. Advertising agencies that manufacture articles of tangible personal property that are sold or used for commercial or industrial use are subject to the manufacturing B&O tax classification on the value of these articles. For additional information on manufacturing, see WAC 458-20-134 and 458-20-136.
(d) Multiple activities tax credit (MATC). An advertising agency that sells the product it manufactures must report under each of the appropriate "production" (manufacturing) and "selling" (retailing or wholesaling) classifications of the B&O tax. The advertising agency may then claim a MATC for the lesser of either the manufacturing B&O tax, or the wholesaling and/or retailing B&O tax liability. For additional information on the MATC, see WAC 458-20-19301.
Example 2. Advertising Agency provides various advertising services to its Washington-based client, News Station. It provides News Station with new marketing strategies and sells billboards it manufactures. On the invoice, Advertising Agency separately itemizes its sales of billboards to News Station and the marketing strategy services. Advertising Agency is subject to service and other activities B&O tax on amounts it receives from marketing strategy services, manufacturing B&O tax on its manufacturing of billboards, and retailing B&O tax on its sale of billboards. Advertising Agency must also collect and remit retail sales tax on the sale of billboards. Advertising Agency may claim the MATC for the lesser of either its retailing B&O tax or manufacturing B&O tax liability.
(e) Requirements for excluding amounts received when acting as an agent for a client. Under WAC 458-20-111, there is an exclusion from B&O tax for advances or reimbursements an advertising agency receives when the funds are used to pay costs or fees for a client if certain conditions are met. An advertising agency must meet all three of the following requirements to exclude advances and reimbursements from its gross income:
(i) The amounts are reimbursements or advances made to pay obligations of a client;
(ii) The advertising agency is not performing these services, either directly or indirectly, through independent contractors; and
(iii) The advertising agency has no liability to pay the client's obligations, except as the agent of its clients.
Example 3. Advertising Agency arranges advertising for its client, Sports Co., through radio and television broadcasting companies. For a total contract amount of $8,000, it provides marketing and branding strategies, sales promotions, and is obligated to purchase airtime from media outlets on behalf of Sports Co. for television and radio commercials. Advertising Agency pays the media outlets $3,000 to air the commercials and is responsible for the quality of the commercials to Sports Co., which includes the commercials' video and audio quality. In addition, Advertising Agency is liable to the media outlet for payment.
Advertising Agency may not deduct the $3,000 payment to the media outlets as an advance or reimbursement under WAC 458-20-111 for the following reasons:
• It is discharging its own obligations to secure airtime to fulfill its advertising services;
• It is liable to Sports Co. for the quality of the services; and
• It is liable to the media outlets for payment.
Advertising Agency failed to meet each of the three requirements under WAC 458-20-111 as described in (e) of this subsection. Thus, the entire amount of $8,000 is subject to service and other activities B&O tax.
Example 4. Same facts as Example 3, except now Advertising Agency is only acting as an agent on behalf of Sports Co. to secure airtime for a total contract amount of $4,000. Sports Co. is directing and controlling Advertising Agency's activities as well as the selection of the media. In addition, Advertising Agency is not obligated to pay the media outlet and is not responsible for the quality of the services. Because Advertising Agency has satisfied the required three elements as described in (e) of this subsection, it may deduct the $3,000 payment it makes to the media outlet as an advance and reimbursement under WAC 458-20-111. Thus, only the $1,000 is subject to service and other activities B&O tax.
(4) Retail sales tax. Retail sales tax applies to all retail sales including, but not limited to, the following:
(a) Sales made to an advertising agency. An advertising agency is subject to retail sales tax on all purchases of items used or consumed in providing advertising services and not resold to clients. Items purchased for resale to the client are not subject to retail sales tax if the advertising agency provides the seller with a reseller permit as provided by WAC 458-20-102.
(b) Sales made to clients. Advertising agencies are required to collect retail sales tax from its clients on retail sales made and retail services provided under subsection (3)(b) of this rule.
(c) Purchases as an agent. Retail sales tax must be paid by advertising agencies to vendors on retail purchases made by them acting as an agent on behalf of clients.
(5) Use tax. Use tax applies on the use of items purchased or manufactured to be used by an advertising agency in rendering an advertising service if retail sales tax has not been paid. Items acquired without payment of retail sales tax and that are resold to clients, but not separately stated from charges for advertising service, are also subject to use tax.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 18-03-060, § 458-20-218, filed 1/10/18, effective 2/10/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-218, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-218, filed 3/30/83; Order ET 70-3, § 458-20-218 (Rule 218), filed 5/29/70, effective 7/1/70.]


PDF458-20-221

Collection of use tax by retailers and selling agents.

(1) Statutory requirements. RCW 82.12.040(1) provides that every person who maintains a place of business in this state, maintains a stock of goods in this state, or engages in business activities within this state must obtain a certificate of registration and must collect use tax from purchasers at the time it makes sales of tangible personal property for use in this state. The legislature has directed the department of revenue to specify, by rule, activities which constitute engaging in business activities within this state. These are activities which are sufficient under the Constitution of the United States to require the collection of use tax.
(2) Definitions.
(a) "Maintains a place of business in this state" includes:
(i) Maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business; or
(ii) Soliciting sales or taking orders by sales agents or traveling representatives.
(b) "Engages in business activities within this state" includes:
(i) Purposefully or systematically exploiting the market provided by this state by any media-assisted, media-facilitated, or media-solicited means, including, but not limited to, direct mail advertising, unsolicited distribution of catalogues, computer-assisted shopping, telephone, television, radio or other electronic media, or magazine or newspaper advertisements or other media; or
(ii) Being owned or controlled by the same interests which own or control any seller engaged in business in the same or similar line of business in this state; or
(iii) Maintaining or having a franchisee or licensee operating under the seller's trade name in this state if the franchisee or licensee is required to collect use tax.
(c) "Purposefully or systematically exploiting the market provided by this state" is presumed to take place if the gross proceeds of sales of tangible personal property delivered from outside this state to destinations in this state exceed five hundred thousand dollars during a period of twelve consecutive months.
(3) Liability of buyers for use tax. Persons in this state who buy articles of tangible personal property at retail are liable for use tax if they have not paid sales tax. See WAC 458-20-178.
(4) Obligation of sellers to collect use tax. Persons who obtain a certificate of registration, maintain a place of business in this state, maintain a stock of goods in this state, or engage in business activities within this state are required to collect use tax from persons in this state to whom they sell tangible personal property at retail and from whom they have not collected sales tax. Use tax collected by sellers shall be deemed to be held in trust until paid to the department. Any seller failing to collect the tax or, if collected, failing to remit the tax is personally liable to the state for the amount of tax. (For exceptions as to sale to certain persons engaged in interstate or foreign commerce see WAC 458-20-175.)
(5) Local use tax. Persons who are obligated to collect use tax solely because they are engaged in business activities within this state as defined in subsection (2)(b)(i) of this section may elect to collect local use tax at a uniform statewide rate of .005 without the necessity of reporting taxable sales to the local jurisdiction of delivery. Amounts collected under the uniform rate shall be allocated by the department to counties and cities in accordance with ratios reflected by the distribution of local sales and use taxes collected from all other taxpayers. Persons not electing to collect at the uniform statewide rate or not eligible to collect at the uniform state rate shall collect local use tax in accordance with WAC 458-20-145.
(6) Reporting frequency. Persons who are obligated to collect use tax solely because they are engaged in business activities within this state as defined in subsection (2)(b) of this section shall not be required to file returns and remit use tax more frequently than quarterly.
(7) Selling agents. RCW 82.12.040 of the law provides, among other things, as follows:
(a) "Every person who engages in this state in the business of acting as an independent selling agent for persons who do not hold a valid certificate of registration, and who receives compensation by reason of sales of tangible personal property of his principals made for use in this state, shall, at the time such sales are made, collect from the purchasers the tax imposed under this chapter, and for that purpose shall be deemed a retailer as defined in this chapter."
(b) However, in those cases where the agent receives compensation by reason of a sale made pursuant to an order given directly to his principal by the buyer, and of which the agent had no knowledge at the time of sale, the said agent will be relieved of all liability for the collection of or payment of the tax. Furthermore, in other cases where payment is made by the buyer direct to the principal and the agent is unable to collect the tax from the buyer, the agent will be relieved from all liability for the collection of the tax from the buyer and for payment of the tax to the department, provided that within ten days after receipt of commission on any such sale, the agent shall forward to the department a written statement showing the following: Name and address of purchaser, date of sale, type of goods sold, and selling price. (Agents may avoid all liability for collection of this tax, provided their principals obtain a certificate of registration.)
(8) Time and manner of collection. The use tax is computed upon the value of the property sold. At the time of making a sale of tangible personal property, the use of which is taxable under the use tax, the seller must collect the tax from the purchaser and upon request give to the purchaser a receipt therefor. This receipt need not be in any particular form, and may be an invoice which identifies the property sold, shows the sale price thereof and the amount of the tax. It is a misdemeanor for a retailer to refund, remit, or rebate to a purchaser or transferee, either directly or indirectly, by whatever means, all or any part of the use tax.
(9) Effective date. This rule shall take effect on April 1, 1989.
[Statutory Authority: RCW 82.32.300. WSR 89-06-016 (Order 89-4), § 458-20-221, filed 2/23/89, effective 4/1/89; WSR 83-08-026 (Order ET 83-1), § 458-20-221, filed 3/30/83; Order ET 70-3, § 458-20-221 (Rule 221), filed 5/29/70, effective 7/1/70.]


PDF458-20-222

Veterinarians.

(1) Introduction. This section explains Washington's business and occupation (B&O), retail sales, and use tax applications to sales and services provided by veterinarians. It explains the tax liability resulting from the performance of professional services and the sale of medicines and supplies for use in the care of animals. This section also explains the tax liability of persons who provide other services for live animals including grooming, boarding, training, artificial insemination, and stud services.
(2) Business and occupation tax. Persons providing services for live animals are subject to the B&O tax as follows:
(a) Service and other activities. The service and other activities B&O tax applies to the gross income derived from veterinary services. For purposes of this section, "veterinary services" includes the diagnosis, cure, mitigation, treatment, or prevention of disease, deformity, defect, wounds, or injuries of animals. It also includes the administration of any drug, medicine, method or practice, or performance of any operation, or manipulation, or application of any apparatus or appliance for the diagnosis, cure, mitigation, treatment, or prevention of any animal disease, deformity, defect, wound, or injury. "Veterinary services" does not include the therapeutic use of an item of personal property opened and partly administered by the veterinarian or by an assistant under his or her direction, and taken by the customer for further administration by the customer to the animal, provided the charge for the item is separately stated on the invoice.
(i) The gross income derived from veterinary services includes the amount paid by a customer for any drug, medicine, apparatus, appliance, or supply administered by the veterinarian or by an assistant under his or her direction, even when the charge is separately stated on the invoice from charges for other veterinary services.
(ii) The service and other activities B&O tax applies to the gross income derived from grooming, boarding, training, artificial insemination, stud services, or other services provided to live animals. However, if the person providing these services also sells tangible personal property to a consumer for a separate and distinct charge, the charge made for the tangible personal property is subject to the retailing classification of B&O tax.
(b) Retailing. The retailing classification of B&O tax applies to the gross income from the sale of drugs, medicines, or other substances or items of personal property to consumers when the sale is not part of veterinary services. The retailing classification applies only when the veterinarian does not administer, or only administers part of the drug, medicine, or other substance or item of personal property to the animal with further administration to be completed by the customer. Adequate records must be kept by the veterinarian to distinguish drugs, medicines, or other substances or items of personal property that are administered as part of veterinary services from those that are sold at retail. The retailing classification also applies to gross income from the sale of tangible personal property for which there is a separate and distinct charge, when sold by persons providing grooming, boarding, training, artificial insemination, stud services, or other services for live animals.
(3) Retail sales tax. The retail sales tax applies to all the retail sales identified under subsection (2) of this section, unless a specific exemption applies.
(a) Sales to veterinarians and others who provide services to live animals. Sales of tangible personal property to veterinarians for use or consumption by them in performing veterinary services are retail sales upon which the retail sales tax must be collected. Such sales include, among others, sales of medicines, bandages, splints and other supplies primarily for use by veterinarians in performing their professional services. Sales of tangible personal property to persons who provide grooming, boarding, training, artificial insemination, stud services, or other services for live animals for use or consumption by those persons in performing their services are also retail sales upon which the retail sales tax must be collected.
Sales to veterinarians and others who purchase tangible personal property for the purpose of resale in the regular course of business without intervening use by the buyer are sales at wholesale, and not subject to the retail sales tax. The buyer must present the seller with a resale certificate for purchases made before January 1, 2010, or a reseller permit for sales made on or after January 1, 2010, to document the wholesale nature of any sale as provided in WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(b) Sales to consumers. Tangible personal property sold by a veterinarian to a consumer that is carried away by or left with the consumer is a retail sale and the retail sales tax must be collected. Items of personal property include those that the veterinarian may have opened and used for therapy but were taken by the consumer to complete the therapy. The tax applies whether the tangible personal property was sold at the time the professional services were performed or was sold subsequently, provided the charge for the item is separately stated. Sales to a consumer of tangible personal property by a person who provides other than veterinary services to live animals and who separately states the charges, are subject to retail sales tax and the retail sales tax must be collected. (See WAC 458-20-210 for additional information regarding sales to farmers.)
(c) Exemptions. A retail sales tax exemption is available for sales of feed for purebred livestock used for breeding purposes, provided the seller obtains a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions certificate from the buyer. Also exempt are sales of semen for use in the artificial insemination of livestock. These sales remain subject to the retailing B&O tax. (See WAC 458-20-210 for additional information regarding exemptions for farmers.)
(4) 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 WAC 458-20-178.) If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the retail sales or use tax directly to the department unless the purchase and/or use is exempt from tax. Complementary use tax exemptions are available for the use of those items identified in subsection (3)(c) of this section. Veterinarians and others who provide services to live animals are required to pay use tax on any samples that they acquire or give away unless retail sales tax or use tax has been previously paid on these samples.
(5) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.
(a) A dog owner brings her dog to a veterinarian for professional services. The dog has multiple wounds and a broken leg. The veterinarian sets the broken bone and uses a cast and other appropriate therapeutic medicines on the dog in the course of treatment. The veterinarian also applies some salve to the wounds and gives the remainder of the salve to the dog's owner for application over the next few days. The veterinarian segregates the charges for the veterinary services, including the cast materials, and the medicines. The charge for the salve is also separately stated on the billing invoice. The gross income for the veterinary services is subject to the service and other activities B&O tax classification. This includes the charges for the cast materials and the medicines. The charge for the salve is considered a retail sale, and subject to the retailing B&O and retail sales taxes. If the veterinarian had previously paid sales or use tax on the salve, he or she is allowed a tax paid at source deduction. (See also the discussion of tax paid at source deductions in WAC 458-20-102.)
(b) AB boards other person's horses for a fee. When AB bills the customer, AB separately lists the charges for the boarding services and the feed. The gross income received by AB for boarding services is subject to B&O tax under the service classification. The charges for the feed are subject to the retailing B&O and retail sales taxes. However, a retail sales tax exemption is available for any sales of feed for purebred livestock, if the livestock is used for breeding purposes and AB obtains a completed Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions certificate from the customer.
(c) CD trains and boards dogs for various lengths of time. CD bills the customer a lump sum amount for the training and boarding, including feed for the dogs. The gross income received by CD is subject to B&O tax under the service classification. CD must pay retail sales tax or use tax on the feed it purchases for the dogs.
(d) EF is a farrier and shoes horses for others. When EF performs this service, he lists a separate charge on the invoice for the horseshoes. The charge for the horseshoeing service is subject to B&O tax under the service classification, and the separate charge for the horseshoes is subject to the retailing B&O and retail sales taxes. EF's purchases of the horseshoes are purchases for resale and not subject to the retail sales tax.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-222, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 99-08-033, § 458-20-222, filed 3/31/99, effective 5/1/99; WSR 83-08-026 (Order ET 83-1), § 458-20-222, filed 3/30/83; Order ET 70-3, § 458-20-222 (Rule 222), filed 5/29/70, effective 7/1/70.]


PDF458-20-223

Persons performing contracts on the basis of time and material, or cost-plus-fixed-fee.

Business and Occupation Tax
Such persons are subject to business tax in accordance with the principles laid down in the department of revenue's published rules, as follows:
As to manufacturing or processing for hire, WAC 458-20-136;
As to constructing and repairing of new or existing buildings, WAC 458-20-170;
As to building or improving of publicly owned roads, etc., WAC 458-20-171;
As to contracts involving only the grading and clearing of land, WAC 458-20-172;
As to service and other business activities, WAC 458-20-224.
The measure of the tax under each of the foregoing types of contracts is the amount of profit or fixed fee received, plus the amount of reimbursements or prepayments received on account of sales of materials and supplies, on account of labor costs, on account of taxes paid, on account of payments made to subcontractors, and on account of all other costs and expenses incurred by the contractor, plus all payments made by his principal direct to a creditor of the contractor in payment of a liability incurred by the latter.
Retail Sales Tax
The retail sales tax applies upon sales made to or by contractors to the extent set forth in said WAC 458-20-136, 458-20-170, 458-20-171, 458-20-172 and 458-20-224.
[Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-223, filed 3/30/83; Order ET 70-3, § 458-20-223 (Rule 223), filed 5/29/70, effective 7/1/70.]


PDF458-20-224

Service and other business activities.

(1) Chapter 82.04 RCW imposes a tax upon every person for the privilege of engaging in business in this state. Persons engaged in the certain specifically named business activities are subject to a tax rate set out in the statute which is measured by value of products, gross sales or gross income, e.g.: Extracting, manufacturing, retailing, wholesaling, printing and publishing, and building and repairing of publicly owned streets and roads.
(2) Persons engaged in any business activity, other than or in addition to those for which a specific rate is provided in the statute, are taxable under a classification known as service and other business activities, and so designated upon return forms. In general, it includes persons rendering professional or personal services to persons (as distinguished from services rendered to personal property of persons) such as accountants, aerial surveyors and map makers, agents, ambulances, appraisers, architects, assayers, attorneys, automobile brokers, barbers, baseball clubs, beauty shop owners, brokers, chemists, chiropractors, collection agents, community television antenna owners, court reporters, dentists, detectives, employment agents, engineers, financiers, funeral directors, refuse collectors, hospital owners, janitors, kennel operators, laboratory operators, landscape architects, lawyers, loan agents, music teachers, oculists, orchestra or band leaders contracting to provide musical services, osteopathic physicians, physicians, real estate agents, school bus operators, school operators, sewer services other than collection, stenographers, warehouse operators who are not subject to other specific statutory tax classifications, teachers, theater operators, undertakers, veterinarians, and numerous other persons.
(3) It does not include persons engaged in the business of cleaning, repairing, improving, etc., the personal property of others, such as automobile, house, jewelry, radio, refrigerator and machinery repairmen, laundry or dry cleaners. Also, it does not include certain personal and professional services specifically included within the definition of the term "sale at retail" in RCW 82.04.050, such as amusement and recreation businesses of a participatory nature (see WAC 458-20-183); abstract, title insurance and escrow businesses, credit bureau businesses and automobile parking and storage garage businesses. Furthermore, it does not include persons who render services to others in the capacity of employees as distinguished from independent contractors. (See WAC 458-20-105.)
(4) Business and occupation tax. Persons engaged in any business activity, other than or in addition to those for which a specific rate is provided in chapter 82.04 RCW, are taxable under the service and other business activities classification upon gross income from such business.
(5) Persons engaged in a public service business taxable under chapter 82.16 RCW (see WAC 458-20-179) are exempt from business tax under chapter 82.04 RCW with respect to such businesses.
(6) Retail sales tax. The retail sales tax applies upon all sales of tangible personal property made to persons for use or consumption in performing a business activity which is taxable under the service and other business activities classification of chapter 82.04 RCW.
[Statutory Authority: RCW 82.32.300. WSR 86-18-069 (Order 86-16), § 458-20-224, filed 9/3/86; WSR 83-17-099 (Order ET 83-6), § 458-20-224, filed 8/23/83; WSR 83-07-032 (Order ET 83-15), § 458-20-224, filed 3/15/83; Order ET 70-3, § 458-20-224 (Rule 224), filed 5/29/70, effective 7/1/70.]


PDF458-20-226

Landscape and horticultural services.

(1) Introduction. This section provides tax reporting instructions for persons who provide landscape and horticultural services. This section does not apply to silvicultural activities or to horticultural services provided to farmers. Silviculture means the commercial production of timber and includes activities such as growing seed into seedlings, planting, fertilizer and pesticide application, pruning and thinning as provided to timber growers. Silvicultural activities are generally subject to the extracting B&O tax classification or the service and other business activities B&O tax classification. (See WAC 458-20-135 and 458-20-224.)
(2) Retail landscape and horticultural services. Landscape and horticultural services which are retail sales include:
(a) Grading, filling, leveling, planting, seeding, sodding, removing, cutting, trimming, pruning, mulching, aerating, applying chemicals, watering, and fertilizing to establish, promote, or control the growth of trees, shrubs, flowers, grass, ground cover and other flora for ornamentation or other nonagricultural purposes.
(b) The sale or rental of landscaping materials and the construction of sprinkling systems, walks, pools, fences, trellises, rockeries, and retaining walls.
(c) Cultivating fruits, flowers, and vegetables for consumers other than farmers.
(d) All tree trimming other than for farmers or persons engaged in silviculture. This includes all trimming for size, shape, aesthetics, removal of diseased branches, and removal of limbs because they are too close to structures. It does not include tree trimming performed for public and private electric utilities or at the direction of electric utilities to keep power lines, distribution lines, or equipment free of tree branches or brush.
(3) Nonretail landscape and horticultural services. Landscape and horticultural services which are not retail sales include:
(a) Landscape design services performed by a landscape architect separate from a contract for landscape maintenance.
(b) Planting trees for farmers.
(c) Thinning or planting of trees for persons who are involved in the commercial production of timber. These are silvicultural activities and silvicultural activities are not considered to be horticultural or landscape maintenance activities. (See WAC 458-20-135 and 458-20-209.)
(d) Landscape services performed for municipal corporations or political subdivisions of the state on real property owned by those entities if the real property is used or held for public road purposes. (See WAC 458-20-171.)
(e) Horticultural services, including spraying and fertilizing, performed for farmers for agricultural purposes. See WAC 458-20-209 for examples of horticultural services performed for farmers.
(f) Pruning, trimming, repairing, removing, and clearing of trees and brush near electric transmission or distribution lines or equipment, if performed by or at the direction of an electric utility. The removing and clearing of trees includes the stump removal by grinding, digging, or any other means, if performed by or at the direction of an electric utility. These are retail activities when not performed by or at the direction of an electric utility.
(4) Business and occupation tax. The business and occupation (B&O) tax applies as follows.
(a) Retailing. The gross income from landscape and horticultural services which are retail sales and which are performed for consumers is taxable under the retailing classification.
(b) Wholesaling. The gross income from services which are retail sales and which are performed for other contractors for resale is taxable under the wholesaling classification.
(c) Service. The gross income from horticultural services provided to farmers is taxable under the service and other activities classification. This tax classification also applies to income received from pruning, tree trimming, removing and clearing of trees and brush near electric lines, if performed by or at the direction of an electric utility. Income from services performed by landscape architects is also subject to the service and other activities classification. RCW 82.04.290.
(d) Public road construction. Persons who perform landscape services for municipal corporations or political subdivisions of the state on real property owned by those entities are taxable under the public road construction B&O tax classification, but only if the real property is used or held for public road purposes.
(e) Government contracting. This classification applies to persons engaged in the business of constructing, repairing, decorating, or improving new or existing buildings or other structures for the United States, or a city or county housing authority created under chapter 35.82 RCW. This classification would include the construction or maintenance of items such as walls, fences, walks, pools and other structures. This classification does not include the planting of lawns or trees or the cutting of grass or tree trimming performed for these customers. These activities are subject to the retailing classification.
(5) Retail sales and use tax. Landscape gardeners and horticulturists, except horticulturists performing services for farmers, must generally collect and report the retail sales tax upon the full contract price when performing landscaping or horticultural services for consumers. For purposes of collecting the local option retail sales tax, the sale takes place where the service is performed. See WAC 458-20-145. The retail sales tax does not apply to charges to the United States for landscape services, including landscape maintenance services, and sellers may take a deduction from the retail sales tax classification in reporting those sales which are taxable under the retailing B&O tax classification.
(a) Persons performing a landscaping or horticultural service for a contractor for resale must provide a resale certificate for sales made before January 1, 2010, or a reseller permit for sales made on or after January 1, 2010, to document the wholesale nature of any sale as provided by WAC 458-20-102A (Resale certificates) and WAC 458-20-102 (Reseller permits). Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by a seller for five years from the date of last use or December 31, 2014.
(b) Landscape gardeners and horticulturists must pay the retail sales tax to their vendors when purchasing tools, equipment, and supplies which are not resold, either directly or as a component part of the finished work. They must pay deferred sales or use tax directly to the department upon the value of any such property that was purchased or acquired without payment of Washington retail sales tax.
(c) Plants, shrubs, trees, sod, seed, chemicals, fertilizer, peat moss, sprinkler systems, rocks, building materials and any other tangible personal property which becomes a part of the finished work may be purchased for resale, except items used in providing horticultural services for farmers and items used in performing public road construction, government contracting, or services for timber growers.
(d) Retail sales tax or use tax is due with respect to items purchased by horticulturists for use in performing services for farmers. (See also WAC 458-20-209.)
(e) Retail sales tax or use tax is due with respect to items purchased for use in performing services for timber growers or which are taxable as either public road construction or government contracting. This includes items such as sod, seed, trees, building materials, fertilizers, spray materials, etc.
(f) The retail sales tax does not apply to the charge made by persons performing tree trimming near electric transmission or distribution lines, but only if the work is performed at the direction of an electric utility. Persons performing these services must pay retail sales or use tax on all materials, supplies, tools, and equipment used in performing the service.
(6) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(a) John Doe, a landscaper, was hired by a city to maintain the landscaping around the buildings at the city's municipal golf courses. He must collect and report the retail sales tax and pay retailing B&O tax on the full contract amount.
(b) John Doe purchased several plants, some fertilizer, and insect spray to use in landscaping the golf course. He also purchased some solvent and mineral oil to clean and maintain some of his landscaping tools. His purchases of the plants, fertilizer and insect spray are purchases for resale. He must pay retail sales tax to his vendors on his purchases of the solvent and mineral oil.
(c) Landscaping company provides complete landscaping services including landscape design by a licensed landscape architect, installation, and maintenance. Landscaping charged Jane Smith two hundred dollars for a landscaping plan for her new home. She planned to purchase the plants and do the landscaping work herself. Landscaping must report B&O tax on the charge for the design service at the service and other activities classification rate.
(d) Landscaping company entered into a contract to landscape the yard for a client's new home. The company must collect and report retail sales tax and pay retailing B&O on the full contract amount, even though part of Landscaping's services included drawing a landscaping plan.
(e) Landscaping company entered into a two-phase contract with a county. Phase one required the company to plant trees and shrubs and put in a sprinkling system as part of a public road project. The sprinkler system is located in the public road right of way. The contract provided Landscaping would receive five hundred thousand dollars for phase one of the project. Phase two provided that Landscaping would maintain the trees and shrubs for a period of five years. The contract provided for payments of four thousand dollars per month plus costs for fertilizer and spray for maintaining the planted strips.
(i) Phase one is part of public road construction and Landscaping is taxable under the public road construction classification upon the five hundred thousand dollars received for phase one. The company must pay sales tax when purchasing the trees and shrubs and materials for the sprinkling system for use in phase one of the project. See WAC 458-20-171 for the tax liability for public road construction.
(ii) Phase two for the maintenance of the completed project is also public road construction. This is not a retail sale because the work is performed for a municipal corporation or political subdivision of the state on land owned by that entity and which is being used for public road purposes. See RCW 82.04.190.
Landscaping will owe B&O tax under the public road construction classification and must pay retail sales or use tax on any items used in performing this work, including purchases of fertilizers, chemicals and other materials.
(f) John Doe operates a tree trimming business and has a contract with a public utility district (PUD) to trim trees along the PUD's power lines. Some of these trees are on private property with the PUD obtaining the permission of the owners to trim the trees. Some trees are also located on land for which the PUD has an easement, including along public road right of ways. This tree trimming is not a retail sale, but taxable under the service and other activities classification. This includes trimming performed along the road right of way. The property on the road right of way is not owned by the PUD for whom the work is being performed. The easement is not for use as a public road and as such the tree trimming is not public road construction.
(g) John Doe provides a tree trimming service to his residential customers. The tree trimming is performed at the direction of the residential customer to remove diseased limbs, limbs too close to the house, limbs which are a safety hazard because of their proximity to power lines, and limbs which are objectionable to the desired shape of the tree. All of this tree trimming is a retail activity, regardless of the specific reason for cutting the limbs.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-226, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300. WSR 99-09-013, § 458-20-226, filed 4/13/99, effective 5/14/99. Statutory Authority: RCW 82.32.300 and to implement RCW 82.04.050. WSR 96-05-080, § 458-20-226, filed 2/21/96, effective 3/23/96. Statutory Authority: RCW 82.32.300 and 82.04.050 (3)(e). WSR 94-23-053, § 458-20-226, filed 11/10/94, effective 12/11/94. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-226, filed 3/30/83; Order ET 70-3, § 458-20-226 (Rule 226), filed 5/29/70, effective 7/1/70.]


PDF458-20-227

Subscriber television services.

(1) Definitions. The following definitions apply to this section.
(a) "Subscriber television" refers to all businesses providing television programming to consumers for a fee. It includes, but is not limited to, cable television and satellite television. Subscriber television often transmits to its customers special channels offering a variety of programming such as movies, sporting events, children's entertainment, news and other informational services.
(b) "Fee" includes the amount paid by the subscriber to receive the subscription television service. Generally, the fee consists of an amount for installation and a monthly charge for maintenance or service.
(2) Business and occupation tax. Persons engaging in the business of subscriber television are subject to the business and occupation tax as follows:
(a) Gross income derived from the charge made for installation and the monthly rental or service fee is subject to tax under the classification service and other activities. (See WAC 458-20-224.)
(b) Gross income derived from advertising revenues is subject to tax under the classification radio and television broadcasting. (See WAC 458-20-241.)
(c) No deductions from gross income may be taken for affiliate fees, video service fees, satellite fees, copyright fees, or any other amounts paid to other firms for special programming provided to subscribers.
(3) Use tax. Persons engaging in the business of subscriber television are subject to retail sales tax or use tax on all purchases of tangible personal property utilized or required in providing service to subscribers. (See WAC 458-20-178.)
[Statutory Authority: RCW 82.32.300. WSR 91-05-039, § 458-20-227, filed 2/13/91, effective 3/16/91; WSR 83-08-026 (Order ET 83-1), § 458-20-227, filed 3/30/83; Order ET 70-3, § 458-20-227 (Rule 227), filed 5/29/70, effective 7/1/70.]


PDF458-20-228

Returns, payments, penalties, extensions, interest, stays of collection.

(1) Introduction. This rule discusses the responsibility of taxpayers to pay their tax by the appropriate due date, and the acceptable methods of payment. It discusses the interest and penalties that are imposed by law when a taxpayer fails to pay the correct amount of tax by the due date. It also discusses the circumstances under which the law allows the department of revenue (department) to waive interest or penalties.
(a) Where can I get my questions answered, or learn more about what I owe and how to report it? Washington's tax system is based largely on voluntary compliance. Taxpayers have a legal responsibility to become informed about applicable tax laws, to register with the department, to seek instruction from the department, to file accurate returns, and to pay their tax liability in a timely manner (chapter 82.32A RCW, Taxpayer rights and responsibilities). The department has a taxpayer services program to provide taxpayers with accurate tax-reporting assistance and instructions. The department staffs local district offices, maintains a question and information phone line ( 360-705-6705), provides information and electronic forms on the internet (dor.wa.gov), and conducts free public workshops on tax reporting. The department also publishes notices, interpretive statements, and rules discussing important tax issues and changes.
(b) What is My DOR and how can it help me? My DOR is an internet-based application providing a secure and encrypted way for taxpayers to file and pay many of Washington state's excise taxes online. The My DOR system automatically performs math calculations and checks for other types of reporting errors. Using My DOR to file electronically will help taxpayers avoid penalties and interest related to unintentional underpayments and delinquencies. My DOR can be accessed on the department's internet site dor.wa.gov. Taxpayers may also call the department's telephone center at 360-705-6705 for more information.
All taxpayers are required to electronically file and electronically pay their taxes unless the department waives the requirement in accordance with RCW 82.32.080. For more detailed information on the requirement and exceptions for electronically filing using My DOR and submitting payment electronically, see WAC 458-20-22802 (Electronic filing and payment).
(c) Index of subjects addressed in this rule:
Topic—Description
See subsection
Where can I get my questions answered, or learn more about what I owe and how to report it? - By phone or online, the department provides a number of free and easy resources to help you find answers.
(1)(a) of this rule, (see above)
What is My DOR and how can it help me? - My DOR guides you through the return and helps you avoid many common mistakes.
(1)(b) of this rule, (see above)
Do I need to file a return? - How do I access returns and file them?
(2) of this rule
What methods of payment can I use? - What can I use to pay my taxes?
(3) of this rule
When is my tax payment due? - Different reporting frequencies can have different due dates. What if the due date is a weekend or a holiday? If my payment is in the mail on the due date, am I late or on time?
(4) of this rule
Penalties - What types of penalty exist? How big are they? When do they apply?
(5) of this rule
Statutory restrictions on imposing penalties - More than one penalty can apply at the same time, but there are restrictions. Which penalties can be combined?
(6) of this rule
Interest - In most cases interest is required. What interest rates apply?
How is interest applied?
(7) of this rule
Application of payment towards liability - Interest, penalties, and taxes are paid in a particular order. If my payment doesn't pay the entire liability, how can I determine what parts have been paid?
(8) of this rule
Waiver or cancellation of penalties - I think I was on time, or I had a good reason for not paying the tax when I should have. What reasons qualify me for a waiver of penalty? How can I get a penalty removed?
(9) of this rule
Waiver or cancellation of interest - Interest will only be waived in two limited situations. What are they?
(10) of this rule
Interest and penalty waiver for active duty military personnel - Is a majority owner of the business on active duty with the military? both interest and penalty can be waived if all the statutory requirements are met. What are the requirements?
(11) of this rule
Stay of collection - Revenue will sometimes temporarily delay collection action on unpaid taxes. When can this happen? Can I request that revenue delay collection?
(12) of this rule
Extensions - Can I get an extension of my due date? How long does an extension last? A special extension may be available if the governor proclaims a state of emergency in your area.
(13) of this rule
(2) Do I need to file a return? A "return" is defined as any paper or electronic document a person is required to file by the state of Washington in order to satisfy or establish a tax or fee obligation which is administered or collected by the department, and that has a statutorily defined due date. RCW 82.32.050.
(a) Electronic returns and payments are to be filed with the department by every person liable for any tax which the department administers and/or collects, except for the taxes imposed under chapter 82.24 RCW (Tax on cigarettes), which are collected through sales of revenue stamps. Returns must be filed through the My DOR system (see subsection (1)(b) of this rule), or by other means if approved by the department.
Taxpayers who file with My DOR do not receive paper returns. However, taxpayers can set up alerts in My DOR and an electronic reminder for each upcoming return as the time to file approaches.
(b) Taxpayers whose accounts are placed on an "active nonreporting" status are required to timely notify the department and file a tax return with My DOR if they no longer qualify for this reporting status.See WAC 458-20-101 (Tax registration and tax reporting) for an explanation of the active nonreporting status.
(c) Some consumers may not be required to register with the department and obtain a tax registration endorsement. (Refer to WAC 458-20-101 for detailed information about tax registration and when it is required.) But even if they do not have to be registered, consumers may be required to pay use tax directly to the department if they have purchased items without paying Washington's sales tax. An unregistered consumer must report and pay their use tax liability directly to the department. Use tax can be reported and paid on a "Consumer Use Tax Return" or the consumer can create an online account at the department's website to conveniently report and pay use tax electronically. Consumer use tax returns are available from the department at any of the local district offices. A consumer may also call the department's telephone information center at 360-705-6705 to request a consumer use tax return by mail. Finally, the consumer use tax return is available for download from the department's internet site at dor.wa.gov, along with a number of other returns and forms which are available there.
The interest and penalty provisions of this rule may apply if use tax is not paid on time. Unregistered consumers should refer to WAC 458-20-178 (Use tax and use of tangible personal property) for an explanation of their tax reporting responsibilities.
(3) What methods of payment can I use? The law requires taxpayers to file and pay their taxes electronically. There are two electronic payment methods: Electronic funds transfer (EFT) and credit card. The department may waive the electronic payment requirement for any taxpayer or class of taxpayers, for good cause. Waivers may be temporary or permanent, and may be made on the department's own motion. (See WAC 458-20-22802 for more information on electronic filing and payment.)
(a) For taxpayers not required to pay electronically, payment may be made by cash, check, cashier's check, or money order.
(b) Payment by cash should only be made at an office of the department to ensure that the payment is safely received and properly credited.
(c) Payment may be made by uncertified bank check, but if the check is not honored by the financial institution on which it is drawn, the taxpayer remains liable for the payment of the tax, as well as any applicable interest and penalties. RCW 82.32.080. The department may refuse to accept any check which, in its opinion, would not be honored by the financial institution on which that check is drawn. If the department refuses a check for this reason the taxpayer remains liable for the tax due, as well as any applicable interest and penalties.
(4) When is my tax payment due? RCW 82.32.045 provides that payment of the taxes due with the excise tax return must be made monthly and within 25 days after the end of the month in which taxable activities occur, unless the department assigns the taxpayer a longer reporting frequency. Payment of taxes due with returns covering a quarterly reporting frequency are due on or before the last day of the month following the period covered by the return. (For example, payment of the tax liability for a first quarter tax return is due on April 30th.) For annual filers, tax payments, along with reports and returns are due on or before April 15th of the year immediately following the end of the period covered by the return. WAC 458-20-22801 (Tax reporting frequency) explains the department's procedure for assigning a quarterly or annual reporting frequency.
(a) If the date for payment of the tax due on a tax return falls upon a Saturday, Sunday, or legal holiday, the filing will be considered timely if performed on the next business day. RCW 1.12.070 and 1.16.050.
(b) When a taxpayer is not required to electronically file and pay taxes and chooses to file or pay taxes through the U.S. Postal Service, the postmark date as shown by the post office cancellation mark stamped on the envelope will be considered conclusive evidence by the department in determining if a tax return or payment was timely filed or received. RCW 1.12.070. It is the responsibility of the taxpayer to mail the tax return or payment sufficiently in advance of the due date to assure that the postmark date is timely.
(c) Taxpayers required to file and pay taxes electronically should refer to WAC 458-20-22802 (Electronic filing and payment) for more information regarding My DOR, electronic payment due dates, and when electronic payments are considered received.
(d) If a taxpayer suspects that it will not be able to file and pay by the coming due date, it may be able to obtain an extension of the due date to temporarily avoid additional penalties. Refer to subsection (12) of this rule for details on requesting an extension.
(5) Penalties. Various penalties may apply as a result of the failure to correctly or accurately compute the proper tax liability, or to timely pay the tax. Separate penalties may apply and be cumulative for the same tax. Interest may also apply if any tax has not been paid when it is due, as explained in subsection (7) of this rule. (The department's My DOR system can help taxpayers avoid additional penalties and interest. See subsection (1)(b) of this rule for more information.)
The penalty types and rates addressed in this subsection are:
Penalty Type—Description
Penalty Rate
See
subsection
Late payment of a return - Nine percent added when payment is not received by the due date, and increases if the tax due remains unpaid.
9/19/29%
(5)(a) of this rule
Unregistered taxpayer - Five percent added against unpaid tax when revenue discovers a taxpayer who has taxable activity but is not registered.
5%
(5)(b) of this rule
Assessment - Five percent added when a tax assessment is issued if the tax was "substantially underpaid," and increases if the tax due remains unpaid.
5/15/25% or 0/15/25%
(5)(c) of this rule
Issuance of a warrant - Ten percent added when a warrant is issued to collect unpaid tax, and does not require actual filing of a lien.
10%
(5)(d) of this rule
Disregard of specific written instructions - Ten percent added when the department has provided specific, written reporting instructions and tax is underpaid because the instructions are not followed.
10%
(5)(e) of this rule
Evasion - Fifty percent added when tax is underpaid and there is an intentional effort to hide that fact.
50%
(5)(f) of this rule
Misuse of resale certificates or a reseller permit - Fifty percent added against unpaid sales tax when a buyer uses a resale certificate or reseller permit, but should not have.
50%
(5)(g) of this rule
Failure to remit sales tax to seller - Ten percent added against sales tax when the department proceeds directly against a buyer who fails to pay sales tax to the seller as part of a sales taxable retail purchase.
10%
(5)(h) of this rule
Failure to obtain the contractor's unified business identifier (UBI) number - A two hundred fifty dollar maximum penalty (does not require any tax liability) when specified businesses hire certain contractors but do not obtain and keep the contractor's UBI number.
$250 (max)
(5)(i) of this rule
Disregarded transaction - A thirty-five percent penalty of the additional tax found to be due as a result of engaging in a disregarded transaction.
35%
(5)(j) of this rule
(a) Late payment of a return. RCW 82.32.090(1) imposes a nine percent penalty if the tax due on a taxpayer's return is not paid by the due date. A total penalty of 19 percent is imposed if the tax due is not paid on or before the last day of the month following the due date, and a total penalty of 29 percent is imposed if the tax due is still not paid on or before the last day of the second month following the due date. The minimum penalty for late payment is five dollars.
Various sets of circumstances can affect how the late payment of a return penalty is applied. See (a)(i) through (iii) of this subsection for some of the most common circumstances.
(i) Will I avoid the penalty if I file my return without the payment? The department may refuse to accept any return that is not accompanied by payment of the tax shown to be due on the return. If the return is not accepted, the taxpayer is considered to have failed or refused to file the return. RCW 82.32.080. Failure to file the return can result in the issuance of an assessment for the actual, or an estimated, amount of unpaid tax. Any assessment issued may include an assessment penalty. (See RCW 82.32.100 and (c) of this subsection for details of when and how the assessment penalty applies.) If the tax return is accepted without payment and payment is not made by the due date, the late payment of return penalty will apply.
(ii) What if my account is given an active nonreporting status, but I later have taxes I need to report and pay? WAC 458-20-101 provides information about the active nonreporting status available for tax reporting accounts. In general, the active nonreporting status allows persons, under certain circumstances, to engage in business activities subject to the Revenue Act without filing excise tax returns. Persons placed on an active nonreporting status by the department are required to timely notify the department if their business activities no longer meet the conditions to be in active nonreporting status. One of the conditions is that the person is not required to collect or pay a tax the department is authorized to collect. The late payment of return penalty will be imposed if a person on active nonreporting status incurs a tax liability that is not paid by the due date for taxpayers that are on an annual reporting basis.
(iii) I did not register my business with the department when I started it, and now I think I was supposed to be paying taxes! What should I do? You should fill out a business license application to get your business registered. It is important for you to register before the department identifies you as an unregistered taxpayer and contacts you about your business activities. (WAC 458-20-101 provides information about registering your business.) Except as noted below, if a person engages in taxable activities while unregistered, but then registers prior to being contacted by the department, the registration is considered voluntary. When a person voluntarily registers, the late payment of return penalty does not apply to those specific tax-reporting periods representing the time during which the person was unregistered.
(A) However, even if the person has voluntarily registered as explained above, the late payment of return penalty will apply if the person:
(I) Collected retail sales tax from customers and failed to remit it to the department; or
(II) Engaged in evasion or misrepresentation with respect to reporting tax liabilities or other tax requirements; or
(III) Engaged in taxable business activities during a period of time in which the person's previously open tax reporting account had been closed.
(B) Even though other circumstances may warrant retention of the late payment of return penalty, if a person has voluntarily registered, the unregistered taxpayer penalty (see (b) of this subsection) will not be due.
(b) Unregistered taxpayer. RCW 82.32.090(4) imposes a five percent penalty on the tax due for any period of time where a person engages in a taxable activity and does not voluntarily register prior to being contacted by the department. "Voluntarily register" means to properly complete and submit a master application to any agency or entity participating in the unified business identifier (UBI) program for the purpose of obtaining a UBI number, all of which is done before any contact from the department. For example, if a person properly completes and submits a business license application to the department of labor and industries for the purpose of obtaining a UBI number, and this is done prior to any contact from the department of revenue, the department considers that person to have voluntarily registered. A person has not voluntarily registered if a UBI number is obtained by any means other than submitting a properly completed business license application. WAC 458-20-101 (Tax registration and tax reporting) provides additional information regarding the UBI program.
(c) Assessment. If the department issues an assessment for substantially underpaid tax, a five percent penalty will be added to the assessment when it is issued. If any tax included in the assessment is not paid by the due date, or by any extended due date, the penalty will increase to a total of 15 percent against the amount of tax that remains unpaid. If any tax included in the assessment is not paid within 30 days of the original or extended due date, the penalty will further increase to a total of 25 percent against the amount of tax that remains unpaid. The minimum for this penalty is five dollars. RCW 82.32.090(2).
(i) As used in this rule, "substantially underpaid" means that:
(A) The taxpayer has paid less than 80 percent of the amount of tax determined by the department to be due for all of the types of taxes included in, and for the entire period of time covered by, the department's examination; and
(B) The amount of underpayment is at least $1,000. If both of these conditions are true when an assessment is issued, it will include the initial five percent assessment penalty. If factual adjustments are made after issuance of an assessment, and those adjustments change whether a taxpayer paid less than 80 percent of the tax due, the department will reevaluate imposition of the original five percent penalty.
(ii) If the initial five percent assessment penalty is included with an assessment when it is issued, the penalty is calculated against the total amount of tax that was not paid when originally due and payable (see RCW 82.32.045). Audit payments made prior to issuance of an assessment will be applied to the assessment after calculation of the initial five percent assessment penalty. At the discretion of the department, preexisting credits or amendments paid prior to an audit or unrelated to the scope of the assessment may be applied before the five percent assessment penalty is calculated, reducing the amount of the penalty. Additional assessment penalty is assessed against the amount of tax that remains unpaid at that particular time, after payments are applied to the assessment.
(d) Issuance of a warrant. If the department issues a tax warrant for the collection of any fee, tax, increase, or penalty, an additional penalty will immediately be added in the amount of 10 percent of the amount of the tax due, but not less than $10.00. RCW 82.32.090(3). Refer to WAC 458-20-217 for additional information on the application of warrants and tax liens.
(e) Disregard of specific written instructions. If the department finds that all or any part of a deficiency resulted from the disregard of specific written instructions as to reporting of tax liabilities, an additional penalty of 10 percent of the additional tax found due will be imposed because of the failure to follow the instructions. RCW 82.32.090(5).
(i) What is "disregard of specific written instructions"? A taxpayer is considered to have received specific written instructions when the department has informed the taxpayer in writing of its tax obligations and specifically advised the taxpayer that failure to act in accordance with those instructions may result in this penalty being imposed. The specific written instructions may be given as a part of a tax assessment, audit, determination, or closing agreement. The penalty applies when a taxpayer does not follow the specific written instructions, resulting in underpayment of the tax due. The penalty may be applied only against the taxpayer given the specific written instructions. However, the taxpayer will not be considered to have disregarded the instructions if the taxpayer has appealed the subject matter of the instructions and the department has not issued its final instructions or decision.
(ii) What if I try to follow the written instructions, but I still don't get it quite right? The penalty will not be applied if the taxpayer has made a good faith effort to comply with specific written instructions.
(f) Evasion. If the department finds that all or any part of the deficiency resulted from an intent to evade the tax due, a penalty of 50 percent of the additional tax found to be due will be added. RCW 82.32.090(7). The evasion penalty is imposed when a taxpayer knows a tax liability is due but attempts to escape detection or payment of the tax liability through deceit, fraud, or other intentional wrongdoing. An intent to evade does not exist where a deficiency is the result of an honest mistake, miscommunication, or the lack of knowledge regarding proper accounting methods. The department has the burden of showing the existence of an intent to evade a tax liability through clear, cogent and convincing evidence.
(i) Evasion penalty only applies to the specific taxes that a taxpayer intended to evade. To the extent that the evasion involved only specific taxes, the evasion penalty will be added only to those taxes. The evasion penalty will not be applied to those taxes which were inadvertently underpaid. For example, if the department finds that the taxpayer intentionally understated the purchase price of equipment in reporting use tax and also inadvertently failed to collect or remit the sales tax at the correct rate on retail sales of merchandise, the evasion penalty will be added only to the use tax deficiency and not the sales tax.
(ii) What actions may establish an intent to evade? The following is a nonexclusive list of actions that are generally considered to establish an intent to evade a tax liability. This list should only be used as a general guide. A determination of whether an intent to evade exists may be ascertained only after a review of all the facts and circumstances.
(A) The use of an out-of-state address by a Washington resident to register property to avoid a Washington excise or use tax, when at the time of registration the taxpayer does not reside at the out-of-state address on a more than temporary basis. Examples of such an address include, but are not limited to, the residence of a relative, mail forwarding or post office box location, motel, campground, or vacation property;
(B) The willful failure of a seller to remit retail sales taxes collected from customers to the department; and
(C) The alteration of a purchase invoice or misrepresentation of the price paid for property (e.g., a used vehicle) to reduce the amount of tax owing.
(g) Misuse of resale certificates, reseller permits, and other documents. Any buyer who uses a resale certificate, a reseller permit, or other documentation authorized under RCW 82.04.470, to purchase items or retail services without payment of sales tax, and who is not entitled to use the certificate, permit, or other documentation for the purchase, will be assessed a penalty of 50 percent of the tax due. RCW 82.32.291. The penalty can apply even if there was no intent to evade the payment of the tax. For more information concerning this penalty or the proper use of resale certificates, reseller permits, and other documentation, refer to WAC 458-20-102 (Reseller permits).
(h) Failure to remit sales tax to seller. The department may assert an additional 10 percent penalty against a buyer who has failed to pay the seller the retail sales tax on taxable purchases, if the department proceeds directly against the buyer for the payment of the tax. This penalty is in addition to any other penalties or interest prescribed by law. RCW 82.08.050.
(i) Failure to obtain the contractor's unified business identifier (UBI) number. If a person who is liable for any fee or tax imposed by chapters 82.04 through 82.27 RCW contracts with another person or entity for work subject to chapter 18.27 RCW (Registration of contractors) or chapter 19.28 RCW (Electricians and electrical installations), that person must obtain and preserve a record of the UBI number of the person or entity performing the work. A person failing to do so is subject to the public works contracting restrictions in RCW 39.06.010 (Contracts with unregistered or unlicensed contractors prohibited), and a penalty determined by the director, but not to exceed $250. RCW 82.32.070(2).
(j) Engaging in disregarded transactions. RCW 82.32.090 imposes a 35 percent penalty for engaging in a disregarded transaction as defined in RCW 82.32.655(3). See RCW 82.32.090(6), 82.32.655, and 82.32.660.
(6) Statutory restrictions on imposing penalties. Depending on the circumstances, the law may impose more than one type of penalty on the same tax liability. However, those penalties are subject to the following restrictions:
(a) The penalties imposed for the late payment of a return, unregistered taxpayer, assessment, and issuance of a warrant (see subsection (5)(a) through (d) of this rule) may be applied against the same tax concurrently, each unaffected by the others, up to their combined maximum rates. Application of one or any combination of these penalties does not prohibit or restrict full application of other penalties authorized by law, even when they are applied against the same tax. RCW 82.32.090(8).
(b) The department may impose either the evasion penalty (subsection (5)(f) of this rule) or the penalty for disregarding specific written instructions (subsection (5)(e) of this rule), but may not impose both penalties on the same tax. RCW 82.32.090(9). The department also will not impose the penalty for the misuse of a resale certificate (subsection (5)(g) of this rule) in combination with either the evasion penalty or the penalty for disregarding specific written instructions on the same tax.
(c) The penalty provided in subsection (5)(j) of this rule may be assessed together with any other applicable penalties provided in this rule on the same tax found to be due, except for the evasion penalty provided in subsection (5)(f) of this rule.
(7) Interest. The department is required by law to add interest to assessments for tax deficiencies and overpayments. RCW 82.32.050 and 82.32.060. Interest accrued against an underpayment only applies to underpaid tax. (Refer to WAC 458-20-229 for a discussion of interest as it relates to refunds and WAC 458-20-230 for a discussion of the statute of limitations as applied to interest.)
(a) For interest imposed after December 31, 1998, interest will be added from the last day of the month following each calendar year included in a notice, or the last day of the month following the final month included in a notice if not the end of the calendar year, until the due date of the notice. However, for 1998 taxes only, interest may not begin to accrue any earlier than February 1, 1999, even if the last period included in the notice is not at the end of calendar year 1998. If payment in full is not made by the due date of the notice, additional interest will be due until the date of payment. The rate of interest continues at the annual variable interest rates described below in (c) of this subsection.
(b) How is interest applied to an assessment that includes underpaid tax from multiple years? The following is an example of how the interest provisions apply. Assume that a tax assessment is issued with a due date of June 30, 2010. The assessment includes periods from January 1, 2008, through September 30, 2009.
(i) For calendar year 2008 tax, interest begins February 1, 2009, (from the last day of the month following the end of the calendar year). When the assessment is issued interest is computed through June 30, 2010, (the due date).
(ii) For the 2009 tax period ending with September 30, 2009, interest begins November 1, 2009, (from the last day of the month following the last month included in the assessment period). When the assessment is issued interest is computed through June 30, 2010, (the due date).
(iii) Interest will continue to accrue on any portion of the assessed taxes which remain unpaid after the due date, until the date those taxes are paid.
(c) How is each year's interest rate determined? The annual variable interest rate will be an average of the federal short-term rate as defined in 26 U.S.C. Sec. 1274(d) plus two percentage points. The rate for each new year will be computed by taking an arithmetical average to the nearest percentage point of the federal short-term rate, compounded annually. The average is calculated using the federal short-term rates from January, April, July of the calendar year immediately preceding the new year, and October of the previous preceding year, as published by the United States Secretary of the Treasury. The interest rate will be adjusted on the first day of January of each year.
(d) How is the interest applied if an assessment includes some years that are underpaid and some that are overpaid? If the assessment contains tax deficiencies in some years and overpayments in other years with the net difference being a tax deficiency, the interest rate for tax deficiencies will also be applied to the overpayments. (Refer to WAC 458-20-229 for interest on refunds.)
(8) Application of payment towards liability. The department will apply taxpayer payments in the following order:
• Interest;
• Penalties;
• Fees;
• Other nontax amounts;
• Tax, except spirits tax;
• Spirits tax;
without regard to any direction of the taxpayer. RCW 82.32.080.
In applying a partial payment to a tax assessment, the payment will first be applied against the oldest tax liability. For purposes of RCW 82.32.145 (Limited liability business entity – Terminated, dissolved, abandoned, insolvent – Collection of unpaid trust fund taxes), it will be assumed that any payments applied to the tax liability will be first applied against any retail sales tax liability, and then to other trust fund tax liabilities. For example, an audit assessment is issued covering a period of two years, which will be referred to as "year1" (the earlier year) and "year2" (the most recent year). The tax assessment includes total interest and penalties for year1 and year2 of $500, retail sales tax of $400 for year1, $600 retail sales tax for year2, $2,000 of other taxes for year1, and $7,000 of other taxes for year2. The order of application of any payments will be first against the $500 of total interest and penalties, second against the $400 retail sales tax in year1, third against the $2,000 of other taxes in year1, fourth against the $600 retail sales tax of year2, and finally against the $7,000 of other taxes in year2.
(9) Waiver or cancellation of penalties. RCW 82.32.105 authorizes the department to waive or cancel penalties under limited circumstances.
(a) Circumstances beyond the control of the taxpayer. The department will waive or cancel the penalties imposed under chapter 82.32 RCW upon finding that the underpayment of the tax, or the failure to pay any tax by the due date, was the result of circumstances beyond the control of the taxpayer. It is possible that a taxpayer will qualify for a waiver of one type of penalty, without obtaining a waiver for all penalties associated with a particular tax liability. Circumstances determined to be beyond the control of the taxpayer when considering a waiver of one type of penalty are not necessarily pertinent when considering a waiver of a different penalty type. For example, circumstances that qualify for waiver of a late payment of return penalty do not necessarily also justify waiver of the substantial underpayment assessment penalty. Refer to WAC 458-20-102 (Reseller permits) for examples of circumstances which are beyond the control of the taxpayer specifically regarding the penalty for misuse of a reseller permit found in RCW 82.32.291.
(i) A request for a waiver or cancellation of penalties should contain all pertinent facts and be accompanied by such proof as may be available. The taxpayer bears the burden of establishing that the circumstances were beyond its control and directly caused the late payment. The request should be made in the form of a letter; however, verbal requests may be accepted and considered at the discretion of the department. Any petition for correction of assessment submitted to the department's administrative review and hearings division for waiver of penalties must be made within the period for filing under RCW 82.32.160 (within 30 days after the issuance of the original notice of the amount owed or within the period covered by any extension of the due date granted by the department), and must be in writing, as explained in WAC 458-20-100 (Informal administrative reviews). Refund requests must be made within the statutory limitation period.
(ii) The circumstances beyond the control of the taxpayer must actually cause the late payment. Circumstances beyond the control of the taxpayer are generally those which are immediate, unexpected, or in the nature of an emergency. Such circumstances result in the taxpayer not having reasonable time or opportunity to obtain an extension of the due date or otherwise timely file and pay. Circumstances beyond the control of the taxpayer include, but are not necessarily limited to, the following.
(A) The return payment was mailed on time but inadvertently sent to another agency.
(B) Erroneous written information given to the taxpayer by a department officer or employee caused the delinquency. A penalty generally will not be waived when it is claimed that erroneous oral information was given by a department employee. The reason for not canceling the penalty in cases of oral information is because of the uncertainty of the facts presented, the uncertainty of the instructions or information imparted by the department employee, and the uncertainty that the taxpayer fully understood the information given. Reliance by the taxpayer on incorrect advice received from the taxpayer's legal or accounting representative is not a basis for cancellation of a penalty.
(C) The delinquency was directly caused by death or serious illness of the taxpayer, or a member of the taxpayer's immediate family. The same circumstances apply to the taxpayer's accountant or other tax preparer, or their immediate family. This situation is not intended to have an indefinite application. A death or serious illness which denies a taxpayer reasonable time or opportunity to obtain an extension or to otherwise arrange timely filing and payment is a circumstance eligible for penalty waiver.
(D) The delinquency was caused by the unavoidable absence of the taxpayer or key employee, prior to the filing date. "Unavoidable absence of the taxpayer" does not include absences because of business trips, vacations, personnel turnover, or terminations.
(E) The delinquency was caused by the destruction by fire or other casualty of the taxpayer's place of business or business records.
(F) The delinquency was caused by an act of fraud, embezzlement, theft, or conversion on the part of the taxpayer's employee or other persons contracted with the taxpayer, which the taxpayer could not immediately detect or prevent, provided that reasonable safeguards or internal controls were in place. See (a)(iii)(E) of this subsection.
(G) The department does not respond to the taxpayer's request for a tax return (or other forms necessary to compute the tax) within a reasonable period of time, which directly causes delinquent filing and payment on the part of the taxpayer. This assumes that, given the same situation, if the department had provided the requested form(s) within a reasonable period of time, the taxpayer would have been able to meet its obligation for timely payment of the tax. In any case, the taxpayer has responsibility to insure that its return is filed in a timely manner (e.g., by keeping track of pending due dates) and must anticipatively request a return for that purpose, if one is not received. (Note: Tax returns and other forms are available at no cost from the department's website, dor.wa.gov. When good cause exists, taxpayers are advised to contact the department and request an extension of the due date for filing, before the due date of concern has passed. See subsection (12) of this rule. Taxpayers who have registered to file electronically with My DOR will avoid potential penalties relating to paper returns not received. See subsection (1)(b) of this rule.)
(iii) The following are examples of circumstances that are generally not considered to be beyond the control of the taxpayer and will not qualify for a waiver or cancellation of penalty:
(A) Financial hardship;
(B) A misunderstanding or lack of knowledge of a tax liability;
(C) The failure of the taxpayer to receive a tax return form, except where the taxpayer timely requested the form and it was still not furnished in reasonable time to mail the return and payment by the due date, as described in (a)(ii)(G) of this subsection;
(D) Registration of an account that is not considered a voluntary registration, as described in subsection (5)(a)(iii) and (b) of this rule;
(E) Mistakes or misconduct on the part of employees or other persons contracted with the taxpayer (not including conduct covered in (a)(ii)(F) of this subsection); and
(F) Reliance upon unpublished, written information from the department that was issued to and specifically addresses the circumstances of some other taxpayer.
(b) Waiver of the late payment of return penalty. The late payment of return penalty (see subsection (5)(a) of this rule) may be waived either as a result of circumstances beyond the control of the taxpayer (RCW 82.32.105 (1) and (a) of this subsection) or after a 24 month review of the taxpayer's reporting history, as described below.
(i) If the late payment of return penalty is assessed on a return but is not the result of circumstances beyond the control of the taxpayer, the penalty will still be waived or canceled if the following two circumstances are satisfied:
(A) The taxpayer requests the penalty waiver for a tax return which was required to be filed under RCW 82.32.045 (taxes reported on the combined excise tax return), RCW 82.23B.020 (oil spill response tax), RCW 82.29A.050 (leasehold excise tax), RCW 84.33.086 (timber and forest lands), RCW 82.14B.030 (tax on telephone access line use); and
(B) The taxpayer has timely filed and paid all tax returns due for that specific tax program for a period of 24 months immediately preceding the period covered by the return for which the waiver is being requested. RCW 82.32.105(2).
If a taxpayer has obtained a tax registration endorsement with the department prior to engaging in business within the state and has engaged in business activities for a period less than 24 months, the taxpayer is eligible for the waiver if the taxpayer had no delinquent tax returns for periods prior to the period covered by the return for which the waiver is being requested. As a result, the taxpayer's very first return due can qualify for a waiver under the 24 month review provision. (See also WAC 458-20-101 for more information regarding the tax registration and tax reporting requirements.) This is the only situation under which the department will consider a waiver when the taxpayer has not timely filed and paid tax returns covering an immediately preceding 24 month period.
(ii) A return will be considered timely for purpose of the waiver if there is no tax liability on it when it is filed. Also, a return will be considered timely if any late payment penalties assessed on it were waived or canceled due to circumstances beyond the control of the taxpayer (see (a) of this subsection). The number of times penalty has been waived due to circumstances beyond the control of the taxpayer does not influence whether the waiver in this subsection will be granted. A taxpayer may receive more than one of the waivers in this subsection within a 24 month period if returns for more than one of the listed tax programs are filed, but no more than one waiver can be applied to any one tax program in a 24 month period.
For example, a taxpayer files combined excise tax returns as required under RCW 82.32.045, and timber tax returns as required under RCW 84.33.086. This taxpayer may qualify for two waivers of the late payment of return penalty during the same 24 month period, one for each tax program. If this taxpayer had an unwaived late payment of return penalty for the combined excise tax return during the previous 24 month period, the taxpayer may still qualify for a penalty waiver for the timber tax program.
(iii) The 24 month period reviewed for this waiver is not affected by the due date of the return for which the penalty waiver is requested, even if that due date has been extended beyond the original due date.
For example, assume a taxpayer's September 2012 return has had the original due date of October 25th extended to November 25th. The return and payment are received after the November 25th extended due date. A penalty waiver is requested. Since the delinquent return represented the month of September 2012, the 24 months which will be reviewed begin on September 1, 2010, and end with August 31, 2012, (the 24 months prior to September 2012). All of the returns representing that period of time will be included in the review. The extension of the original due date has no effect on the 24 month period under review.
(iv) A 24 month review is only valid when considering waiver of the late payment of return penalty described in subsection (5)(a) of this rule. The 24 month review process cannot be used as justification for a waiver of interest, assessment penalty, or any penalty other than the late payment of return penalty.
(10) Waiver or cancellation of interest. The department will waive or cancel interest imposed under chapter 82.32 RCW only in the following situations:
(a) The failure to pay the tax prior to issuance of the assessment was the direct result of written instructions given the taxpayer by the department; or
(b) The extension of the due date for payment of an assessment was not at the request of the taxpayer and was for the sole convenience of the department. RCW 82.32.105(3).
(11) Interest and penalty waiver for active duty military personnel. RCW 82.32.055 provides a waiver of both interest and penalty imposed under chapter 82.32 RCW when:
(a) The majority owner of the business is:
(i) On active duty in the military;
(ii) Participating in an armed conflict;
(iii) Assigned to a location outside the territorial boundaries of the United States; and
(b) The gross income of the business is $1,000,000 or less for the calendar year immediately prior to the year in which the majority owner is initially deployed outside the United States for the armed conflict.
Interest and penalty may not be waived or canceled for a period longer than 24 months. The waiver applies to interest or penalty based on the date they are imposed, which must be within the 24 month waiver period.
To receive a waiver or cancellation of interest and penalty under this subsection, the taxpayer must submit a copy of the majority owner's deployment orders for deployment outside the territorial boundaries of the United States.
(12) Stay of collection. RCW 82.32.190 allows the department to initiate a stay of collection, without the request of the taxpayer and without requiring any bond, for certain tax liabilities when they may be affected by the outcome of a question pending before the courts (see (a) of this subsection). RCW 82.32.200 provides conditions under which the department, at its discretion, may allow a taxpayer to file a bond in order to obtain a stay of collection on a tax assessment (see (b) of this subsection). The department will grant a taxpayer's stay of collection request, as described in RCW 82.32.200, only when the department determines that a stay is in the best interests of the state.
(a) Circumstances under which the department may consider initiating a stay of collection without requiring a bond (RCW 82.32.190) include, but are not necessarily limited to, the existence of the following:
(i) A constitutional issue to be litigated by the taxpayer, the resolution of which is uncertain;
(ii) A matter of first impression for which the department has little precedent in administrative practice; or
(iii) An issue affecting other similarly situated taxpayers for whom the department would be willing to stay collection of the tax.
(b) The department will give consideration to a request for a stay of collection of an assessment (RCW 82.32.200) if:
(i) A written request for the stay is made prior to the due date for payment of the assessment; and
(ii) Payment of any unprotested portion of the assessment and other taxes due is made timely; and
(iii) The request is accompanied by an offer of a cash bond, or a security bond that is guaranteed by a specified authorized surety insurer. The amount of the bond will generally be equal to the total amount of the assessment, including any penalties and interest. However, where appropriate, the department may require a bond in an increased amount not to exceed twice the amount for which the stay is requested.
(c) Claims of financial hardship or threat of litigation are not grounds that justify the granting of a stay of collection. However, the department will consider a claim of significant financial hardship as grounds for staying collection procedures, but this will be done only if a partial payment agreement is executed and kept in accordance with the department's procedures and with such security as the department deems necessary.
(d) If the department grants a stay of collection, the stay will be for a period of no longer than two calendar years from the date of acceptance of the taxpayer request, or 30 days following a decision not appealed from by a tribunal or court of competent jurisdiction upholding the validity of the tax assessed, whichever date occurs first. The department may extend the period of a stay originally granted, but only for good cause shown.
(e) Interest will continue to accrue against the unpaid tax portion of a liability under stay of collection.
(13) Extensions. The department, for good cause, may extend the due date for filing any return.
(a) Any permanent extension more than 10 days beyond the due date, and any temporary extension in excess of 30 days, must be conditional upon deposit by the taxpayer with the department of an amount equal to the estimated tax liability for the reporting period or periods for which the extension is granted. This deposit is credited to the taxpayer's account and may be applied to the taxpayer's liability upon cancellation of the permanent extension or upon reporting of the tax liability where a temporary extension of more than 30 days has been granted.
The amount of the deposit is subject to departmental approval. The amount will be reviewed from time to time, and a change may be required at any time that the department concludes that such amount does not approximate the tax liability for the reporting period or periods for which the extension was granted.
(b) RCW 82.32.080 allows department of revenue to grant extensions of the due date for any taxes due to department of revenue when the governor has proclaimed a state of emergency under RCW 43.06.010. In general, the bill gives department of revenue the authority to provide extensions on its own initiative, or at the specific request of any taxpayers affected by the emergency. The specific details of how, where, and to whom any extensions are granted will depend on the type and scope of each unique emergency and will be determined when an emergency is declared.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-04-003, § 458-20-228, filed 1/24/24, effective 2/24/24; WSR 23-14-002, § 458-20-228, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-13-039, § 458-20-228, filed 6/7/16, effective 7/8/16; WSR 16-06-046, § 458-20-228, filed 2/24/16, effective 3/26/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.080, 82.32.085, 82.32.655, and 82.04.470. WSR 13-22-049, § 458-20-228, filed 11/1/13, effective 12/2/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-07-134, § 458-20-228, filed 3/23/10, effective 4/23/10; WSR 07-06-077, § 458-20-228, filed 3/6/07, effective 4/6/07; WSR 05-22-095, § 458-20-228, filed 11/1/05, effective 12/2/05. Statutory Authority: RCW 82.32.300. WSR 01-05-022, § 458-20-228, filed 2/9/01, effective 3/12/01; WSR 00-04-028, § 458-20-228, filed 1/24/00, effective 2/24/00; WSR 92-03-025, § 458-20-228, filed 1/8/92, effective 2/8/92; WSR 85-04-016 (Order 85-1), § 458-20-228, filed 1/29/85; WSR 83-16-052 (Order ET 83-4), § 458-20-228, filed 8/1/83; Order ET 74-1, § 458-20-228, filed 5/7/74; Order ET 71-1, § 458-20-228, filed 7/22/72; Order ET 70-3, § 458-20-228, filed 5/29/70, effective 7/1/70.]


PDF458-20-22801

Tax reporting frequency.

(1) Introduction.
(a) Every person liable for an excise tax imposed by the laws of the state of Washington for which the department of revenue has primary or secondary administrative responsibility, i.e., Title 82 RCW and chapters 67.28 (Hotel/motel tax), 70A.200 (Litter tax), 70A.205 (Tax on tires), and 84.33 RCW (Forest excise tax), must file an electronic tax return with the department of revenue accompanied by an electronic payment of the tax due; however, the taxes under chapter 82.24 RCW (Tax on cigarettes) must be collected through sales of revenue stamps.
(b) Other rules to reference. The department has adopted other rules that readers may want to refer to:
(i) WAC 458-20-228 Returns, payments, penalties, extensions, interest, stays of collection.
(ii) WAC 458-20-22802 Electronic filing and payment.
(2) Reporting frequency. Taxpayers are required to electronically file and pay their excise taxes on a monthly basis. However, the department may relieve any taxpayer or class of taxpayers from this monthly obligation and may require the return to cover other longer reporting periods, but not in excess of one year. RCW 82.32.045.
(a) General rule. Unless otherwise provided by the department, a taxpayer must report and pay taxes due according to the following schedule:
IF ANNUAL ESTIMATED TAX LIABILITY IS:
REPORTING FREQUENCY
Over $4800.00 per year
Monthly returns:
Between $1050.00 & $4800.00 per year
Quarterly returns:
Less than $1050.00 per year
Annual returns:
When requested by a taxpayer or group of taxpayers, the department may approve more frequent or less frequent reporting if, in the opinion of the department, the change assists the department in the efficient and effective administration of the tax laws of this state.
(b) Changes in reporting frequency. Changes in reporting frequency are effective only after the department has consented to or required the change, and notice of the change has been given by the department to the taxpayer or group of taxpayers.
Situations when changes in reporting frequency may be approved or required include, but are not limited to, the following:
(i) An increase or decrease in the estimated annual tax liability of a taxpayer results in a different threshold as provided in (a) of this subsection;
(ii) A taxpayer or group of taxpayers has substantial periods of no taxable business activity during the calendar year, i.e., temporary businesses;
(iii) The department finds a taxpayer or a group of taxpayers has repeatedly failed to comply with tax reporting and/or payment obligations; or
(iv) The type of tax reported is required to be filed on a specific reporting frequency.
(c) Notice of change in reporting frequency. No change in reporting frequency will be effective except with at least 30 days advance written or electronic notice from the department to the taxpayer at the taxpayer's last provided email address or reported business address.
(d) Filing returns. Returns must be submitted electronically. Taxpayers approved by the department may continue to submit paper returns that are either provided by the department, or approved and accepted by the department. Paper forms (including multipurpose returns for past and present reporting periods) are available for download from the department's website at dor.wa.gov.
Taxes not reported on the combined excise tax return, i.e. forest excise tax, etc. must be reported at such times and upon such forms as are otherwise provided by the department.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-23-124, § 458-20-22801, filed 11/16/23, effective 12/17/23; WSR 20-22-093, § 458-20-22801, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.32.080. WSR 13-22-048, § 458-20-22801, filed 11/1/13, effective 12/2/13. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-07-134, § 458-20-22801, filed 3/23/10, effective 4/23/10. Statutory Authority: RCW 82.32.300 and 82.32.045. WSR 90-05-044, § 458-20-22801, filed 2/15/90, effective 3/18/90.]


PDF458-20-22802

Electronic filing and payment.

(1) Introduction. The department of revenue (department) makes electronic filing (My DOR) and electronic payment available to taxpayers. The law requires all taxpayers to file and pay excise taxes electronically unless a specific waiver applies. RCW 82.32.080.
(a) Taxpayers required to electronically file and pay their excise taxes must register to use My DOR. If they choose to pay using certain electronic payment methods, they must also provide the department with the necessary banking information.
(b) Electronic filing and electronic payment are available for taxes reported on the combined excise tax return, which includes those taxes administered by the department under chapter 82.32 RCW. For purposes of the taxes under chapter 82.32 RCW, unless the context clearly requires otherwise, the term "tax" is defined under RCW 82.32.020. Electronic filing and electronic payment are not required for city and town taxes on financial institutions (chapter 82.14A RCW), cigarette tax (chapter 82.24 RCW), leasehold excise tax (chapter 82.29A RCW), and forest tax (chapter 84.33 RCW). Taxpayers not required to file or pay taxes electronically are encouraged to voluntarily use My DOR to file and pay electronically.
(2) Electronic filing and electronic payment. My DOR is an internet-based application providing a secure and encrypted method for taxpayers to file and pay Washington state's excise taxes.
(a) All taxpayers are required to electronically file using My DOR and pay electronically unless the department waives the requirement for good cause.
(b) If good cause exists, the department may waive the electronic filing and payment requirements for any taxpayer. Waiver for "good cause" is generally temporary. Reasons for good cause include, but are not limited to the following:
(i) The taxpayer does not have the necessary equipment or software;
(ii) The equipment or software necessary is not functioning properly;
(iii) The taxpayer does not have access to the internet using the taxpayer's equipment;
(iv) The taxpayer does not have a bank account or credit card;
(v) The taxpayer's bank is unable to send or receive electronic funds transfer transactions; or
(vi) Some other circumstance or condition exists that, in the department's judgment, prevents the taxpayer from complying.
(3) Electronic payments. Taxpayers required to use My DOR to submit their tax return must also pay the associated taxes electronically. The department accepts two electronic payment methods: Electronic funds transfer (EFT) and credit card, as described in (a) and (b) of this subsection. Taxpayers required to pay electronically must use EFT or credit card unless the department authorizes some other type of electronic payment for a specific taxpayer.
(a) Payment by electronic funds transfer (EFT). EFT is a method of transferring funds from a taxpayer's bank account into the department's bank account.
(i) Definitions. For purposes of this rule, the following terms apply:
(A) "Electronic funds transfer" or "EFT" means any transfer of funds, other than a transaction originated or accomplished by conventional check, drafts, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit a checking or other deposit account. Electronic funds transfer includes payments made by electronic check (e-check).
(B) "ACH" or "automated clearing house" means a central distribution and settlement system for the electronic clearing of debits and credits between financial institutions.
(C) "EFT debit" means the electronic transfer of funds, cleared through the ACH system, generated by the taxpayer instructing the department's bank to charge the taxpayer's account and deposit the funds to the department's account. E-check is a singular payment transaction functioning in the same manner as an EFT debit transaction.
(D) "EFT credit" means the electronic transfer of funds, cleared through the ACH system, generated by the taxpayer instructing the taxpayer's bank to charge the taxpayer's account and deposit the funds to the department's account.
(E) "Department's bank" means the bank with which the department of revenue has a contract to assist in the receipt of taxes and includes any agents of the bank.
(F) "Collectible funds" means funds that have completed the electronic funds transfer process and are available for immediate use by the state.
(G) "ACH CCD+addenda" and "ACH CCD+record" mean the information in a required ACH format transmitted to properly identify the payment.
(ii) EFT methods. Taxpayers paying by EFT must use the EFT debit, EFT credit, or e-check methods. In an emergency, the taxpayer should contact the department for alternative methods of payment.
(iii) Form and content of EFT. The form and content of EFT will be as follows:
(A) If a taxpayer uses EFT debit, they must furnish the department with the information needed to complete the transaction by registering for electronic funds transfer on the department's website.
(B) If a taxpayer uses EFT credit, they are responsible for ensuring their bank has the information necessary to complete the payment. The payment must be submitted using the ACH CCD+addenda format. The EFT credit payment method requires the taxpayer to complete an EFT authorization form.
(C) If the taxpayer wishes to use e-check, they must enter their bank account and routing number for each payment transaction. The e-check transaction authorizes the department to withdraw the payment amount from the taxpayer's bank account.
(iv) Due date of EFT payment. The EFT payment is due on or before the next banking day following the tax return due date.
(A) An EFT payment made using the EFT debit or e-check method is timely if the payment is initiated on or before 11:59 p.m. Pacific Time on the tax return due date, and the effective date for that payment is on or before the next banking day following the tax return due date.
(B) An EFT payment made using the EFT credit method is timely when the state receives collectible U.S. funds on or before 5:00 p.m., Pacific Time, on the EFT payment due date.
(C) The ACH system, either EFT debit or EFT credit, requires the necessary information be in the originating bank's possession on the banking day preceding the date for completion of the transaction. Each bank generally has its own transaction deadlines, but it is the responsibility of the taxpayer to ensure timely payment.
(D) The tax return due date is the next business day after the statutory due date if the statutory due date falls on a Saturday, Sunday, or legal holiday. Legal holidays are determined under state of Washington law and banking holidays are those recognized by the Federal Reserve System.
Example. The tax return due date is Friday, December 25th, a legal and banking holiday. The next business day is Monday, December 28th, and this is the holiday-adjusted tax return due date. This means EFT debit and e-check users must initiate their debit payment by 11:59 p.m., Pacific Time, on December 28th, with a payment effective date of Tuesday, December 29th, for the payment to be considered timely. EFT credit users must contact their bank to ensure funds are deposited in the department's bank no later than 5:00 p.m., Pacific Time, on Tuesday, December 29th, for the payment to be considered timely.
(b) Payment by credit card. Payment by credit card is available using American Express, Discover, Visa, or MasterCard. Taxpayers who wish to make their payment with one of these credit cards are directed to the website of a third-party, nonstate, vendor when they submit their electronic return. Taxpayers then provide their credit card number in the same manner as with any other credit card payment transaction. A credit card payment is considered timely if the payment is completed, including the time it takes to enter the required information on the credit card vendor's website, on or before 11:59 p.m., Pacific Time, on the tax return due date. Each credit card payment may be subject to a convenience fee charged by the third-party, nonstate, vendor.
(4) Electronic refunds. If a taxpayer is due a refund, the taxpayer is entitled to a refund of those taxes by EFT. If the taxpayer wishes to have the refund made by EFT, the taxpayer must provide the department with the information necessary to make an appropriate EFT transaction or the refund will be issued as a paper check. No electronic adjustments or refunds are made directly to a taxpayer's credit card. Overpayments of tax will either be retained to be credited to future tax liabilities or, at the taxpayer's request, will be refunded.
(5) Coordinating a paper return and an electronic payment. To file a paper return, the taxpayer must qualify for a waiver from electronically filing. If approved, and the taxpayer uses the EFT credit payment method but files a paper return, the department will match the payment with the return. A paper return will be considered timely filed only if it is received by the department on or before the tax return due date and the taxpayer has been waived from the electronic filing and payment requirements. The associated EFT credit payment must be received by the next banking day after the tax return due date. If both events occur, the return and payment are considered timely, and the late payment penalty does not apply. If the return is sent through the U.S. Postal Service, it will be considered received on the date shown by the post office cancellation mark stamped on the envelope. RCW 82.32.080.
(6) Crediting and proof of payment. The department will credit the taxpayer with the amount paid as of the date the payment is received by the department's bank. The proof of payment by the taxpayer will depend on the means of transmission.
(a) EFT debit and e-check transactions may be proved by use of the confirmation number received from the department that the transaction was initiated and bank statements or other evidence from the bank that the transaction was settled.
(b) An EFT credit transaction is initiated by the taxpayer through the taxpayer's bank. The taxpayer is responsible for completion of the transaction. The taxpayer generally will be given a verification number by the taxpayer's bank. This verification number with proof of the ACH CCD+record showing the department's bank and account number, plus confirmation the transaction has been settled will constitute proof of payment.
(c) A taxpayer using any other electronic payment method is responsible for completion of the transaction. Proof of payment will include transaction initiation date and any other evidence from a financial institution or credit card company showing the transaction was settled.
(7) Correcting errors. Errors in the electronic payment process may result in either an underpayment or an overpayment of the tax. In either case, the taxpayer needs to contact the department to arrange for appropriate action. Overpayments may be used as a credit, or the taxpayer may apply for a refund. The department will expedite a refund where it is caused by an error in transmission. Underpayments should be corrected by the taxpayer immediately to avoid any penalties.
(8) Penalties. There are no special provisions for penalties when payment is made by electronic means. WAC 458-20-228 discusses the various penalties that may apply and the limited circumstances under which they may be waived. To avoid the imposition of penalties, the taxpayer must provide correct bank account information to the department, and ensure their payment is timely.
(a) If the department finds a taxpayer disregarded specific written instructions to file returns or remit payments electronically, as provided by RCW 82.32.080, the department will add a penalty of 10 percent to the amount of the tax that should have been reported and/or paid electronically or the additional tax found due if there is a deficiency because of failure to follow written instructions.
(b) A taxpayer will be considered to have willfully disregarded the requirement to file returns or remit payment electronically if the department:
(i) Has mailed or otherwise delivered the specific written instructions to the taxpayer on at least two occasions; and
(ii) Has provided the taxpayer at least 45 days after the second written notice to come into compliance with its electronic filing and/or payment obligations.
(c) In an EFT debit and e-check transaction, the department's bank is the originating bank and is responsible for the accuracy of transmission. If the taxpayer has timely initiated the EFT debit or e-check transaction, provided accurate bank account information, received a confirmation number, and shows adequate funds were available in the account, no late payment penalties will apply with respect to those funds authorized.
(d) In an EFT credit transaction, the taxpayer's bank is the originating bank, and the taxpayer is primarily responsible for its accuracy. The taxpayer must have timely initiated the transaction, provided the correct information for the ACH CCD+record, and shown there were sufficient funds in the account, to prove timely compliance. If the taxpayer can make this showing, then no late payment penalties will apply with respect to those funds authorized if the transaction is not completed.
(e) When a payment is made using an approved credit card, the credit card company acts as the taxpayer's agent and the taxpayer is primarily responsible for the accuracy of this transaction. If the taxpayer can prove the payment was initiated and submitted timely, no late payment penalties will apply to those funds authorized.
[Statutory Authority: RCW 82.32.085. WSR 22-23-092, § 458-20-22802, filed 11/15/22, effective 12/16/22. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-040, § 458-20-22802, filed 2/24/16, effective 3/26/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.080, and 82.32.085. WSR 13-22-047, § 458-20-22802, filed 11/1/13, effective 12/2/13. Statutory Authority: RCW 82.32.085, 82.32.300, and 82.01.060(2). WSR 06-23-066, § 458-20-22802, filed 11/9/06, effective 12/10/06. Statutory Authority: RCW 82.32.300 and 82.32.085. WSR 01-07-017, § 458-20-22802, filed 3/13/01, effective 4/13/01. Statutory Authority: RCW 82.32.300. WSR 91-24-070, § 458-20-22802, filed 12/2/91, effective 1/2/92; WSR 90-19-052, § 458-20-22802, filed 9/14/90, effective 10/15/90.]


PDF458-20-229

Refunds.

(1) Introduction. This rule explains the procedures relating to refunds or credits for the overpayment of taxes, penalties, or interest. It describes the statutory time limits for refunds and the interest rates that apply to those refunds.
References to a "refund application" in this rule include a request for a credit against future tax liability as well as a refund to the taxpayer.
Examples provided in this rule should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) What are the time limits for a tax refund or credit?
(a) Time limits. No refund or credit may be made for taxes, penalties, or interest paid more than four years before the beginning of the calendar year in which a refund application is made or examination of records by the department is completed. See RCW 82.32.060. This is a nonclaim statute rather than a statute of limitations. This means a valid application must be filed within the statutory period, which may not be extended or tolled, unless a waiver extending the time for assessment has been entered into as described in (c) of this subsection.
For example, a refund or credit may be granted for any overpayment made in a shaded year in the following chart:
(b) Relation back to date paid. Because the time limits relate to the date the taxes, penalties, or interest is paid, a refund application can be timely even though the payment concerned liabilities for a tax year normally outside the time limits. For example, Taxpayer P owes $1,000 in B&O tax for activity undertaken in December 2000. In January 2001, Taxpayer P makes an arithmetic error and submits a payment of $1,500 with its December 2000 tax return. In December 2005, Taxpayer P requests a refund of $500 for the overpayment of taxes for the December 2000 period. This request is timely because the overpayment occurred within the time limits, even though the payment concerned tax liabilities incurred (December 2000) outside the time limits.
Fact situations can be complicated. For example, Taxpayer P pays B&O taxes in Years 1 through 4. The department subsequently conducts an audit of Taxpayer P that includes Years 1-4. The audit is completed in Year 5. As a result of the audit, the department issues an assessment in Year 5 for $50,000 in additional retail sales taxes that were due from Years 1-4. Taxpayer P pays the assessment in full in Year 6. In Year 10, Taxpayer P files an application requesting a refund of B&O taxes. Taxpayer P's application is timely because it relates to a payment (payment of the assessment in Year 6) made no more than four years before the year in which the application is filed. It does not matter that the taxes relate to years outside the time limits; the actual payment occurred within four years before the refund application. Nor does it matter that the refund is based on an overpayment of B&O taxes while the assessment involved retail sales taxes, because both taxes relate to the same tax years. However, the amount of any refund is limited to $50,000 - the amount of the payment that occurred within the time limits.
Assume the same facts as described above. When the department reviews Taxpayer P's refund application, it determines that the refund is valid. After reviewing the new information, however, the department also determines that Taxpayer P should have paid $20,000 in additional B&O taxes during Years 1-4. Because Taxpayer P paid $30,000 more than the amount properly due ($50,000 overpayment less $20,000 underpayment), the amount of the refund will be $30,000.
(c) Waiver. Under RCW 82.32.050 or 82.32.100, a taxpayer may agree to waive the time limits and extend the time for the assessment of taxes, penalties and interest. If the taxpayer executes such a waiver, the time limits for a refund or credit are extended for the same period.
(3) How do I get a refund or credit?
(a) Departmental examination of returns. If the department performs an examination of the taxpayer's records and determines that the taxpayer has overpaid taxes, penalties, or interest, the department will issue a refund or a credit, at the taxpayer's option. In this situation, the taxpayer does not need to apply for a refund.
(b) Taxpayer application.
(i) If a taxpayer discovers that it has overpaid taxes, penalties, or interest, it may apply for a refund or credit. Refund application forms are available from the following sources:
• The department's internet website at http://dor.wa.gov
• By facsimile by calling Fast Fax at 360-705-6705
• By writing to:
Taxpayer Services
Washington State Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478.
The application form should be submitted to the department at the following location:
Taxpayer Account Administration
P.O. Box 47476
Olympia, WA 98504-7476.
Taxpayers are encouraged to use the department's refund application form to ensure that all necessary information is provided for a timely valid application. However, while use of the department's application form is encouraged, it is not mandatory and any written request for refund or credit meeting the requirements of this rule shall constitute a valid application. Filing an amended return showing an overpayment will also constitute an application for refund or credit, provided that the taxpayer also specifically identifies the basis for the refund or credit.
(ii) A taxpayer must submit a refund application within the time limits described in subsection (2)(a) of this rule. An application must contain the following five elements:
(A) The taxpayer's name and UBI/TRA number must be on the application.
(B) The amount of the claim must be stated. Where the exact amount of the claim cannot be specifically ascertained at time of filing, the taxpayer may submit an application containing an estimated claim amount. Taxpayers must explain why the amount of the claim cannot be stated with specificity and how the estimated amount of the claim was determined.
(C) The tax type and taxable period must be on the application.
(D) The specific basis for the claim must be on the application. Any basis for a refund or credit not specifically identified in the initial refund application will be considered untimely, except that an application may be refiled to add additional bases at any time before the time limits in subsection (2) of this rule expire.
(E) The signature of the taxpayer or the taxpayer's representative must be on the application. If the taxpayer is represented, the confidential taxpayer information waiver signed by the taxpayer specifically for that refund claim must be received by the department by the date the substantiation documents are first required, without regard to any extensions. If the signed confidential taxpayer information waiver for the refund claim lists the representative as an entity, every member or employee of that entity is authorized to represent the taxpayer. If the signed confidential taxpayer information waiver for the refund claim lists the representative as an individual, only that individual is authorized to represent the taxpayer.
(iii) If the nonclaim statute has run prior to the filing of the application, the department will deny the application and notify the taxpayer.
(iv) If the department determines that the taxpayer is not entitled to a refund as a matter of law, the application may be denied without requiring substantiation. The taxpayer shall be responsible for maintaining substantiation as may eventually be needed should taxpayer seek review.
(v) The taxpayer is encouraged to file substantiation documents at the time of filing the application. However, once an application is filed, the taxpayer must submit sufficient substantiation to support the claim for refund or credit before the department can determine whether the claim is valid. The department will notify the taxpayer if additional substantiation is required. The taxpayer must provide the necessary substantiation within 90 days after such notice is sent, unless the documentation is under the control of a third party, not affiliated with or under the control of the taxpayer, in which case the taxpayer will have 180 days to provide the documentation. The department may request any other books, records, invoices or electronic equivalents and, where appropriate, federal and state tax returns to determine whether to accept or deny the claimed refund and to assess an existing deficiency.
(vi) In its discretion and upon good cause shown, the department may extend the period for providing substantiation upon its own or the taxpayer's request, which may not be unreasonably denied.
(vii) If the department does not receive the necessary substantiation within the applicable time period, the department shall deny the claim for lack of adequate substantiation and shall so notify the taxpayer. Any application denied for lack of adequate substantiation may be filed again with additional substantiation at any time before the time limits in subsection (2) of this rule expire. Once the department determines that substantiation is sufficient, the department shall process the refund claim within 90 days, except that the department may extend the time of processing such claim upon notice to the taxpayer and explanation of why the claim cannot be completed within such time.
(viii) The following examples illustrate the refund application process:
(A) A taxpayer discovers in January 2005 that its June 2004 excise tax return was prepared using incorrect figures that overstated its sales, resulting in an overpayment of tax. The taxpayer files an amended June 2004 tax return with the department's taxpayer account administration division. The department will treat the taxpayer's amended June 2004 tax return as an application for a refund or credit of the amounts overpaid during that tax period, except that the taxpayer must also specifically identify the basis for the refund or credit and provide sufficient substantiation to support the claim for refund or credit. The taxpayer may satisfy this obligation by submitting a completed refund application form with its amended return or providing the additional required substantiation by other means.
(B) On December 31, 2005, a taxpayer files an amended return for the 2001 calendar year. The return includes changed figures indicating that an overpayment occurred, but does not provide any supporting substantiation. No written waiver of the time limits, under subsection (2)(c) of this rule, for this time period exists. The department sends a letter notifying the taxpayer that the taxpayer's application is not complete and substantiation must be provided within 90 days or the application will be denied. If the taxpayer does not provide the necessary substantiation by the stated date, the claim will be denied and, if refiled, will not be granted because it is then past the nonclaim limit of the statute.
(C) Taxpayer submits a refund application on December 31, 2004, claiming that taxpayer overpaid use tax in 2000 on certain machinery and equipment obtained by the taxpayer at that time. No substantiation is provided with the application and no written waiver of the time limit, under subsection (2)(c) of this rule, for this taxable period exists. The department sends a letter notifying the taxpayer that the taxpayer's application is not complete and substantiation must be provided within 90 days or the application will be denied. The taxpayer does not respond by the stated date. The claim will be denied and, if refiled, will not be granted since it is then past the nonclaim limit of the statute.
(D) Assume the same facts as in (b)(viii)(B) and (C) of this subsection, except that within 90 days from the date the department sent the letter the taxpayer submits substantiation, which the department deems sufficient. The taxpayer's claim is valid, notwithstanding that the substantiation was provided after the nonclaim limit expired.
(E) Assume the same facts as in (b)(viii)(B) and (C) of this subsection, except that before the 90-day period expires, the taxpayer requests an additional 15 days in which to respond, explaining why the substantiation will require the additional time to assemble. The department agrees to the extended deadline. If the taxpayer submits the requested substantiation within the resulting 105-day period, the department will not deny the claim for failure to provide timely substantiation.
(F) Assume the same facts as in (b)(iii)(B) and (C) of this subsection, except that the taxpayer submits substantiation within 90 days. The department reviews the substantiation and finds that it is still insufficient. The department, in its discretion, may extend the deadline and request additional substantiation from the taxpayer or may deny the refund claim as not substantiated.
(4) May I get a refund of retail sales tax paid in error?
(a) Refund from seller. Except as provided for in RCW 82.08.130 regarding deductions for tax paid at source, if a buyer pays retail sales tax on a transaction that the buyer later believes was not taxable, the buyer should request a refund or credit directly from the seller from whom the purchase was made. If the seller determines the tax was not due and issues a refund or credit to the buyer, the seller may seek its own refund from the department. It is better for a buyer to seek a retail sales tax refund directly from the seller. This is because the seller has the records to know if retail sales tax was collected on the original sale, knows the buyer, knows the circumstances surrounding the original sale, is aware of any disputes between itself and the buyer concerning the product, and may already be aware of the circumstances as to why a refund of sales tax is or is not appropriate. If a seller questions whether he or she should refund sales tax to a buyer, the seller may request advice from the department's telephone information center at 360-705-6705.
(b) Refund from department. In certain situations where the buyer has not received a refund from the seller, the department will refund retail sales tax directly to a buyer. The buyer must file a complete refund application as described in subsection (3)(b) of this rule and either a seller's declaration or a buyer's declaration, under penalty of perjury, must be provided for each seller.
(i) If the buyer is able to obtain a waiver from the seller of the seller's right to claim the refund, the buyer should file a seller's declaration, under penalty of perjury, with the refund application. A seller's declaration substantiates that:
(A) Retail sales tax was collected and paid to the department on the purchase for which a refund is sought;
(B) The seller has not refunded the retail sales tax to the buyer or claimed a refund from the department; and
(C) The seller will not seek a refund of the sales tax from the department.
(ii) If the seller no longer exists, the seller refuses to sign the declaration, under penalty of perjury, or the buyer is unable to locate the seller, the buyer should file a buyer's declaration, under penalty of perjury, with the refund application. The buyer's declaration explains why the buyer is unable to obtain a seller's declaration and provides information about the seller and declares that the buyer has not obtained and will not in the future seek a refund from the seller for that claim.
(iii) Seller's declaration, under penalty of perjury, and buyer's declaration, under penalty of perjury, forms are available from the following sources:
• The department's internet website at http://dor.wa.gov
• By facsimile by calling Fast Fax at 360-705-6705
• By writing to:
Taxpayer Services
Washington State Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478.
(5) May I use statistical sampling to substantiate a refund? Sampling will only be used when a detailed audit is not possible. However, if your applications for refund or credit involve voluminous documents, the preferred method for substantiating your application is the use of statistical sampling. Alternative methods of sampling, including but not limited to, random sampling, time period sampling, transaction sampling, and block sampling, may be used when the department agrees that such methods are appropriate.
When using statistical sampling or an alternative method to substantiate an application for refund or credit, the applicant must contact the department prior to preparing the sampling to obtain the department's approval of the sampling plan. The sampling plan will describe the following:
• Population and sampling frame;
• Sampling unit;
• Source of the random numbers;
• Who will physically locate the sample units and how and where they will be presented for review;
• Any special instructions to those who were involved in reviewing the sample units;
• Special valuation guidelines to any of the sample units selected in the sample;
• How the sample will be evaluated, including the precision and confidence levels; and
• The applicant must obtain a seller's declaration from those sellers identified in the sample and separately certify, under penalty of perjury, that applicant will not otherwise request or accept a refund or credit for sales or deferred sales tax paid to any seller or any use tax remitted during the taxable period covered by the audit.
Failure to contact the department before preparing the sampling may result in the department rejecting the application on the grounds that the results are not statistically valid.
Contact the department prior to performing a statistical sampling at these locations:
• The department's internet website at http://dor.wa.gov
• By facsimile by calling Fast Fax at 360-705-6705
• By writing to:
Taxpayer Services
Washington State Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478.
(6) Is my refund final? The department may review a refund or credit provided on the basis of a taxpayer application without an examination by audit. If the refund or credit is granted and the department subsequently determines that the refund or credit exceeded the amount properly due the taxpayer, the department may issue an assessment to recover the excess amount. This assessment must be made within the time limits of RCW 82.32.050.
(7) Refunds made as a result of a court decision. The department will grant refunds or credits required by a court or Board of Tax Appeals decision, if the decision is not under appeal.
If the court action requires the refund or credit of retail sales taxes, the department will not require that buyers attempt to obtain a refund directly from the seller if it would be unreasonable and an undue burden on the buyer. In such a case, the department may refund the retail sales tax directly to the buyer and may use the public media to notify persons that they may be entitled to refunds or credits. The department will make available special refund application forms that buyers must use for these situations. The application will request the appropriate information needed to identify the buyer, item purchased, amount of sales tax to be refunded, and the seller. The department may, at its discretion, request additional documentation that the buyer could reasonably be expected to retain, based on the particular circumstances and value of the transaction. The department will approve or deny such refund requests within 90 days after the buyer has submitted all documentation.
(8) What interest is due on my refund? Interest is due on a refund or credit granted to a taxpayer as provided in this subsection.
(a) Rate for overpayments made between 1992 through 1998. For amounts overpaid by a taxpayer between January 31, 1991 and December 31, 1998, the rate of interest on refunds and credits is:
(i) Computed the same way as the rate provided under (b) of this subsection minus one percent, for interest allowed through December 31, 1998; and
(ii) Computed the same way as the rate provided under (b) of this subsection, for interest allowed after December 31, 1998.
(b) Rate for overpayments after 1998. For amounts overpaid by a taxpayer after December 31, 1998, the rate of interest on refunds and credits is the average of the federal short-term rate as defined in 26 U.S.C. Sec. 1274(d) plus two percentage points. The rate is adjusted on the first day of January of each year by taking an arithmetical average to the nearest percentage point of the federal short-term rate, compounded annually, for the months of January, April and July of the immediately preceding calendar year and October of the previous preceding year, as published by the United States Secretary of Treasury.
(c) Start date for the calculation of interest. If the taxpayer made all overpayments for each calendar year and all reporting periods ending with the final month included in a credit notice or refund on or before the due date of the final return for each calendar year or the final reporting period included in the notice or refund, interest is computed from either:
(i) January 31st following each calendar year included in a notice or refund; or
(ii) The last day of the month following the final month included in a notice or refund.
If the taxpayer did not make all overpayments for each calendar year and all reporting periods ending with the final month included in the notice or refund, interest is computed from the last day of the month following the date on which payment in full of the liabilities was made for each calendar year included in a notice or refund, and the last day of the month following the date on which payment in full of the liabilities was made if the final month included in a notice or refund is not the end of a calendar year.
(d) Calculation of interest on credits. The department will include interest on credit notices with the interest computed to the date the taxpayer could reasonably be expected to use the credit notice, generally the due date of the next tax return. If a taxpayer requests that a credit notice be converted to a refund, interest is recomputed to the date the refund (warrant) is issued, but not to exceed the interest that would have been granted through the credit notice.
(9) May the department apply my refund against other taxes I owe? The department may apply overpayments against existing deficiencies and/or future assessments for the same legal entity. However, if preliminary schedules have not been issued regarding existing deficiencies or future assessments and the taxpayer is not presently under audit, the refund of an overpayment may not be delayed when the department determines a refund is due. The following examples illustrate the application of overpayments against existing deficiencies:
(a) The taxpayer's records are audited for the period Year 1 through Year 4. The audit disclosed underpayments in Year 2 and overpayments in Year 4. The department will apply the overpayments in Year 4 to the deficiencies in Year 2. The resulting amount will indicate whether a refund or credit is owed the taxpayer or whether the taxpayer owes additional tax.
(b) The department has determined that the taxpayer has overpaid its real estate excise tax. The department believes that the taxpayer may owe additional B&O taxes, but this has yet to be established. The department will not delay the refund of the real estate excise tax while it schedules and performs an audit for the B&O taxes.
(c) The department simultaneously performed a timber tax audit and a B&O tax audit of a taxpayer. The audit disclosed underpayments of B&O tax and overpayments of timber tax. Separate assessments were issued on the same date, one showing additional taxes due and the other overpayments. The department may apply the overpayment against the tax deficiency assessment since both the underpayment and overpayment have been established.
(10) How do I seek review of the department's decision? The taxpayer may seek review of the denial of: A refund claim (or any part thereof, including tax, penalties, or interest overpayments), a request for an extension for providing substantiation, or a request to use a specific sampling technique. Taxpayer may seek review to either:
(a) The department as provided in WAC 458-20-100 (Informal administrative reviews); or
(b) Directly to Thurston County superior court.
(11) Application. This rule applies to refund applications or amended returns showing overpayments, where the taxpayer has also specifically identified the basis for the refund or credit, that are received by the department on or after the effective date of this rule.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-229, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-229, filed 5/27/16, effective 6/27/16; WSR 08-14-038, § 458-20-229, filed 6/23/08, effective 7/24/08; WSR 07-17-065, § 458-20-229, filed 8/13/07, effective 9/13/07. Statutory Authority: RCW 82.32.300. WSR 93-04-077, § 458-20-229, filed 2/1/93, effective 3/4/93; WSR 83-08-026 (Order ET 83-1), § 458-20-229, filed 3/30/83; Order ET 70-3, § 458-20-229 (Rule 229), filed 5/29/70, effective 7/1/70.]


PDF458-20-230

Statutory limitations on assessments.

(1) Introduction. This section explains the time period during which the department of revenue may issue a tax assessment. It also explains the circumstances under which the department may request that a taxpayer complete a statute of limitations waiver.
(2) Assessment period. Tax assessments must be made within four years after the close of the tax (calendar) year in which the tax was incurred with the following exceptions:
(a) Against a taxpayer who was not registered as required by chapter 82.32 RCW.
(b) Upon a showing of fraud or of misrepresentation of a material fact by the taxpayer.
(c) Where the taxpayer has executed a written waiver of such limitation.
(d) Sales tax collected by a seller upon retail sales and not remitted to the department.
(3) Unregistered taxpayer. Except for evasion or misrepresentation, if the department of revenue discovers any unregistered taxpayer doing business in this state, the department will assess taxes, interest, and penalties for a period of seven years plus the current year. If a taxpayer voluntarily registers before being contacted by the department, assessments will not exceed four years plus the current year, provided the taxpayer has made a good faith attempt to report correctly and there is no evidence of intent to evade tax under RCW 82.32.050. It will be presumed that a taxpayer has registered with the department if the taxpayer voluntarily files for an identification number under the Unified Business Identifier (UBI) system prior to any contact from the department of revenue.
(4) Evasion or misrepresentation. There is no limitation for the period in which an assessment or correction of an assessment can be made upon a showing of evasion or of misrepresentation of a material fact. Evasion involves a situation where the taxpayer knows a tax liability is due and the taxpayer attempts to escape detection through deceit, fraud, or other intentional wrongdoing. The evasion must be shown by clear, cogent, and convincing evidence which is objective and creditable. However, in the case of evasion or misrepresentation, any assessment for taxes which extends beyond four years and the current year will be limited to taxes which were underpaid as a result of the evasion or misrepresentation. (See RCW 82.32.050 and 82.32.090.)
(5) Statute of limitations waiver. The department may request that a taxpayer complete a waiver of the statute of limitations in those cases where the delay in timely completing an audit or issuance of an assessment is the result of actions of the taxpayer. If the department requests that a statute of limitations waiver be completed, the waiver will also hold open the period during which the department may refund taxes discovered to have been overpaid. The department may also request that a taxpayer complete a waiver of the statute of limitations in connection with a request from a taxpayer for a refund or credit for overpaid taxes. If the refund or credit request relates to a year for which the statute of limitations will expire within a short period, the department may be able to more promptly issue a refund by delaying the verification process until it is more convenient to the taxpayer and/or the department if the taxpayer will execute a statute of limitations waiver. (Refer to WAC 458-20-229.)
(6) Trust funds. Retail sales tax which is collected by a seller must be remitted to the department of revenue. These amounts are deemed to be held in trust by the seller until paid to the department. The statute of limitations does not apply to retail sales tax which was collected and not remitted to the department.
(7) Revised assessments. The department may issue an assessment to correct errors found in examining tax returns or it may issue an assessment to correct errors based on a review of the taxpayer's records. Assessments which are based on a review of the tax returns are subject to further review and revision by future audit. Once issued, the department may revise an audit assessment subject to the following restrictions.
(a) The assessment generally may not be increased from the amount originally assessed for those years for which the statute of limitations would have expired if this were an original assessment. For these years an assessment can be reduced, but not increased.
(b) An assessment may be increased upon discovery of fraud/evasion or misrepresentation of a material fact.
(8) Assessments following conditional refunds or credits. Taxpayers may petition for a credit or refund of overpaid taxes by following the procedures in WAC 458-20-229. The department at its option may grant such credits or refunds without further immediate verification. If it is later determined that a refund was granted in error and that there was no fraud/evasion or misrepresentation of a material fact, the department may issue an assessment to recover the taxes and interest which were refunded in error, provided the assessment is issued within four years from the close of the tax year in which the tax was incurred or within a period covered by a statute of limitations waiver.
(9) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(a) ABC Manufacturing has manufacturing plants in Oregon and Washington. This taxpayer properly registered with the department of revenue when first engaging in business in Washington a number of years ago and has remained registered. In 1987 the taxpayer transferred equipment from its Oregon plant and used the equipment in its Washington plant. (See RCW 82.12.010 for a definition of use.) This transfer was recorded in the accounting records in 1987, but the taxpayer inadvertently failed to report the use tax. The taxpayer's records were audited in 1992 at which time this transfer and the failure to report the use tax came to the department's attention. Since the department discovered the use tax had not been paid more than four years after the close of 1987 and none of the exceptions as stated in subsection (2) of this section apply, the department is barred by the statute of limitations from now assessing the use tax. The department can expand the statute of limitations to seven years plus the current year if the taxpayer was required to be registered and failed to do so.
(b) The department issued its assessment on December 20, 1992, for use taxes owed by ABC Manufacturing covering the period January 1, 1988, through September 30, 1992. The taxpayer contacted the department in April 1994 and provided documentation to support that retail sales tax had been paid on some items assessed for use tax in the tax years 1989 and 1990. In the process of reviewing the documentation, the department discovered that the auditor inadvertently had failed to assess use tax on some assets purchased in the year 1988 which would have resulted in a larger tax assessment for that year than originally assessed. The department issued a revised assessment on June 15, 1994, covering the period January 1, 1988, through September 30, 1992 which reflected the deletion of the use tax assessed in error for 1989 and 1990. The revised assessment did not increase the tax assessment for taxes owed in 1988 because this would have resulted in the assessment being increased more than four years after the close of the 1988 tax year. Any petition for refund must be made within four years of the close of the tax year in which the tax was paid.
(c) The department contacted XYZ Distributing on September 1, 1992, to schedule a routine audit of its records. The taxpayer requested that the department delay the start of the audit until December 1, 1992, because its records are maintained on a fiscal year ending September 30 and the audit would be extremely disruptive to its year end closing if begun immediately. This delay would not allow the department sufficient time to complete the review of the records for 1988 and timely make an assessment for any taxes found to be due. The department may request the taxpayer to complete a statute of limitations waiver for the year 1988 in exchange for delaying the start of the audit. The completion of the waiver by the taxpayer will also hold open the year 1988 for refund or credit of any taxes found to have been overpaid in this period until such time as an assessment is issued or the waiver expires.
(d) ABC Manufacturing was being audited by the department for the period January 1, 1988, through September 30, 1992. During the process of examining the records, the department discovered that ABC had collected retail sales tax on sales in 1986 which had never been remitted to the department. There was no fraud or misrepresentation involved in the taxpayer's failure to remit the tax. The department appropriately expanded the period covered by the assessment to include the unremitted retail sales tax in the year 1986. Retail sales tax collected by a seller is deemed to be held in trust until paid to the department and the statute of limitations does not apply. (See RCW 82.08.050.)
(e) The department, through staff at its Seattle office, was unable to find a registration for ARC Company. The department contacted ARC by letter inquiring about its business activities in Washington and asking ARC for its registration number. ARC had not registered with the department of revenue, nor had it registered with any other state agencies through the UBI system. Shortly after being contacted by the department's Seattle staff, ARC contacted the Olympia office of the department and completed an application for registration without disclosing the earlier contact by the Seattle office. ARC subsequently argued that the assessment should be restricted to four years plus the current year. The department appropriately made its assessment for seven years plus the current year because the taxpayer was unregistered at the time of being first contacted by the department.
(f) John Smith lives in Washington part of the year, votes in Washington, has a Washington driver's license, and uses his Washington address in filing federal tax returns. He spends the winters in Arizona. In 1986, while in Arizona, he purchased a new motor home which he licensed in Arizona. He assumed that it was appropriate to license the vehicle in Arizona since he spends a considerable part of the year there and was not aware that he should pay use tax on the first use in Washington which occurred later that year. In 1992 he traded this motor home for a new motor home which he purchased from an Arizona dealer. Shortly thereafter, he returned to Washington and the department became aware of Mr. Smith's use of both of these motor homes in Washington. The department concluded that use tax was due. However, because the department could not show any evidence of evasion or misrepresentation and the taxpayer was not required to be registered with the department, the statute of limitations had expired on the 1986 purchase. Use tax was properly due and assessed on the 1992 purchase with the value based on the total purchase price after allowing a deduction for the trade-in value.
(g) In 1992 the department audited the records of XYZ Hauling for the years 1988 through 1991. The audit disclosed that some income from hauling performed in 1988 had not been reported and issued an assessment in 1992 for additional taxes owed under the motor transportation public utility tax. The taxpayer paid the assessment in 1992. In 1994 the taxpayer contacted the department with additional records which disclosed that part of the hauling for which motor transportation tax was assessed for the year 1988 should have been assessed under the urban transportation classification, a lower tax rate. The taxpayer requested that all of the motor transportation tax be refunded and argued that the urban transportation tax could not be assessed since the statute of limitations had expired for the year 1988. The department issued a revised assessment in which it subtracted the tax that should have been paid under urban transportation from the motor transportation tax which was assessed. The department refunded the difference. The revised assessment did not result in additional taxes being assessed, but was a reduction of the original assessment.
[Statutory Authority: RCW 82.32.300. WSR 93-03-004, § 458-20-230, filed 1/8/93, effective 2/8/93; Order ET 70-3, § 458-20-230 (Rule 230), filed 5/29/70, effective 7/1/70.]


PDF458-20-233

Tax liability of medical and hospital service bureaus and associations and similar health care organizations.

All medical service bureaus, medical service corporations, hospital service associations and similar health care organizations engaging in business within this state are subject to the provisions of the business and occupation tax and are taxable under the service and other business activities classification upon their gross income. The term "gross income" as defined in RCW 82.04.080 is construed to include the total contributions, fees, premiums or other receipts paid in by the members or subscribers. Insofar as tax liability is concerned it is immaterial that such organizations may be incorporated as charitable or nonprofit corporations.
Certain of these organizations operate under contracts by the terms of which the bureau or association acts solely as the agent of a physician, hospital, or ambulance company in offering to its members or subscribers medical and surgical services, hospitalization, nursing, and ambulance services. In computing tax liability such bureaus and associations, therefore, will be entitled to deduct from their gross income the amounts paid to member physicians, hospitals and ambulance companies. No deduction will be allowed with respect to amounts retained as surplus or reserve accounts or to amounts expended for the purchase of supplies or for any other expense of the bureau or association other than as provided herein.
Under contracts wherein these organizations furnish to their members medical and surgical, hospitalization and ambulance services as a principal and not as an agent, no such deduction is allowed.
Revised July 1, 1956.
[Order ET 70-3, § 458-20-233 (Rule 233), filed 5/29/70, effective 7/1/70.]


PDF458-20-235

Effect of rate changes on prior contracts and sales agreements.

(1) Introduction. This section explains the principals that determine the applicability of changes in the rates of tax imposed under the Revenue Act, with respect to contracts, sales agreements, and installment sales made prior to the effective date of the change.
(2) Unconditional sales contracts.
• When an unconditional sales contract to sell tangible personal property is entered into prior to the effective date of a rate change, and the property is delivered after the rate change date, the new tax rate applies to the transaction.
• When an unconditional sales contract to sell tangible personal property is entered into prior to the effective date, and the property is delivered prior to the rate change date, the tax rate in effect for the prior period applies.
• When a contract to sell tangible personal property contains a specific provision to pass title at some time prior to delivery of the property, such a specific provision is controlling and the tax rate in effect at that time applies.
(3) Conditional and installment sales. The taxes due on conditional and installment sales must be wholly reported during the period in which the sale is made (see WAC 458-20-198 Installment sales, method of reporting), even when the seller receives payment in installments. Sellers who receive installment payments after the effective date of a rate change on conditional and installment sales made prior to that date do not need to adjust the installment payment amounts to reflect the rate change.
(4) Leasing or rental of tangible personal property. Lessors who lease tangible personal property are required to collect from their lessees the retail sales tax measured by the gross income from leases or rentals as of the time the lease or rental payments are due (WAC 458-20-211 Leases or rentals of tangible personal property, bailments). Lessors must collect and remit taxes to the department of revenue (department) at the new rates on all lease or rental payments due on and after the effective date of a rate change, including lease or rental payments on contracts entered into prior to that date.
(5) Repairing or improving tangible personal or real property. When persons install, repair, clean, alter, imprint, or improve tangible person property for others, or improve buildings or other structures upon real property of others:
• Sales and use tax rate increases apply to the first billing period starting on or after the effective date of the increase; and
• Sales and use tax rate decreases apply when bills are rendered on or after the effective date of the decrease. (RCW 82.08.064)
The new tax rate applies to the full contract amount if the contract was executed prior to the effective date of the rate change, unless the contract work is completed and accepted prior to the effective date.
If under the terms of the contract, the seller is entitled to periodic payments, which amounts are calculated to compensate the seller for the work completed to the date of payment, the applicable tax rates upon such payments (including, in the case of public works contracts, the percentage retained by the public agency pursuant to the provisions of RCW 60.28.010) will be those in effect at the time the seller is entitled to receive the payments.
(6) Do you have questions on rate changes? If you have questions on how a rate change may affect you, please contact the Telephone Information Center at 360-705-6705, or write the department at:
Taxpayer Information and Education
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-235, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.08.064. WSR 10-07-135, § 458-20-235, filed 3/23/10, effective 4/23/10. Statutory Authority: RCW 82.32.300. WSR 83-07-032 (Order ET 83-15), § 458-20-235, filed 3/15/83; Order ET 70-3, § 458-20-235 (Rule 235), filed 5/29/70, effective 7/1/70.]


PDF458-20-238

Sales of watercraft to nonresidents—Use of watercraft in Washington by nonresidents.

(1) Introduction. This rule explains:
• Nonresident temporary use of watercraft in Washington waters for sales and use tax purposes;
• Purchase and delivery of vessels in Washington by nonresidents, and the application or exemption of retail sales and use taxes;
• The vessel use permit, authorized by RCW 82.08.700 and 82.12.700, for one year in Washington waters by nonresident individuals for vessels 30 feet or longer;
• The nonresident vessel permit, authorized by RCW 88.02.620, for individual persons extending their stay an additional 60 days on Washington waters;
• The nonresident entity vessel permit, authorized by RCW 88.02.620 and 82.32.865, that allows for an additional 60 days on Washington waters; and
• The nonresident vessel repair affidavit required when vessels are in Washington exclusively for repair. RCW 88.02.570.
(a) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(b) Other rules that may be relevant.
(i) WAC 458-20-136 Manufacturing, processing for hire, fabricating;
(ii) WAC 458-20-178 Use tax and the use of tangible personal property;
(iii) WAC 458-20-193 Interstate sales of tangible personal property;
(iv) WAC 458-20-19301 Multiple activities tax credits;
(v) WAC 458-20-145 Local sales and use tax; and
(vi) WAC 458-20-211 Leases or rentals of tangible personal property, bailments.
(2) Business and occupation (B&O) tax. Retailing B&O tax is due on all sales of watercraft to consumers if delivery is made within the state of Washington, even though the sale may qualify for an exemption from retail sales tax. If the seller also manufactures the vessel in Washington, the seller must report under both the manufacturing and wholesaling or retailing classifications of the B&O tax, and claim a multiple activities tax credit (MATC). For additional information on manufacturing and the MATC, manufacturers should refer to WAC 458-20-136 and 458-20-19301.
(3) Retail sales tax. The retail sales tax generally applies to the sale of watercraft to consumers when delivery is made within the state of Washington. Under certain conditions, however, retail sales tax exemptions are available for sales of watercraft to nonresidents of Washington, even when delivery is made within Washington.
(a) Exemptions for sales of watercraft, to nonresidents, requiring United States Coast Guard documentation and certain sales of vessels to residents of foreign countries. RCW 82.08.0266 provides an exemption from retail sales tax for sales of watercraft to residents of states other than Washington for use outside this state, even when delivery is made within Washington. The exemption provided by RCW 82.08.0266 is limited to sales of watercraft requiring United States Coast Guard registration or registration by the state of principal use according to the Federal Boating Act of 1958.
RCW 82.08.02665 provides a retail sales tax exemption for sales of vessels to residents of foreign countries for use outside this state, even when delivery is made in Washington. This exemption is not limited to the types of watercraft qualifying for the exemption provided by RCW 82.08.0266. The term "vessel," for the purposes of RCW 82.08.02665, means every watercraft used or capable of being used as a means of transportation on the water, other than a seaplane.
(i) Exemption requirements. The following requirements must be met to perfect any claim for exemption under RCW 82.08.0266 and 82.08.02665:
(A) The watercraft must not be used within this state for more than 45 days from delivery;
(B) The seller must examine acceptable proof that the buyer is a resident of another state or a foreign country; and
(C) The seller, at the time of the sale, must retain as a part of its records a completed exemption certificate to document the exempt nature of the sale. This requirement may be satisfied by using the department's "Buyer's Retail Sales Tax Exemption Certificate," or another certificate with substantially the information as it relates to the exemption provided by RCW 82.08.0266 and 82.08.02665. The certificate must be completed in its entirety, and retained by the seller. A blank certificate is available on the department of revenue's (department) website at dor.wa.gov.
The seller should not accept an exemption certificate if the seller becomes aware of any information prior to the completion of the sale that is inconsistent with the buyer's claim of residency, such as a Washington address on a credit application.
(ii) Component parts and repairs. The exemptions provided by RCW 82.08.0266 and 82.08.02665 apply only to sales of watercraft. For the purposes of these exemptions, the term "watercraft" includes component parts which are installed in or on the watercraft prior to delivery to and acceptance by the buyer, but only when these parts are sold by the seller of the watercraft. "Component part" means tangible personal property which is attached to and used as an integral part of the operation of the watercraft, even if the item is not required mechanically for the operation of the watercraft. Component parts include, but are not necessarily limited to, motors, navigational equipment, radios, depthfinders, and winches, whether they are permanently attached to the watercraft or held by brackets which are permanently attached. If held by brackets, the brackets must be permanently attached to the watercraft in a definite and secure manner.
These exemptions do not extend to the sale of boat trailers, repair parts, or repair labor. These exemptions also do not extend to a separate seller of unattached component parts, even though these parts may be manufactured specifically for the watercraft and/or permanently installed in or on the watercraft prior to the watercraft being delivered to and accepted by the buyer.
(b) A one year "use permit" for vessels 30 feet or longer. RCW 82.08.700 and 82.12.700 provide the retail sales and use tax exemptions for sales of vessels 30 feet or longer to individuals who are nonresidents of Washington.
(i) Exemption requirements. The following requirements must be met for an individual to claim these exemptions:
(A) The individual must provide valid proof of nonresidency at the time of purchase;
(B) The vessel purchased must measure at least 30 feet in length; and
(C) The individual must obtain a valid use permit from the vessel dealer authorized to sell use permits.
(ii) Valid proof of nonresidency. An individual may prove nonresidency with identification that:
(A) Includes a photograph of the individual;
(B) Is issued by the jurisdiction in which the individual claims residency;
(C) Includes the individual's residential address; and
(D) Is issued for the purpose of establishing an individual's residency in a jurisdiction outside Washington state.
Acceptable identification includes a valid out-of-state driver's license.
(iii) Use permits. A use permit is not renewable. It costs $500 for vessels 30 to 50 feet, and $800 for vessels greater than 50 feet in length. The permit includes an affidavit from the buyer declaring that the purchased vessel will be used in a manner consistent with this exemption. The use permit also includes an adhesive sticker (sticker) that must be displayed on the purchased vessel and is valid for 12 consecutive months from the date of purchase. The sticker serves as proof of a validly issued use permit. Vessel dealers are not obligated to issue use permits to any individual. Buyers must elect this exemption irrevocably and may not elect additional exemptions under RCW 82.08.0266 and 82.08.02665 for the same period. Individuals must wait 24 months from the expiration of a use permit before claiming the use tax exemption for their vessel pursuant to RCW 82.12.0251.
(iv) What are the obligations of vessel dealers? A vessel dealer electing to issue a use permit under this subsection must:
(A) Examine and determine, in good faith, whether the individual has valid proof of nonresidency.
(B) Use the department's approved use permits. Use permits are available on the department's website at dor.wa.gov.
(C) Retain copies of issued use permits in their records for the statutory period. For information about the statutory period and maintaining records, please refer to WAC 458-20-254.
(D) Provide copies of issued use permits to the department on a quarterly basis. Copies of issued permits must be sent to: Taxpayer Account Administration Division, Department of Revenue, P.O. Box 47476, Olympia, Washington 98504-7476.
(E) Collect, remit, and report use permit fees. Dealers report use permit fees on their excise tax returns and remit in accordance with RCW 82.32.045.
(F) Electronically file all returns, as described in RCW 82.32.080, with the department. Nonelectronically filed returns are not deemed filed unless approved by the department for good cause shown.
(v) Liability for retail sales tax.
(A) A nonresident individual may purchase a vessel in Washington without paying retail sales tax and remain in the state for 12 consecutive months, from the date of issuance, by obtaining a use permit under RCW 82.08.700 from the vessel dealer. If the nonresident individual uses that vessel in Washington after the use permit expires, the individual will be liable for retail sales tax on the original selling price of that vessel (along with interest from the date of purchase at the rate provided in RCW 82.32.050).
(B) Vessel dealers are personally liable for retail sales tax if the dealer either does not collect retail sales tax when making sales to individuals without valid identification establishing nonresidency, or fails to maintain records of sales as provided under (b)(iv) of this subsection.
(4) Deferred retail sales or use tax. If Washington retail sales tax has not been paid, persons using watercraft on Washington waters are required to report and remit to the department sales tax (commonly referred to as deferred retail sales tax) or use tax, unless the use is specifically exempt by law. A credit against Washington's use tax is allowed for retail sales or use tax previously paid by the user or the user's bailor or donor with respect to the property to any other state of the United States, any political subdivision thereof, the District of Columbia, and any foreign country or political subdivision thereof, prior to the use of the property in Washington. For additional information on use tax refer to WAC 458-20-178.
(a) Purchased and used within Washington for more than 45 days. Tax is due on the use by any nonresident of watercraft purchased from a Washington seller and first used within this state for more than 45 days if retail sales or use tax was not paid by the user. Tax is due notwithstanding the watercraft qualified for a retail sales tax exemption at the time of purchase.
(b) Temporary use. Use tax does not apply, for the first 60 days, for temporary use or enjoyment of watercraft brought into this state by nonresidents while temporarily within this state.
(i) For watercraft owned by nonresident entities (i.e., corporations, limited liability companies, trusts, partnerships, etc.), it will be presumed that use within Washington exceeding 60 days in any 12-month period is more than temporary use and use tax is due, except as otherwise provided in this rule. For vessels at least 30 feet in length, but no more than 200 feet in length, see subsection (e) of this subsection.
(ii) Nonresident individuals (whether residents of other states or foreign countries) may temporarily bring watercraft into this state for 60 days before they are required to obtain a nonresident vessel permit, from the department of licensing, to continue their use or enjoyment without incurring liability for the use tax. RCW 88.02.620. Such use may not exceed a total of six months in any 12-month period. Eligibility for this six-month exemption period is conditioned on the following requirements:
(A) The watercraft must be issued a valid number under federal law or by an approved authority of the state or county of principal operation, be documented under the laws of a foreign country, or have a valid United States customs service cruising license issued under 19 C.F.R. Sec. 4.94. Failure to meet the applicable documentation and identification requirements will result in a loss of the exemption.
(B) The watercraft must be used in Washington only for the following purposes:
(I) Personal use;
(II) Chartering a vessel with a captain or crew, as long as individual charters are for at least three or more consecutive days in duration, excluding the transit time described in (b)(ii)(B)(III) of this subsection; or
(III) Necessary transit to or from the start or end point of a charter described in (b)(ii)(B)(II) of this subsection.
(c) Repair, alteration, or reconstruction of watercraft in Washington. Watercraft owned by nonresidents and in this state exclusively for repair, alteration, or reconstruction are exempt from the use tax if removed from this state within 60 days. RCW 88.02.570 and 82.12.0251. If repair, alteration, or reconstruction cannot be completed within this period, the exemption may be extended by filing with the department's compliance division an affidavit as required by RCW 88.02.570 verifying the vessel is located on the waters of this state exclusively for repair, alteration, reconstruction, or testing. This document, titled "Nonresident Vessel Repair Affidavit," is effective for 60 days. If additional extensions of the exemption period are needed, additional affidavits must be sent to the department prior to the expiration date. Failure to file this affidavit can result in requiring that the vessel be registered in Washington and subject to the use tax.
(d) One year "use permit" for nonresident individuals - Use tax exemption for vessels 30 feet or longer. RCW 82.12.700 provides an exemption from use tax for the purchase of vessels 30 feet or longer used in Washington by nonresident individuals. This exemption is available to nonresident individuals in any of the three following situations: The vessel is purchased from a vessel dealer and a use permit is obtained in accordance with subsection (3)(b) of this rule; the vessel is purchased in Washington from someone other than a vessel dealer and within 14 days of purchase the nonresident individual obtains a use permit under this subsection; the vessel is acquired outside Washington and the nonresident individual, within 14 days of bringing the vessel into Washington, buys a use permit as provided under this subsection. Any vessel dealer that issues permits under subsection (3)(b) of this rule must also issue permits under this subsection.
(i) What are the obligations of vessel dealers? Vessel dealers that issue use permits have the same obligations as those described in subsection (3)(b)(iv) of this rule. Vessel dealers may not issue use permits under this subsection where a nonresident individual has already obtained a use permit under subsection (3)(b) of this rule.
(ii) Valid proof of nonresidency. Nonresident individuals must meet the same identification requirements described in subsection (3)(b)(ii) of this rule.
(iii) Use permits. The use permit is not renewable and costs $500 for vessels 30 to 50 feet and $800 for vessels greater than 50 feet in length. This use permit must be displayed on the vessel and is valid for 12 consecutive months from the date of issuance. Nonresident individuals must obtain a use permit from a vessel dealer; however, vessel dealers are not obligated to issue these use permits. Nonresident individuals must elect this exemption irrevocably and may not elect exemption under RCW 82.08.0266 and 82.08.02665 for the same period. The nonresident individual must wait 24 consecutive months from the expiration of a use permit before claiming exemption for a vessel under RCW 82.12.0251.
(iv) Liability for use tax.
(A) If a nonresident individual's vessel is in Washington after their use permit expires, that individual is liable for use tax under RCW 82.12.020. Liability for use tax will be based on the value of the vessel at the time it was either purchased or first brought into Washington. Interest will accrue from the date of purchase or first use in Washington at a rate set by RCW 82.32.050.
(B) Vessel dealers are personally liable for use tax where a dealer either issues a use permit to a nonresident individual who does not hold valid proof of nonresidency, or fails to maintain records for each use permit issued showing the type of identification accepted, the identification numbers, and expiration date.
(e) Permits for nonresident entity owned vessels 30 feet – 200 feet. A nonresident entity vessel owner that is not a natural person, or a nonresident vessel owner who is a natural person who intends to charter the vessel with a captain or crew as described in (b)(ii)(B)(II) of this subsection, may qualify to receive a nonresident vessel permit from the department of licensing under RCW 88.02.620.
(i) This permit applies only to vessels at least 30 feet in length, but no more than 200 feet in length.
(ii) An application must be filed, prior to the 61st day of use in this state, to obtain a nonresident vessel permit. Application must be made directly to the department for written approval in accordance with RCW 82.32.865.
(iii) To qualify, no Washington resident may own the vessel or be a principal of the nonresident entity. For the purpose of this subsection, "principal" means a natural person that owns, directly or indirectly, including through any tiered ownership structure, more than a one percent interest in the nonresident person applying for a nonresident vessel permit.
(iv) The "Nonresident Vessel Permit Approval Application" can be found on the department's website at dor.wa.gov.
(5) Examples. In all applicable examples, retailing B&O tax is due from the seller for all sales of watercraft and parts, and all charges for repair parts and labor.
(a) Example 1. Mr. Kelley, a resident of California, pilots his cabin cruiser that is registered in that state into Puget Sound for his enjoyment. On the 60th day of his stay, Mr. Kelley obtains a 60-day nonresident vessel permit for the cabin cruiser under RCW 88.02.620 from the department of licensing. To further extend his stay in Washington waters, he applies for a second permit within the prescribed period. In the middle of his fifth month on Puget Sound, Mr. Kelley departs and returns the cabin cruiser to its home port in California. The stay would not subject Mr. Kelley to use tax. The same would be true if Mr. Kelley were a resident of Vancouver, British Columbia, with a cabin cruiser registered in Canada, as long as he timely obtains and displays the permit required by RCW 88.02.570 and 88.02.620 to allow his temporary use of the cabin cruiser in Washington.
(b) Example 2. Company A sells a yacht to John Doe, an Oregon resident, who takes delivery in Washington. The yacht is required to be registered by the state of Oregon. The vessel is removed from Washington waters within 45 days of delivery. Company A examines a driver's license confirming John Doe is an Oregon resident, and records this information in the sales file. Company A does not complete and retain the required exemption certificate.
The sale of the yacht is subject to the retail sales tax. The exclusive authority for granting a retail sales tax exemption for this sale is provided by RCW 82.08.0266. Completion of an exemption certificate is a statutorily imposed condition for obtaining this exemption. Company A has not satisfied the conditions and requirements necessary to grant an exemption under this statute. The exemption provisions under RCW 82.08.0273 for sales to nonresidents of states having less than three percent retail sales tax may not be used for purchases of vessels which require United States Coast Guard documentation, or registration in the state of principal use. If the exemption certificate had been properly completed at the time of sale, this sale would have qualified for the retail sales tax exemption.
(c) Example 3. Mr. Jones, a California resident, contracts Company B to manufacture a pleasure yacht. Mr. Jones purchases a boat motor from Company Y with instructions that delivery be made to Company B for installation on the yacht. The yacht is required to be registered with the state of California, which has assumed the registration and numbering function under the Federal Boating Act of 1958. Company B examines Mr. Jones' driver's license to verify Mr. Jones is a nonresident of Washington, and retains the proper exemption certificate at the time of sale. Delivery is made in Washington, and Mr. Jones removes the yacht from Washington waters within 45 days of delivery.
The sale of the yacht by Company B to Mr. Jones is not subject to the retail sales tax, as the requirements and conditions for exemption have been satisfied. Retail sales tax does apply to the sale of the motor by Company Y to Mr. Jones. The exemption provided by RCW 82.08.0266 does not extend to a separate seller of unattached component parts, even though the parts are installed in the yacht prior to delivery.
(d) Example 4. Mr. Smith, a resident of British Columbia, Canada, brings his yacht into Washington with the intention of temporarily using the yacht for personal enjoyment. Mr. Smith obtains the required 60-day nonresident vessel permit issued by the department of licensing. After four months of personal use, the yacht experiences mechanical difficulty. The yacht is taken to a repair facility and due to the extensive nature of the damage the yacht remains at the repair facility for six months being repaired. As explained in subsection (4)(c) of this rule, Mr. Smith timely files each required "Nonresident Vessel Repair Affidavit." An employee of the repair facility is on board the yacht during all testing, and there is no personal use by Mr. Smith during this period. Upon completion of the repairs and testing, Mr. Smith takes delivery at the repair facility.
Mr. Smith obtains a second 60-day nonresident vessel permit so he may personally use the yacht in Washington waters for up to two months after taking delivery of the repaired yacht. He will not incur liability for use tax because the instate use of the yacht for personal enjoyment will not exceed six months in a 12-month period. The time the yacht is at the repair facility exclusively for repair does not count against the period of time Mr. Smith is considered to be "temporarily" using the yacht in Washington for personal enjoyment because he properly filed the repair affidavit with the department. Retail sales tax is due, and must be paid, on all charges for repair parts and labor. The exemption from sales tax for purchases of vessels does not extend to repairs.
[Statutory Authority: RCW 82.32.865, 82.32.300, and 82.01.060. WSR 22-04-022, § 458-20-238, filed 1/24/22, effective 2/24/22. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-068, § 458-20-238, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0266, and 82.08.02665. WSR 08-14-022, § 458-20-238, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300. WSR 00-23-003, § 458-20-238, filed 11/1/00, effective 12/2/00; WSR 95-24-103, § 458-20-238, filed 12/6/95, effective 1/6/96; WSR 83-21-061 (Order ET 83-7), § 458-20-238, filed 10/17/83; WSR 83-08-026 (Order ET 83-1), § 458-20-238, filed 3/30/83; Order ET 70-3, § 458-20-238 (Rule 238), filed 5/29/70, effective 7/1/70.]


(Effective until January 1, 2025)

PDF458-20-23801

Watercraft excise tax—Watercraft depreciation schedule.

(1) Introduction. This rule addresses the watercraft excise tax, including an overview of the tax, exemptions from the tax, and the watercraft depreciation schedule used to determine a watercraft's fair market value. The rule also addresses administrative issues including payment, interest, and penalties.
(2) Examples. This rule includes examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(3) Definitions and terms. The following definitions and terms apply throughout this rule.
(a) "Dealer" means a person, partnership, association, or corporation engaged in the business of selling vessels at wholesale or retail in this state. RCW 88.02.310.
(b) "Fair market value."
(i) In cases where the most recent purchase price of a vessel is known to the vessel owner, "fair market value" means the purchase price of the vessel in the year it was purchased. For subsequent years, "fair market value" means the purchase price of the vessel depreciated according to the schedule in subsection (6) of this rule. RCW 82.49.040.
(ii) In cases where a vessel has been acquired by lease or gift, or the most recent purchase price of the vessel is not known to the vessel owner, "fair market value" means the appraised value of the vessel determined according to subsection (7) of this rule. RCW 82.49.050(1).
(iii) In cases where the department determines that the purchase price stated by the owner is not a reasonable representation of the true "fair market value" of the vessel, the department must appraise the vessel according to subsection (7) of this rule. RCW 82.49.050(2).
(c) "Owner" means a person who has a lawful right to possession of a vessel by purchase, exchange, gift, lease, inheritance, or legal action whether or not the vessel is subject to a security interest, and means registered owner where the reference to owner may be construed as either to registered or legal owner. RCW 88.02.310.
(d) "Vessel" means every watercraft used or capable of being used as a means of transportation on the water, other than a seaplane. RCW 88.02.310.
(e) "Waters of this state" means any waters within the territorial limits of this state as described in 43 U.S.C. Sec. 1312. RCW 88.02.310.
(4) Overview of the watercraft excise tax.
(a) The watercraft excise tax generally applies to vessels measuring 16 feet or more in overall length. The tax is imposed for the privilege of using a vessel upon the waters of this state, except those vessels which are exempt from the tax under subsection (5) of this rule and under RCW 82.49.020. The tax is imposed on an annual basis and is equal to the greater of five dollars or one-half of one percent of a vessel's fair market value.
(b) Persons required to register a vessel with this state under chapter 88.02 RCW who fail to register their vessel and avoid paying the watercraft excise tax are guilty of a gross misdemeanor and are liable for any unpaid excise tax. The department must also impose the penalties authorized under subsection (9) of this rule and under RCW 82.49.080 and chapter 82.32 RCW.
(c) When a person first registers a vessel in this state, the watercraft excise tax is imposed beginning with the month in which the vessel is registered through the following June 30th. In cases where the initial registration period is less than 12 months, the watercraft excise tax is prorated according to the number of months covered by the registration period. The initial registration is valid from the month of registration through the following June 30th.
(i) The department of licensing may extend or diminish the initial registration period for purposes of staggered renewal periods under RCW 88.02.560.
(ii) A vessel is considered first registered in this state if in the immediately preceding 12 month period the vessel was not registered in this state or was registered in another jurisdiction during the same period.
(iii) Example 1. Watercraft excise tax computation - Initial vessel registration.
Facts: Dan Carter purchases a 20 foot powerboat from a Washington dealer in April 2022. The purchase price is $20,000. Dan is a resident of Washington. Dan registers the vessel with the department of licensing shortly after his purchase, in April 2022.
Result: The department of licensing will issue a registration decal for the vessel covering the registration period of July 2021 through June 2022 and collect the annual watercraft excise tax liability for this registration period in the amount of $25 ($20,000 (purchase price) x .005 (watercraft excise tax rate) x .25 (3 month prorated period April - June 2022)).
(5) Exemptions. The following types of vessels are exempt from watercraft excise tax:
(a) Those exempt from vessel registration under RCW 88.02.570;
(b) Those used exclusively for commercial fishing purposes;
(c) Those measuring less than 16 feet in overall length, including personal watercraft;
(d) Those owned and operated by the United States, another state, or any municipality or subdivision thereof;
(e) Those owned by a nonprofit organization or association engaged in character building of children under 18 years of age and solely used for such purposes;
(f) Those held for sale by a dealer, but not rented on a regular commercial basis; and
(g) Those owned by Indian tribes and tribal members, used in the exercise of treaty fishing rights, and exempt under WAC 308-93-720.
(6) Depreciation schedule.
(a) RCW 82.49.040 requires the department to prepare a depreciation schedule annually, for use in determining the fair market value of vessels, which is the measure of the watercraft excise tax. The following schedule includes separate depreciation rates for two categories of vessels, including a column for the vessel's year of ownership and columns for the depreciated percentage of the vessel's value by vessel length. First, vessel owners must determine the appropriate column to use, depending on the length of the vessel they own. Second, vessel owners must identify the depreciated percentage of value for their vessel according to the row which corresponds to the number of years they have owned the vessel.
Year of Ownership
Vessels less than 30 feet
Vessels 30 feet or more
1
1.00
1.00
2
0.86
0.84
3
0.79
0.77
4
0.73
0.70
5
0.68
0.66
6
0.64
0.62
7
0.60
0.59
8
0.57
0.56
9
0.55
0.53
10
0.52
0.52
11
0.50
0.50
12
0.47
0.47
13
0.45
0.45
14
0.44
0.44
15
0.42
0.43
16
0.40
0.42
17
0.39
0.42
18
0.37
0.41
19
0.36
0.40
20
0.35
0.39
21
0.34
0.39
22
0.33
0.38
23
0.32
0.37
24
0.32
0.36
25 or more
0.32
0.36
(b) Example 2. Standard vessel registration renewal.
Facts: Deborah Peters purchased a 28-foot sailboat in September 2017. The purchase price of the sailboat was $40,000. Deborah is a Washington resident and the sailboat is used exclusively upon Washington waters. In June 2022, Deborah renews the vessel's registration for the upcoming annual period of July 2022 through June 2023.
Result: Deborah will use the column titled " Vessels less than 30 feet" to determine the fair market value of her sailboat. Since Deborah bought the sailboat within the annual period of July 2017 through June 2018, that period is considered Year 1 for purposes of ownership. Accordingly, the period of July 2022 through June 2023 is considered Year 6 for purposes of ownership. The depreciated value of the sailboat in Year 6 is equal to 61 percent of Deborah's initial purchase price of $40,000, or $24,400. Deborah is subject to watercraft excise tax in the amount of $122 ($24,400 (fair market value) x .005 (watercraft excise tax rate)).
(7) Vessel appraisal.
(a) If a vessel has been acquired by lease or gift, or the most recent purchase price of a vessel is not known to the owner, the department must appraise the vessel before it can be registered for use upon the waters of this state.
(b) If the department determines the purchase price of a vessel reported by the vessel's owner at the time of its registration is not representative of its fair market value, the department must appraise the vessel to determine its fair market value. If the appraised value is less than the reported purchase price, the department will issue a refund of the overpaid tax. If the appraised value is greater than the reported purchase price, the department will notify the vessel owner of the additional tax liability, which must be paid within 30 days of the department's notice.
(c) If a vessel is homemade, the vessel's owner must make a notarized declaration of its value. See RCW 82.49.050(3) for more information.
(d) For purposes of this subsection, "appraisal" includes the use of industry pricing guides, other evaluation tools, and independent appraisals in order to ascertain the fair market value of a vessel.
(8) Disputes related to a vessel's appraised value or taxability.
(a) Any vessel owner who disputes a vessel's appraised value under RCW 82.49.050, or taxable status, may request a review of a tax assessment by filing a petition with the department as provided in WAC 458-20-100 (Informal administrative reviews).
(b) If the vessel owner's petition is denied, the vessel owner may appeal to the board of tax appeals as provided in RCW 82.03.190. In deciding the case, the board of tax appeals may require an independent appraisal of the vessel, the cost of which must be shared between the vessel owner and the department.
(9) Administration.
(a) Payment of tax. The watercraft excise tax is due and payable to the department of licensing, county auditor, or other appointed agent at the time the vessel is registered. A registration will not be issued or renewed until the watercraft excise tax is paid in full. For previously registered vessels, watercraft excise tax is due at the time of the vessel's registration renewal and must be paid prior to the start of the vessel registration period, which covers the period of July 1st through June 30th of the following year.
(b) Refunds. Taxpayers who overpay the watercraft excise tax in full or in part at the time of a vessel's registration are eligible for a refund of the overpaid tax. Taxpayers are also entitled to receive interest according to RCW 82.32.060. See RCW 82.49.065 for more information regarding refunds.
(c) Penalties and interest. An owner of a vessel that is not registered as required under chapter 88.02 RCW and that avoided payment of the watercraft excise tax is liable for the following penalties and interest:
(i) One hundred dollars for the owner's first violation;
(ii) Two hundred dollars for the owner's second violation;
(iii) Four hundred dollars for the owner's third violation and any successive violations;
(iv) The penalties prescribed under chapter 82.32 RCW; and
(v) The interest prescribed under chapter 82.32 RCW.
[Statutory Authority: RCW 82.01.060(2), 82.32.300, and 82.49.040. WSR 23-20-070, § 458-20-23801, filed 9/29/23, effective 1/1/24; WSR 22-24-056, § 458-20-23801, filed 12/1/22, effective 1/1/23; WSR 21-22-009, § 458-20-23801, filed 10/21/21, effective 1/1/22.]
(Effective January 1, 2025)

PDF458-20-23801

Watercraft excise tax—Watercraft depreciation schedule.

(1) Introduction. This rule addresses the watercraft excise tax, including an overview of the tax, exemptions from the tax, and the watercraft depreciation schedule used to determine a watercraft's fair market value. The rule also addresses administrative issues including payment, interest, and penalties.
(2) Examples. This rule includes examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(3) Definitions and terms. The following definitions and terms apply throughout this rule.
(a) "Dealer" means a person, partnership, association, or corporation engaged in the business of selling vessels at wholesale or retail in this state. RCW 88.02.310.
(b) "Fair market value."
(i) In cases where the most recent purchase price of a vessel is known to the vessel owner, "fair market value" means the purchase price of the vessel in the year it was purchased. For subsequent years, "fair market value" means the purchase price of the vessel depreciated according to the schedule in subsection (6) of this rule. RCW 82.49.040.
(ii) In cases where a vessel has been acquired by lease or gift, or the most recent purchase price of the vessel is not known to the vessel owner, "fair market value" means the appraised value of the vessel determined according to subsection (7) of this rule. RCW 82.49.050(1).
(iii) In cases where the department determines that the purchase price stated by the owner is not a reasonable representation of the true "fair market value" of the vessel, the department must appraise the vessel according to subsection (7) of this rule. RCW 82.49.050(2).
(c) "Owner" means a person who has a lawful right to possession of a vessel by purchase, exchange, gift, lease, inheritance, or legal action whether or not the vessel is subject to a security interest, and means registered owner where the reference to owner may be construed as either to registered or legal owner. RCW 88.02.310.
(d) "Vessel" means every watercraft used or capable of being used as a means of transportation on the water, other than a seaplane. RCW 88.02.310.
(e) "Waters of this state" means any waters within the territorial limits of this state as described in 43 U.S.C. Sec. 1312. RCW 88.02.310.
(4) Overview of the watercraft excise tax.
(a) The watercraft excise tax generally applies to vessels measuring 16 feet or more in overall length. The tax is imposed for the privilege of using a vessel upon the waters of this state, except those vessels which are exempt from the tax under subsection (5) of this rule and under RCW 82.49.020. The tax is imposed on an annual basis and is equal to the greater of five dollars or one-half of one percent of a vessel's fair market value.
(b) Persons required to register a vessel with this state under chapter 88.02 RCW who fail to register their vessel and avoid paying the watercraft excise tax are guilty of a gross misdemeanor and are liable for any unpaid excise tax. The department must also impose the penalties authorized under subsection (9) of this rule and under RCW 82.49.080 and chapter 82.32 RCW.
(c) When a person first registers a vessel in this state, the watercraft excise tax is imposed beginning with the month in which the vessel is registered through the following June 30th. In cases where the initial registration period is less than 12 months, the watercraft excise tax is prorated according to the number of months covered by the registration period. The initial registration is valid from the month of registration through the following June 30th.
(i) The department of licensing may extend or diminish the initial registration period for purposes of staggered renewal periods under RCW 88.02.560.
(ii) A vessel is considered first registered in this state if in the immediately preceding 12 month period the vessel was not registered in this state or was registered in another jurisdiction during the same period.
(iii) Example 1. Watercraft excise tax computation - Initial vessel registration.
Facts: Dan Carter purchases a 20 foot powerboat from a Washington dealer in April 2022. The purchase price is $20,000. Dan is a resident of Washington. Dan registers the vessel with the department of licensing shortly after his purchase, in April 2022.
Result: The department of licensing will issue a registration decal for the vessel covering the registration period of July 2021 through June 2022 and collect the annual watercraft excise tax liability for this registration period in the amount of $25 ($20,000 (purchase price) x .005 (watercraft excise tax rate) x .25 (3 month prorated period April - June 2022)).
(5) Exemptions. The following types of vessels are exempt from watercraft excise tax:
(a) Those exempt from vessel registration under RCW 88.02.570;
(b) Those used exclusively for commercial fishing purposes;
(c) Those measuring less than 16 feet in overall length, including personal watercraft;
(d) Those owned and operated by the United States, another state, or any municipality or subdivision thereof;
(e) Those owned by a nonprofit organization or association engaged in character building of children under 18 years of age and solely used for such purposes;
(f) Those held for sale by a dealer, but not rented on a regular commercial basis; and
(g) Those owned by Indian tribes and tribal members, used in the exercise of treaty fishing rights, and exempt under WAC 308-93-720.
(6) Depreciation schedule.
(a) RCW 82.49.040 requires the department to prepare a depreciation schedule annually, for use in determining the fair market value of vessels, which is the measure of the watercraft excise tax. The following schedule includes separate depreciation rates for two categories of vessels, including a column for the vessel's year of ownership and columns for the depreciated percentage of the vessel's value by vessel length. First, vessel owners must determine the appropriate column to use, depending on the length of the vessel they own. Second, vessel owners must identify the depreciated percentage of value for their vessel according to the row which corresponds to the number of years they have owned the vessel.
Year of Ownership
Vessels less than 30 feet
Vessels 30 feet or more
1
1.00
1.00
2
0.87
0.84
3
0.78
0.76
4
0.73
0.71
5
0.69
0.67
6
0.65
0.64
7
0.62
0.61
8
0.59
0.58
9
0.57
0.56
10
0.55
0.53
11
0.53
0.51
12
0.49
0.48
13
0.46
0.45
14
0.45
0.44
15
0.44
0.43
16
0.42
0.42
17
0.40
0.41
18
0.39
0.40
19
0.37
0.39
20
0.36
0.38
21
0.35
0.37
22
0.34
0.37
23
0.34
0.36
24
0.33
0.36
25 or more
0.33
0.35
(b) Example 2. Standard vessel registration renewal.
Facts: Deborah Peters purchased a 28-foot sailboat in September 2017. The purchase price of the sailboat was $40,000. Deborah is a Washington resident and the sailboat is used exclusively upon Washington waters. In June 2022, Deborah renews the vessel's registration for the upcoming annual period of July 2022 through June 2023.
Result: Deborah will use the column titled " Vessels less than 30 feet" to determine the fair market value of her sailboat. Since Deborah bought the sailboat within the annual period of July 2017 through June 2018, that period is considered Year 1 for purposes of ownership. Accordingly, the period of July 2022 through June 2023 is considered Year 6 for purposes of ownership. The depreciated value of the sailboat in Year 6 is equal to 61 percent of Deborah's initial purchase price of $40,000, or $24,400. Deborah is subject to watercraft excise tax in the amount of $122 ($24,400 (fair market value) x .005 (watercraft excise tax rate)).
(7) Vessel appraisal.
(a) If a vessel has been acquired by lease or gift, or the most recent purchase price of a vessel is not known to the owner, the department must appraise the vessel before it can be registered for use upon the waters of this state.
(b) If the department determines the purchase price of a vessel reported by the vessel's owner at the time of its registration is not representative of its fair market value, the department must appraise the vessel to determine its fair market value. If the appraised value is less than the reported purchase price, the department will issue a refund of the overpaid tax. If the appraised value is greater than the reported purchase price, the department will notify the vessel owner of the additional tax liability, which must be paid within 30 days of the department's notice.
(c) If a vessel is homemade, the vessel's owner must make a notarized declaration of its value. See RCW 82.49.050(3) for more information.
(d) For purposes of this subsection, "appraisal" includes the use of industry pricing guides, other evaluation tools, and independent appraisals in order to ascertain the fair market value of a vessel.
(8) Disputes related to a vessel's appraised value or taxability.
(a) Any vessel owner who disputes a vessel's appraised value under RCW 82.49.050, or taxable status, may request a review of a tax assessment by filing a petition with the department as provided in WAC 458-20-100 (Informal administrative reviews).
(b) If the vessel owner's petition is denied, the vessel owner may appeal to the board of tax appeals as provided in RCW 82.03.190. In deciding the case, the board of tax appeals may require an independent appraisal of the vessel, the cost of which must be shared between the vessel owner and the department.
(9) Administration.
(a) Payment of tax. The watercraft excise tax is due and payable to the department of licensing, county auditor, or other appointed agent at the time the vessel is registered. A registration will not be issued or renewed until the watercraft excise tax is paid in full. For previously registered vessels, watercraft excise tax is due at the time of the vessel's registration renewal and must be paid prior to the start of the vessel registration period, which covers the period of July 1st through June 30th of the following year.
(b) Refunds. Taxpayers who overpay the watercraft excise tax in full or in part at the time of a vessel's registration are eligible for a refund of the overpaid tax. Taxpayers are also entitled to receive interest according to RCW 82.32.060. See RCW 82.49.065 for more information regarding refunds.
(c) Penalties and interest. An owner of a vessel that is not registered as required under chapter 88.02 RCW and that avoided payment of the watercraft excise tax is liable for the following penalties and interest:
(i) One hundred dollars for the owner's first violation;
(ii) Two hundred dollars for the owner's second violation;
(iii) Four hundred dollars for the owner's third violation and any successive violations;
(iv) The penalties prescribed under chapter 82.32 RCW; and
(v) The interest prescribed under chapter 82.32 RCW.
[Statutory Authority: RCW 82.01.060(2), 82.32.300, and 82.49.040. WSR 24-20-107, s 458-20-23801, filed 10/1/24, effective 1/1/25; WSR 23-20-070, § 458-20-23801, filed 9/29/23, effective 1/1/24; WSR 22-24-056, § 458-20-23801, filed 12/1/22, effective 1/1/23; WSR 21-22-009, § 458-20-23801, filed 10/21/21, effective 1/1/22.]


PDF458-20-239

Sales to nonresidents of farm machinery or implements, and related services.

(1) Introduction. This section explains the retail sales tax exemption provided by RCW 82.08.0268 for sales to nonresidents of farming machinery and implements, parts for farming machinery and implements, and related labor and services. This section also explains the documents that must be preserved to substantiate a claim of exemption. Sellers should refer to WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property) if they deliver farm machinery or implements to the purchaser at an out-of-state location.
(2) Tax-reporting requirements. Retailing B&O and retail sales taxes generally apply to all sales of tangible personal property, parts, and repair labor in Washington.
(a) RCW 82.08.0268 provides an exemption from retail sales tax for sales to nonresidents of the following when used in conducting a farm activity outside the state of Washington:
(i) Machinery and implements;
(ii) Parts for machinery and implements; and
(iii) Labor and services for repair of machinery, implements, and parts.
(b) To qualify for the exemption, the machinery, implements, or parts must be transported outside the state immediately after sale or completion of the repair or service.
(c) This exemption is allowed even though the property sold or serviced is delivered to the purchaser in this state, but only when the seller receives from the buyer an exemption certificate, and examines acceptable proof such as a driver's license that the buyer is a resident of a state or country other than the state of Washington.
(d) The exempt nature of the transaction must be documented by using the department's "Farmers' Retail Sales Tax Exemption Certificate," or another certificate with substantially the same information as it relates to the exemption provided by RCW 82.08.0268. The certificate must be completed in its entirety, and retained by the seller.
The "Farmers' Retail Sales Tax Exemption Certificate" can be obtained via the internet at http://dor.wa.gov. The form may also be obtained by contacting the department's telephone information center at 360-705-6705, or by writing the department at:
Taxpayer Information and Education
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
If, prior to completion of the sale, the seller becomes aware of any information inconsistent with the purchaser's claim of residency, such as a Washington address on a credit application, the seller should not accept an exemption certificate.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-239, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.08.0268. WSR 09-15-057, § 458-20-239, filed 7/10/09, effective 8/10/09. Statutory Authority: RCW 82.32.300. WSR 00-09-092, § 458-20-239, filed 4/19/00, effective 5/20/00; WSR 83-08-026 (Order ET 83-1), § 458-20-239, filed 3/30/83; Order ET 70-3, § 458-20-239 (Rule 239), filed 5/29/70, effective 7/1/70.]


PDF458-20-240

Manufacturer's new employee tax credits—Applications filed after June 30, 2010.

(1) Introduction. Chapter 82.62 RCW provides business and occupation (B&O) tax credits to certain persons engaged in manufacturing and research and development activities. These credits are intended to stimulate the economy by creating employment opportunities in specific rural counties and community empowerment zones of this state. The credits are as much as $4,000 per qualified employment position. This rule explains the eligibility requirements and application procedures for this program. It is important to note that an application for the tax credits must be submitted to the department of revenue (department) within 90 consecutive days after the first qualified employment position is filled. See subsection (6) of this rule for additional information regarding this application requirement.
(2) Who is eligible for these tax credits? Subject to certain qualifications, an applicant (person applying for a tax credit under chapter 82.62 RCW) who is engaged in an eligible business project is entitled to the tax credits provided by chapter 82.62 RCW.
(a) What is an eligible business project? An "eligible business project" means:
(i) Manufacturing, commercial testing, or research and development activities conducted by an applicant;
(ii) In an eligible area at a specific facility;
(iii) Where employment increases as described under subsection (3) of this rule; and
(iv) Does not include any portion of a business project undertaken by a light and power business or any portion of a business project creating employment positions outside an eligible area.
To be considered an "eligible business project," the applicant's number of average full-time qualified employment positions at the specific facility must increase by 15 percent in the four consecutive full calendar quarters after the calendar quarter during which the first qualified employment position is filled. Subsection (4) of this rule explains how to determine whether this threshold is satisfied.
New businesses meeting all requirement of the program, whether new to Washington or newly formed, are eligible for all qualified employment positions filled during the four consecutive full calendar quarters immediately preceding the quarter during which the first qualified employment position is filled.
(b) What is an eligible area? An "eligible area" is:
(i) A rural county, which is a county with fewer than 100 persons per square mile or, a county smaller than 225 square miles, as determined annually by the office of financial management and published by the department effective for the period of July 1st through June 30th (see RCW 82.14.370); or
(ii) A community empowerment zone (CEZ). CEZ means an area meeting the requirements of RCW 43.31C.020 and officially designated by the director of the department of commerce. For a business located in a CEZ, credit is only earned for those employees, who at the time of hire, are residents of the CEZ in which the project is located.
(iii) How to determine whether an area is an eligible area. Rural county designation information can be obtained from the office of financial management internet website at www.ofm.wa.gov/pop/popden/rural.asp. The department has instituted a geographic information system (GIS), referred to as the Tax Rate Lookup Tool, to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's internet website at dor.wa.gov.
(c) What are manufacturing and research and development activities?
(i) Manufacturing. "Manufacturing" has the meaning given in RCW 82.04.120. In addition, for the purposes of chapter 82.62 RCW, "manufacturing" also includes the activities performed by research and development laboratories and commercial testing laboratories.
(ii) Research and development. "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun, but only when such activities are intended to ultimately result in the production of a new, different, or useful substance or article of tangible personal property for sale. "Commercial sales" does not include sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(3) What are the hiring requirements? The average full-time qualified employment positions at the specific facility will be at least 15 percent greater in the four consecutive full calendar quarters after the calendar quarter during which the first qualified employment position is filled than the applicant's average qualified employment positions at the same facility in the four consecutive full calendar quarters immediately preceding the calendar quarter during which the first qualified employment position is filled.
(a) What is a qualified employment position? A "qualified employment position" means a position filled by a permanent full-time employee employed at an eligible business project for four consecutive full calendar quarters. Once a full-time position is established and filled it will continue to be considered "filled" even during periods of vacancy, provided the cumulative period of any vacancies in that position is not more than 120 days in the four quarter period and the employer is training or actively recruiting a permanent replacement, full-time employee for the position.
(b) What is a "permanent full-time employee"? A "permanent full-time employee" is a position that is filled by an employee who satisfies any one of the following minimum thresholds:
(i) Works 35 hours per week for 52 consecutive weeks;
(ii) Works 455 hours, excluding overtime, each quarter for four consecutive quarters; or
(iii) Works 1,820 hours, excluding overtime, during a period of 12 consecutive months.
(c) "Permanent full-time employee" - Seasonal operations. For applicants that regularly operate on a seasonal basis only and that employ more than 50 percent of their employees to work on a seasonal basis, a "permanent full-time employee" is a permanent full-time employee as described above or an employee(s) that works the equivalent amount of hours on a seasonal basis.
(4) How to determine if the 15 percent employment increase requirement is met. The credit is only available to applicants who satisfy the 15 percent employment increase.
(a) Determining the 15 percent increase. To determine the projected number of permanent full-time qualified employment positions necessary to satisfy the 15 percent employment increase requirement:
(i) Determine the average number of permanent full-time qualified employment positions that existed at the facility during the four consecutive full calendar quarters immediately preceding the calendar quarter for which the first qualified employment position is filled.
(ii) Multiply the average number of full-time positions from subsection (i) by .15 or 15 percent. The resulting number equals the number of new positions that must be filled to meet the 15 percent increase. Numbers are rounded down to the nearest whole number.
(b) When does hiring have to occur? All hiring increases must occur during the four consecutive full calendar quarters after the calendar quarter during which the first qualified employment position is filled for purposes of meeting the 15 percent threshold test. Positions hired in the four consecutive full calendar quarters prior to the first qualified employment position being filled are not eligible for a credit but the positions are used as a base when calculating whether the 15 percent threshold has been met.
(c) The department will assist applicants to determine their hiring requirements. Accompanying the tax credit application is a worksheet to assist the applicant in determining if the 15 percent qualified employment threshold is satisfied. Based upon the information provided in the application, the department will advise applicants of their minimum number of hiring needs for which credits are being sought.
(d) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(i) ABC Company anticipates increasing employment at a manufacturing facility by an average of 15 full-time qualified employment positions for a total of 113 positions. The average number of full-time qualified employment positions for the four consecutive full calendar quarters immediately preceding the calendar quarter for which the first qualified employment position is filled was 98. To qualify for the tax credit program, the minimum average number of full-time qualified employment positions required for the four consecutive full calendar quarters after the calendar quarter for which the first qualified positions is filled is 98 x .15 = 14.7 (rounding down to 14 positions). Therefore, ABC Company's plan to hire 15 full-time qualified employees satisfies the 15% employment increase requirement.
(ii) ABC anticipates increasing employment positions at this same manufacturing facility by an average of 15 additional full-time qualified employment positions during the following four consecutive full calendar quarters for a total of 128 positions. To qualify for the tax credit program, the minimum average number of full-time qualified employment positions required for these four consecutive full calendar quarters is 16 (113 x .15 = 16.95, rounding down to 16). Therefore, ABC Company's plan to hire 15 full-time qualified employees does not satisfy the 15% employment increase requirement.
(5) Restriction against displacing existing jobs within Washington. The law provides that no recipient may use tax credits approved under this program to decertify a union or to displace existing jobs in any community of the state. Thus, the average expected increase of employment positions at the specific facility for which application is made must reflect a gross increase in the applicant's employment of persons at all locations in this state. Transfers of personnel from existing positions outside of an eligible area to new positions at the specific facility within an eligible area will not be allowed for purposes of approving tax credits. Also, layoffs or terminations of employment by the recipient at other locations in Washington but outside an eligible area for the purpose of hiring new positions within an eligible area will result in the withdrawal of any credits taken or approved.
(6) Application procedures. A taxpayer must file an application with and obtain approval from the department to receive tax credits under this program. A new application must be submitted after each group of four consecutive full calendar quarters that you project employment to increase over 15 percent. RCW 82.62.020 requires that application for the tax credits be filed within the first 90 days after the first qualified employment position is filled. Applications failing to satisfy this statutory requirement will be disapproved.
(a) How to obtain and file applications. Rural Area Application for New Employee B&O Tax Credit forms are provided by the department at the department's internet website at dor.wa.gov under the option for forms. The completed application may be sent by fax or mail to the addresses provided in the application form.
The U.S. Post Office postmark or fax date will be used as the date of application.
(b) Confidentiality. Applications, reports, or any other information received by the department in connection with this tax credit program, except applications not approved by the department, are not confidential and are subject to disclosure. All other taxpayer information is subject to the confidentiality provisions in RCW 82.32.330.
(c) Department to act upon application within 60 days. The department will determine if the applicant qualifies for tax credits on the basis of the information provided in the application and will approve or disapprove the application within 60 days. If approved, the department will issue a credit approval letter containing the dollar amount of tax credits available for use and the procedures for taking the credit. If disapproved, the department will notify the applicant in writing of the specific reasons for disapproval. The applicant may seek administrative review of the department's disapproval of an application by filing a petition for review with the department. The petition must be filed within 30 days from the date of notice of the disallowance pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews).
(d) No adjustment of credit after approval. After an application is approved and tax credits are granted, no upward adjustment of the application will be made for the four calendar quarters for which the application was approved.
(7) How much is the tax credit? The amount of tax credit is based on the number of qualified employment positions created and the wages and benefits paid to these qualified employees.
(a) How much tax credit may I claim for each qualified employment position? The amount of tax credit that may be claimed for each position created is as follows:
(i) Two thousand dollars for each qualified employment position that pays $40,000 or less in wages and benefits annually and is employed in an eligible business project; and
(ii) Four thousand dollars for each qualified employment position that pays more than $40,000 in wages and benefits annually and is employed in an eligible business project.
(b) What qualifies as wages and benefits? For the purposes of chapter 82.62 RCW, "wages" means compensation paid to an individual for personal services, whether denominated as wages, salary, commission, bonus, or otherwise. "Benefits" means compensation not paid as wages and includes Social Security, retirement, health care, life insurance, industrial insurance, unemployment compensation, vacation, holiday, sick leave, military leave, and jury duty. "Benefits" does not include any amount reported as wages.
(8) How to claim approved credits. The recipients must take the tax credits approved under this program on excise tax returns filed using the department's electronic filing system. These tax credits may not exceed the B&O tax liability.
(a) When can credits be used? The credits cannot be used until the department has approved the application. After approval, a recipient may use $2,000 or $4,000 of tax credit at the time it hires each new employee, depending on the wage/benefit level of the position filled.
(b) No refunds for unused credits. No tax refunds will be made for any tax credits which exceed tax liability during the life of this program. If tax credits derived from qualified hiring exceed the recipients' business and occupation tax liability in any one calendar year under this program, they may be carried forward to the next reporting period(s), until used or expired.
(c) Expiration of unused credits. All unused credits earned by the recipient expire on January 1st of the year that is six years after the year in which the latest of any one of the following events occurs:
(i) The department receives notice from the recipient or its representative that the recipient has ceased engaging in business in the state as those terms are defined in chapter 82.04 RCW;
(ii) The department closes the recipient's tax reporting account; or
(iii) The filing with the department of the recipient's last return that claimed the credit.
(9) Report to be filed by recipient. A recipient of tax credits under this program must complete and submit a report of employment activities to substantiate that he or she has complied with the hiring and retention requirements for approved credits. RCW 82.62.050. This report must be filed with the department by the last day of the month immediately following the end of the four consecutive full calendar quarter period for which a credit is earned. Based upon this report, the department will verify that the recipient is entitled to the tax credits approved by the department when the application was reviewed. Rural Area Annual Report for New Employee B&O Tax Credit forms are provided by the department at the department's internet website dor.wa.gov under the option for forms. The completed report may be sent by fax or mail to the addresses provided in the report form.
The U.S. Post Office postmark or fax date will be used as the date of filing.
(a) Verification of report. The department will use the same report the recipient provides to the department of employment security, which is known as the quarterly employment security report, to verify the recipient's eligibility for tax credits. The recipient must maintain copies of the quarterly employment report for the four consecutive full calendar quarters prior to the quarter for which the first qualified employment position is filled, the five calendar quarters for which the credits are claimed (this includes the quarter for which the first qualified employment position is filled), and the four consecutive full calendar quarters following the hiring of persons to fill the qualified employment positions. (The recipient does not have to forward copies of the quarterly employment report to the department each quarter.) The department may use other wage information provided to the department by the department of employment security. The taxpayer must provide additional information to the department, as the department finds necessary to calculate and verify wage eligibility.
(b) Failure to file report. The law provides that if any recipient fails to submit a report or submits an inadequate report, the department may declare the amount of taxes for which credit has been used to be immediately due and payable. An inadequate report is one which fails to provide information necessary to confirm that the requisite number of employment positions has been created and maintained for four consecutive full calendar quarters.
(10) What if the required number of positions is not created? The law provides that if the department finds that a recipient is not eligible for tax credits for any reason, other than failure to create the required number of qualified employment positions, the amount of taxes for which any credit has been used will be immediately due. No interest or penalty will be assessed in such cases. However, if the department finds that a recipient has failed to create the specified number of qualified employment positions, the department will assess interest, but not penalties, on the taxes against which the credit has been used. This interest on the assessment is mandatory and will be assessed at the statutory rate under RCW 82.32.050, retroactively to the date the tax credit was used. The interest will accrue until the taxes for which the credit was used are fully repaid. RCW 82.32.050. The interest rates under RCW 82.32.050 can be obtained from the department's website at dor.wa.gov or by calling the department's information center at 360-705-6705.
(11) Program thresholds. The department cannot approve any credits that will cause the total credits approved to exceed $7,500,000 in any fiscal year. RCW 82.62.030. A "fiscal year" is the 12-month period of July 1st through June 30th. If all or part of an application for credit is disallowed due to cap limitations, the disallowed portion will be carried over for approval the next fiscal year. However, the applicant's carryover into the next fiscal year is only permitted if the total credits approved for the next fiscal year does not exceed the cap for that fiscal year as of the date on which the department has disallowed the application.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-24-102, § 458-20-240, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-240, filed 5/27/16, effective 6/27/16; WSR 15-15-033, § 458-20-240, filed 7/8/15, effective 8/8/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0293, and 82.12.0293. WSR 10-23-035, § 458-20-240, filed 11/9/10, effective 12/10/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-01-079, § 458-20-240, filed 12/10/04, effective 1/10/05. Statutory Authority: RCW 82.32.300, 82.62.070 and chapter 82.62 RCW. WSR 01-17-069, § 458-20-240, filed 8/15/01, effective 9/15/01. Statutory Authority: RCW 82.32.300. WSR 88-17-047 (Order 88-5), § 458-20-240, filed 8/16/88; WSR 87-19-007 (Order ET 87-5), § 458-20-240, filed 9/8/87; WSR 86-14-019 (Order ET 86-13), § 458-20-240, filed 6/24/86; WSR 83-08-026 (Order ET 83-1), § 458-20-240, filed 3/30/83; Order ET 71-1, § 458-20-240, filed 7/22/71; Order ET 70-3, § 458-20-240 (Rule 240), filed 5/29/70, effective 7/1/70.]


PDF458-20-24001

Sales and use tax deferral—Manufacturing and research/development activities in high unemployment counties—Applications filed after June 30, 2010.

(1) Introduction. Chapter 82.60 RCW established a limited sales and use tax deferral program. The purpose of the program is to promote economic stimulation, create new employment opportunities in distressed areas, and reduce poverty in certain distressed counties of the state. RCW 82.60.010.
(a) Deferral program. This deferral program applies to an eligible investment project for sales and use taxes imposed on the construction, expansion, or renovation of qualified buildings or acquisition of qualified machinery and equipment. The program requires the recipient of the deferral to maintain the manufacturing or research and development activity for an eight-year period.
This rule does not address specific requirements of RCW 82.08.02565 and 82.12.02565 that provide statewide sales and use tax exemptions for machinery and equipment used directly in a manufacturing operation. Repayment of tax deferred under chapter 82.60 RCW is not required, and interest and penalties under RCW 82.60.070 will not be imposed, on machinery and equipment that qualifies for exemption under RCW 82.08.02565 or 82.12.02565. For additional information on statewide sales and use tax exemptions for machinery and equipment refer to WAC 458-20-13601.
(b) Program enacted. The legislature first enacted this program in 1985. It has since made major revisions to the program criteria, specifically to the definitions of "eligible area," "eligible investment project," and "qualified building." For applications made prior to July 1, 2010, see WAC 458-20-24001A.
(c) Administration of employment and related programs. The employment security department and the department of commerce administer programs for high unemployment counties and job training and should be contacted directly for information concerning these programs.
(d) Examples. Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Acquisition of machinery and equipment" means the machinery and equipment is under the dominion and control of the recipient or its agent.
(b) "Applicant" means a person applying for a tax deferral under chapter 82.60 RCW.
(c) "Certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(d) "Community empowerment zone (CEZ)" means an area meeting the requirements of RCW 43.31C.020 and officially designated as a CEZ by the director of the department of community, trade, and economic development.
(e) "Date of application" means the date of the U.S. Post Office postmark, fax, or electronic transmittal, or when the application is hand delivered to the department. The statute in effect on the "date of application" will determine the program criteria the applicant must satisfy.
(f) "Department" means the department of revenue.
(g) "Eligible area" means:
(i) Beginning July 1, 2010, an eligible area is a county that has an unemployment rate, as determined by the employment security department, which is at least 20 percent above the state average for the three calendar years immediately preceding the year in which the list of qualifying counties is established or updated, as the case may be. RCW 82.60.020.
The department, with the assistance of the employment security department, established a list of qualifying counties effective July 1, 2010. RCW 82.60.120. The list of qualifying counties is effective for a 24-month period and must be updated by July 1st of the year that is two calendar years after the list was established or last updated, as the case may be; or
(ii) A designated community empowerment zone approved under RCW 43.31C.020. RCW 82.60.049.
(h) "Eligible investment project" means an investment project that is located, as of the date the deferral application is received by the department, in an eligible area. "Eligible investment project" does not include any portion of an investment project undertaken by a light and power business as defined in RCW 82.16.010, other than that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site where the cogeneration project is an integral part. It also does not include investment projects that have already received deferrals under chapter 82.60 RCW. RCW 82.60.020 and 82.60.049.
(i) "Industrial fixture" means an item attached to a building or to land. Examples of "industrial fixtures" are fuel oil lines, boilers, craneways, and improvements to land such as concrete slabs.
(j) "Initiation of construction" means the date that a building permit is issued under the building code adopted under RCW 19.27.031 for:
(i) Construction of the qualified building, if the underlying ownership of the building vests exclusively with the person receiving the economic benefit of the deferral;
(ii) Construction of the qualified building, if the economic benefits of the deferral are passed to a lessee as provided in subsection (3) of this rule; or
(iii) Tenant improvements for a qualified building, if the economic benefits of the deferral are passed to a lessee as provided in subsection (3) of this rule.
"Initiation of construction" does not include soil testing, site clearing and grading, site preparation, or any other related activities that are initiated before the issuance of a building permit for the construction of the foundation of the building.
If the investment project is a phased project, "initiation of construction" shall apply separately to each phase.
(k) "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project.
(l) "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing, in addition, includes the activities performed by research and development laboratories and commercial testing laboratories, and the conditioning of vegetable seeds.
For purposes of this rule, both manufacturers and processors for hire may qualify for the deferral program as being engaged in manufacturing activities. For additional information on processors for hire, refer to WAC 458-20-136.
For purposes of this rule, "vegetable seeds" include the seeds of those crops that are grown in gardens and on truck farms and are generally known and sold under the name of vegetable or herb seeds in this state. "Vegetable seeds" include, but are not limited to, cabbage seeds, carrot seeds, onion seeds, tomato seeds, and spinach seeds. Vegetable seeds do not include grain seeds, cereal seeds, fruit seeds, flower seeds, tree seeds, and other similar properties.
(m) "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. An office may be located in a separate building from the building used for manufacturing or research and development activities, but the office must be located at the same site as the qualified building to qualify. Each individual office may qualify or disqualify only in its entirety.
(n) "Operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(o) "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" may be either a lessee or a lessor/owner, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.60 RCW.
(p) "Qualified buildings" means construction of new structures, and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity, used for manufacturing or research and development activities. "Qualified buildings" includes plant offices and warehouses or other facilities for the storage of raw material or finished goods if such facilities are an essential or an integral part of a factory, mill, plant, or laboratory used for manufacturing or research and development. "Qualified buildings" include construction of:
• Specialized sewerage pipes connected to a qualified building that are specifically designed and used exclusively for manufacturing or research and development; and
• Parking lots connected to or adjacent to the building if the parking lots are for the use of workers performing manufacturing or research and development in the building. Parking lots may be apportioned based on qualifying use.
"Qualified buildings" does not include construction of landscaping or most other work outside the building itself, even though the landscaping or other work outside the building may be required by the city or county government in order for the city or county to issue a permit for the construction of a building.
(q) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. "Full-time" means at least 35 hours a week, 455 hours a quarter, or 1,820 hours a year.
(r) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing or research and development operation. "Qualified machinery and equipment" also includes computers; desks; filing cabinets; photocopiers; printers; software; data processing equipment; laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
(s) "Qualifying county" means a county that has an unemployment rate, as determined by the employment security department, which is at least 20 percent above the state average for the three calendar years immediately preceding the year in which the list of qualifying counties is established or updated, as the case may be.
(t) "Recipient" means a person receiving a tax deferral under this program.
(u) "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun, but only when such activities are intended to ultimately result in the production of a new, different, or useful substance or article of tangible personal property for sale. For purposes of this rule, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(v) "Site" means one or more immediately adjacent parcels of real property. Adjacent parcels of real property separated only by a public road comprise a single site.
(w) "Warehouse" means buildings or facilities used for the storage of raw materials or finished goods. A warehouse may be located in a separate building from the building used for manufacturing or research and development activities, but to qualify the warehouse must be located at the same site as the qualified building. Warehouse space may be apportioned based on qualifying use.
(3) Who is eligible for the sales and use tax deferral program? A person engaged in manufacturing or research and development activity is eligible for this deferral program for its eligible investment project.
(a) The lessor or owner of the qualified building is not eligible for deferral unless:
(i) The underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person; or
(ii) The lessor, by written contract, has agreed to pass the economic benefit of the deferral to the lessee;
(iii) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual tax performance report required under RCW 82.60.070; and
(iv) The economic benefit of the deferral passed to the lessee is no less than the amount of tax deferred by the lessor and is evidenced by written documentation of any type of payment, credit, or other financial arrangement between the lessor or owner of the qualified building and the lessee.
For example, the economic benefit of the deferral can be passed through to the lessee when evidenced in writing that the amounts paid to the lessor for construction of tenant improvements are reduced by the amount of the sales tax deferred. Another method of passing the economic benefit is if the lessee receives a credit for tenant improvements or other mechanism in the lease, equal to the amount of the sales tax deferred.
(b) The lessor of the qualified building who receives a letter of intent from a qualifying lessee may be eligible for deferral, assuming that all other requirements of chapter 82.60 RCW are met. At the time of application, the lessor, or another qualifying lessee must provide to the department a letter of intent by the lessee to lease the qualified building and any other information to prove that the lessee will engage in qualified manufacturing or research and development once the building construction is complete. After the investment project is certified as operationally complete, the lessee must actually occupy the building as a lessee and engage in qualified manufacturing or research and development. Otherwise, deferred taxes will be immediately due from the lessor.
The following examples illustrate the application process with lessors and lessees.
Example 1. Prior to the initiation of construction, Owner/Lessor AA enters into an agreement with Lessee BB, a company engaged in qualified manufacturing or research and development. Under the agreement, AA will build a building to house BB's research and development activities, will apply for a tax deferral on construction of the building, will lease the building to BB, and will pass on the economic benefit in the amount of the deferral to BB. BB agrees in writing with the department to complete annual tax performance reports. AA applies for the deferral before the initiation of construction that is prior to the date the building permit is issued. AA is entitled to a deferral on building construction costs assuming all eligibility qualifications are met.
Example 2. The following example assumes no deferral on initial construction activity. After the building construction has begun, Lessee CC asks that certain tenant improvements be added to the building. Lessor DD and Lessee CC each agree to pay a portion of the cost of the improvements. DD agrees with CC in writing that DD will pass on the entire value of DD's portion of the tax deferral to CC, and CC agrees in writing with the department to complete annual tax performance reports. CC and DD each apply for a deferral on the costs of the tenant improvements they are legally responsible for before the date the building permit is issued for the tenant improvements. The department will approve both applications assuming all eligibility qualifications are met. While construction of the building was initiated before submission of the applications, tenant improvements on a building under construction are deemed to be the expansion or renovation of an existing structure. In addition, lessees are entitled to the deferral only if they are legally responsible and actually pay contractors for the improvements, rather than merely reimbursing lessors for the costs.
Example 3. After building construction has begun but before machinery or equipment has been acquired, Lessee EE applies for a deferral on machinery and equipment. The department will approve the application assuming all eligibility qualifications are met, and EE will be required to complete annual tax performance reports. Even though it is too late to apply for a deferral of tax on building costs, it is not too late to apply for a deferral for the machinery and equipment.
(4) What if an investment project is located in an area that qualifies as a high unemployment county and as a CEZ? If an investment project is located in an area that qualifies under more than one type of eligible area, the department will automatically assign the project to the eligible area that imposes the least burden on the taxpayer and with the greatest benefit to the taxpayer. If the applicant elects to be bound by the requirements of the other potential eligible area, the applicant must make a written statement to that effect.
Example 4. On October 1, 2014, a city in a high unemployment county qualifies as a CEZ, and the high unemployment county is on the list as a qualifying county. The CEZ employment requirements are more restrictive than those for qualifying counties. The department will assign the project to the qualifying county designation unless the applicant elects in writing to be bound by the CEZ employment requirements. Refer to subsection (7) of this rule for more information on the application process.
(5) When is apportionment of qualified buildings appropriate? The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of an existing building used in manufacturing or research and development. Where a building(s) is used partly for manufacturing or research and development and partly for purposes that do not qualify for deferral under this rule, apportionment is necessary.
(a) What are the apportionment methods? The deferral is determined by one of the following two apportionment methods. The first method of apportionment is based on square footage and does not require tracking the costs of materials for the qualifying/nonqualifying areas of a building. The second method of apportionment tracks the costs of materials used in the qualifying/nonqualifying areas, and it is primarily used by those industries with specialized building requirements.
(i) First method. The applicable tax deferral is determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing or research and development purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent of building eligible
Total square feet of building(s)
Percent of building eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" is the cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation.
Eligible Costs (as determined above) x Tax Rate = Eligible Tax Deferred.
Example 5. A taxpayer is constructing a 10,000 square foot building, of which 8,000 square feet will be eligible for tax deferral. The cost of the project is $1,000,000. The combined sales/use tax rate at this location is 9.2%.
8,000 qualifying square feet
=
80 percent of the
building is eligible
10,000 total square feet
Based on the above apportionment formula, 80% of the building is eligible for deferral. By multiplying the qualifying percentage 80% by the cost of $1,000,000 to determine eligible costs of $800,000. Multiply the eligible cost of $800,000 by the sales/use tax rate of 9.2% to determine a sales/use tax deferral of $73,600.
(ii) Second method. If the applicable tax deferral is not determined by the first method, it will be determined by calculating the cost of construction of qualifying/nonqualifying areas as follows:
(A) Tax on the cost of construction of areas devoted solely to manufacturing or research and development may be deferred.
(B) Tax on the cost of construction of areas not used at all for manufacturing or research and development may not be deferred.
(C) Tax on the cost of construction of areas used in common for manufacturing or research and development and for other purposes, such as hallways, bathrooms, and conference rooms, may be deferred by apportioning the costs of construction on a square footage basis. The apportioned costs of construction eligible for deferral are established by using the ratio, expressed as a percentage, of the square feet of the construction, expansion, or renovation devoted to manufacturing or research and development, excluding areas used in common, to the total square feet of the construction, expansion, or renovation, excluding areas used in common. That percentage is applied to the cost of construction of the common areas to determine the costs of construction eligible for tax deferral. Expressed as a formula, apportionment of the common areas is determined by:
Square feet devoted to manufacturing or research and development, excluding square feet of common areas
=
Percentage of common areas eligible for deferral
Total square feet, excluding square feet of common areas
Example 6. Taxpayer is planning to build a 10,000 square foot building of which 7,000 square feet will be used for manufacturing and 1,000 square feet will be common area. The remaining portion of the building will not be eligible for any deferral. The cost of the project will be $850,000 for the manufacturing area, $260,000 for the common area, and $140,000 for the remaining portion of the building, for a total cost of construction of $1,250,000. The combined sales/use tax rate at this location is 8.8%.
7,000 square feet devoted to manufacturing, excluding square feet of common areas
=
78% of common areas eligible for deferral
9,000 total square feet, excluding square feet of common areas
Based on the apportionment formula: 78% of common area costs are eligible. Multiply the common area costs of $260,000 by 78% to determine that $202,800 of common area costs are eligible for deferral. Therefore the $850,000 for the manufacturing portion of the building plus the $202,800 for common areas total $1,052,800 of eligible project costs. Multiply the eligible project costs of $1,052,800 by the tax rate of 8.8% to determine a sales/use tax deferral of $92,646.
(b) Are qualified machinery and equipment subject to apportionment? Unlike buildings, machinery and equipment cannot be apportioned if used for both qualifying and nonqualifying purposes.
(c) To what extent is leased equipment eligible for the deferral? The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date, the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(6) Are there any hiring requirements for an investment project? There may or may not be a hiring requirement, depending on the location of the project.
(a) High unemployment county. There are no hiring requirements for qualifying projects located in high unemployment counties.
(b) Community empowerment zone (CEZ). There are hiring requirements for qualifying projects located in CEZs or in counties containing CEZs. The applicant applies for a deferral of investment that correlates to the estimated number of persons to be hired based on a formula. The applicant will create a position and hire at least one qualified employee for each $750,000 of qualified investment in the project. Refer to subsection (7) of this rule for more information on the application process. The recipient must fill the positions with persons who at the time of hire are residents of the CEZ. The persons must be hired after the date the application is filed with the department. As used in this subsection, "resident" means the person makes his or her home in the CEZ or the county in which the zone is located. A mailing address alone is insufficient to establish that a person is a resident. For example, a "P.O. Box" is not a valid address as it does not establish residence at a physical location where the person actually lives. A street address would be an example of a valid address.
The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's website at dor.wa.gov. A recipient must fill the qualified employment positions by the end of the calendar year following the year in which the project is certified as operationally complete and retain the positions during the entire tax year. Refer to subsection (12) of this rule for more information on certification of an investment project as operationally complete. If the recipient does not fill the qualified employment positions by the end of the second calendar year following the year in which the project is certified as operationally complete, all deferred taxes are immediately due.
(7) What are the application and review processes? An application for sales and use tax deferral under this program must be made prior to the initiation of construction, prior to taking possession of machinery and equipment, and prior to the filling of qualified employment positions. Persons, applying after construction is initiated or finished or after taking possession of machinery and equipment, are not eligible for the program. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify. Applications for persons subject to hiring requirements must include information regarding the estimated total project cost and the qualified employment positions.
(a) How does a taxpayer obtain an application form? Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705. Applications approved by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. RCW 82.60.100.
(b) Will the department approve the deferral application? In considering whether to approve or deny an application for a deferral, the department will not approve an application for a project involving construction unless:
(i) The construction will begin within one year from the date of the application; or
(ii) The applicant shows proof that, if the construction will not begin within one year of application, there is a specific and active program to begin construction of the project within two years from the date of application. Proof may include, but is not limited to:
(A) Affirmative action by the board of directors, governing body, or other responsible authority of the applicant toward an active program of construction;
(B) Itemized reasons for the proposed construction;
(C) Clearly established plans for financing the construction; or
(D) Building permits.
Similarly, after an application has been granted, a deferral certificate is no longer valid and should not be used if construction has not begun within one year from the date of application or there is not a specific and active program to begin construction within two years from the date of application. However, the department will grant requests to extend the period for which the certificate is valid if the holder of the certificate can demonstrate that the delay in starting construction is due to circumstances beyond the certificate holder's control such as the acquisition of building permit(s). Refer to subsection (9) of this rule for more information on the use of tax deferral certificates.
(c) When will the department notify approval or disapproval of the deferral application? The department will verify the information contained in the application and approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval.
(d) May an applicant request a review of department disapproval of the deferral application? The applicant may request administrative review of the department's disapproval of an application, within 30 days from the date of notice of the disallowance, pursuant to the provisions of WAC 458-20-100, Appeals. The filing of a petition for review with the department starts a review of departmental action.
(8) What happens after the department approves the deferral application? The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral the recipient is eligible for. Recipients must keep track of how much tax is deferred.
(9) How should a tax deferral certificate be used? A tax deferral certificate issued under this program is for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified buildings or qualified machinery and equipment as defined in this rule. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment. In addition, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller will be relieved of the responsibility for collecting sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales.
(10) May an applicant apply for multiple deferrals at the same project location? The department may not issue a certificate for an investment project that has already received a deferral under chapter 82.60 RCW. For example, replacement machinery and equipment that replaces qualified machinery and equipment is not eligible for the deferral. In addition, if an existing building that received a deferral under chapter 82.60 RCW for the construction of the building is renovated, the renovation is not eligible for the deferral unless the original deferral project is closed and has no more deferral requirements.
(a) If expansion is made from an existing building that has already received a deferral under chapter 82.60 RCW for the construction of the building, the expanded portion of the building may be eligible for the deferral. The expansion must be made for new square footage, either vertically or horizontally. Acquisition of machinery and equipment to be used in the expanded portion of the qualified building may also be eligible.
(b) A certificate may be amended or a certificate issued for a new investment project at an existing facility if all eligibility requirements are met.
(11) May an applicant or recipient amend an application or certificate? Applicants and recipients may make a written request to the special programs division to amend an application or certificate when the original estimates change.
(a) Assuming the project continues to meet all eligibility requirement, grounds for requesting amendment include, but are not limited to:
(i) The project will exceed the costs originally stated;
(ii) The project will take more time to complete than originally stated;
(iii) The original application is no longer accurate because of changes in the project;
(iv) The project location changes (only applicable to machinery and equipment); and
(v) Transfer of ownership of the project.
(b) An application may not be amended if the location of the qualified building changes. Taxes become immediately due if the project location changes after the application has been approved.
(c) The department must rule on the request within 60 days. If the request is denied, the department must explain in writing the basis for the denial. An applicant or recipient may appeal a denial within 30 days under WAC 458-20-100, Appeals.
(12) What are the processes for an investment project? An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a tax deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
(a) What should a certificate holder do if its investment project reaches the estimated costs but the project is not yet operationally complete? If an investment project has reached its estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount on which the deferral taxes are requested along with an explanation for the increase in estimated costs. Requests must be mailed, emailed, or faxed to the department.
(b) What should a certificate holder do if its investment project reaches the completion date but the project is not yet operationally complete? If an investment project has reached the completion date and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised completion date along with an explanation for the new completion date. Requests must be mailed, emailed, or faxed to the department prior to the expiration date on the certificate.
(c) What should a certificate holder do when its investment project is operationally complete? The certificate holder must notify the department in writing when the investment project is operationally complete. The project is operationally complete once it can be used for its intended purpose as described in the application. The department will certify the qualifying costs and the date when the project became operationally complete. The certificate holder of the deferral must maintain the manufacturing or research and development activity beginning the year the project is operationally complete and the following seven calendar years. It is important to remember that annual tax performance report reporting requirements begin the year following the operationally complete date, even though the audit certification may not be complete. For information on submitting annual tax performance reports, see subsection (13) of this rule.
Example 7. Taxpayer estimated a project end date of June 2018, but the project was actually operationally complete in November 2017. Taxpayer must submit the 2017 annual tax performance report by May 31, 2018. Taxpayer is responsible for notifying the department when the project is operationally complete regardless of the estimated completion date. If the 2017 annual tax performance report is not submitted timely, taxpayer will be assessed 12.5% of the deferred sales/use tax for this project.
Example 8. Taxpayer estimated a project end date of May 2017, but the project was actually not operationally complete until December 2017. Taxpayer must submit the 2017 annual tax performance report by May 31, 2018. Taxpayer is responsible for notifying the department when the project is operationally complete regardless of the estimated completion date. If the 2017 annual tax performance report is not submitted timely, taxpayer will be assessed 12.5% of the deferred sales/use tax for this project.
(i) If all or any portion of the project does not qualify, the recipient must repay all or a proportional part of the deferred taxes. The department will notify the recipient of the amount due and the due date.
(ii) The department must explain in writing the basis for not qualifying all or any portion of a project. The decision of the department to not qualify all or a portion of a project may be appealed under WAC 458-20-100, Appeals, within 30 days.
(13) Is a recipient of a tax deferral required to submit annual tax performance report? RCW 82.32.534 requires each recipient of a tax deferral to complete an annual tax performance report, every year, by May 31st for eight years following the year in which the project is operationally complete, regardless if the department has audited the project. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.60.025, the lessee must agree in writing to complete the annual tax performance report and the applicant is not required to complete the annual tax performance report. If the annual tax performance report is not submitted by the due date, or any extension under RCW 82.32.590, the recipient of the tax deferral or lessee, if required to submit, will be billed 12.5% of the deferred tax amount. For example, the deferral project is operationally complete in 2017. The recipient is required to submit the 2017-2024 annual tax performance reports that are due by May 31, 2018-2025, respectively. For more information on the requirements to file annual tax performance reports refer to WAC 458-20-267.
(14) Is a recipient of a tax deferral required to repay deferred taxes for reasons other than not submitting the annual tax performance report? Repayment of tax deferred under chapter 82.60 RCW is waived, as long as all eligibility requirements are met, except as provided in RCW 82.60.070 and this subsection (14).
The following describes the various circumstances under which repayment of the deferral may occur. Outstanding taxes are determined as of December 31st of each year by reference to the following table. No proration is allowed for completing a partial year of the deferral use requirement.
Repayment Year
 
Percentage of
Deferred Tax Waived
1
(Year operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
Any action taken by the department to disqualify a recipient for tax deferral or assess interest will be subject to administrative review pursuant to the provisions of WAC 458-20-100, Appeals. The filing of a petition for review with the department starts a review of departmental action.
(a) Failure of investment project to satisfy general conditions. If based on the recipient's annual tax performance report or other information, including that submitted by the employment security department, the department finds that an investment project is not eligible for tax deferral for reasons other than failure to create the required number of qualified employment positions, including failure to continue qualifying activity, the department will declare the amount of deferred taxes outstanding to be immediately due. There is no proration of the amount owed under this subsection. No penalties or interest will be assessed on the deferred sales or use taxes; however, all other penalties and interest applicable to excise tax assessments may be assessed and imposed.
(b) Failure of investment project to satisfy required employment positions conditions. If based on the recipient's annual tax performance report or other information, the department finds that an investment project has been operationally complete and has failed to create the required number of qualified employment positions the amount of taxes deferred will be immediately due. There is no proration of the amount owed under this subsection. No penalties or interest will be assessed on the deferred sales or use taxes; however, all other penalties and interest applicable to excise tax assessments may be assessed and imposed.
(15) When will the tax deferral program expire? This tax deferral program is scheduled to expire July 1, 2020. No applications for deferral of taxes will be accepted after June 30, 2020. Businesses wishing to take advantage of this program are advised to apply to the department by April 30, 2020. While the department will make every effort to process applications in a timely manner, the department is allowed 60 days to review applications and issue deferral certificates. Applications received after April 30, 2020, may not be processed in time for the business to receive a deferral certificate and would not be eligible for the program. In addition, incomplete applications may be denied or not processed in time for the business to be issued a deferral certificate before July 1, 2020.
(16) Is debt extinguishable because of insolvency or sale? Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes.
(17) Does transfer of ownership terminate tax deferral? Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of chapter 82.60 RCW, for the remaining periods of the deferral. Any person who becomes a successor to such investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral. For additional information on successorship or quitting business refer to WAC 458-20-216.
Any questions regarding the potential eligibility of deferrals to be transferred on the sale of a business, should be directed to the special programs division as provided for in subsection (7)(a) of this rule.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-04-004, § 458-20-24001, filed 1/24/24, effective 2/24/24; WSR 23-14-002, § 458-20-24001, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-24001, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.60 RCW. WSR 15-13-109, § 458-20-24001, filed 6/16/15, effective 7/17/15. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-21-052, § 458-20-24001, filed 10/14/10, effective 11/14/10. Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-24001, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 06-17-007, § 458-20-24001, filed 8/3/06, effective 9/3/06; WSR 04-01-127, § 458-20-24001, filed 12/18/03, effective 1/18/04. Statutory Authority: RCW 82.32.300. WSR 01-12-041, § 458-20-24001, filed 5/30/01, effective 6/30/01; WSR 88-17-047 (Order 88-5), § 458-20-24001, filed 8/16/88; WSR 87-19-139 (Order 87-6), § 458-20-24001, filed 9/22/87; WSR 86-14-019 (Order ET 86-13), § 458-20-24001, filed 6/24/86; WSR 85-21-013 (Order ET 85-5), § 458-20-24001, filed 10/7/85.]


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PDF458-20-24001A

Sales and use tax deferral—Manufacturing and research/development activities in rural counties—Applications filed prior to July 1, 2010.

(1) Introduction. Chapter 82.60 RCW establishes a sales and use tax deferral program. The purpose of the program is to promote economic stimulation, create employment opportunities, and reduce poverty in certain areas of the state. The legislature established this program to be effective solely in those areas and for those circumstances where the deferral is for investments that result in the creation of a specified minimum number of jobs or investment for a qualifying project.
The program applies to sales and use taxes on materials and labor and services rendered in the construction of qualified buildings or acquisition of qualified machinery and equipment and requires the recipient of the deferral to maintain the manufacturing or research and development activity for an eight-year period. This rule does not address RCW 82.08.02565 and 82.12.02565, which provide a statewide sales and use tax exemption for machinery and equipment used directly in a manufacturing operation. Refer to WAC 458-20-13601 for more information regarding the statewide exemption.
(2) Program background. This program was enacted in 1985. The legislature made major revisions to program criteria in 1993, 1994, 1995, 1996, 1999, 2004, 2009, and 2010, specifically to the definitions of "eligible area," "eligible investment project," "qualified building," and "qualifying county." Each revision created additional criteria for prospective applicants. This rule is written in five parts and covers applications made prior to July 1, 2010. Each part sets forth the requirements on the basis of the period of time in which application is made. Refer to the year during which application was made for information on an individual application. For applications made after June 30, 2010, see WAC 458-20-24001.
The employment security department and the department of community, trade, and economic development administer additional programs for distressed areas and job training and should be contacted directly for information concerning these programs.
PART I
Applications from March 31, 2004, to June 30, 2010
(101) Who is eligible for the sales and use tax deferral program? A person engaged in manufacturing or research and development activity is eligible for this deferral program for its eligible investment project.
(a) What does the term "person" mean for purposes of this rule? "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.60 RCW.
(i) The lessor or owner of the qualified building is not eligible for deferral unless:
(A) The underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person; or
(B) All of the following conditions are met:
(I) The lessor has by written contract agreed to pass the economic benefit of the deferral to the lessee;
(II) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual survey required under RCW 82.60.070;
(III) The economic benefit of the deferral passed to the lessee is no less than the amount of tax deferred by the lessor; and
(IV) Upon request, the lessor must provide the department with written documentation to support the eligibility of the deferral, including any type of payment, credit, or other financial arrangement between the lessor or owner of the qualified building and the lessee.
For example, economic benefit of the deferral is passed through to the lessee when evidenced by written documentation that the amounts paid to the lessor for construction of tenant improvements are reduced by the amount of the sales tax deferred, or that the lessee receives more tenant improvements through a credit for tenant improvements or other mechanism in the lease equal to the amount of the sales tax deferred.
(ii) The lessor of the qualified building who receives a letter of intent from a qualifying lessee may be eligible for deferral, assuming that all other requirements of chapter 82.60 RCW are met. At the time of application, the lessor must provide to the department a letter of intent by the lessee to lease the qualified building and any other information to prove that the lessee will engage in qualified research and development or pilot scale manufacturing once the building construction is complete. After the investment project is certified as operationally complete, the lessee must actually occupy the building as a lessee and engage in qualified research and development or pilot scale manufacturing. Otherwise, deferred taxes will be immediately due to the lessor, and interest will be assessed retroactively from the date of deferral.
(b) What is "manufacturing" for purposes of this rule? "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing, in addition, includes:
(i) Computer programming, the production of computer software, and other computer-related services, but only when the computer programming, production of computer software, or other computer-related services are performed by a manufacturer as defined in RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article or tangible personal property for sale (chapter 16, Laws of 2010);
(ii) The activities performed by research and development laboratories and commercial testing laboratories; and
(iii) Effective July 1, 2006, manufacturing also includes the conditioning of vegetable seeds.
For purposes of this rule, both manufacturers and processors for hire may qualify for the deferral program as being engaged in manufacturing activities. Refer to WAC 458-20-136 (Manufacturing, processing for hire, fabricating) for more information on processors for hire.
For purposes of this rule, "computer-related services" means activities such as programming for the manufactured product. It includes creating operating systems, software, and other similar goods that will be copied and sold as canned software. "Computer-related services" does not include information services, such as data or information processing. The activities performed by the manufacturer to test, correct, revise, or upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services.
For purposes of this rule, "vegetable seeds" includes the seeds of those crops that are grown in gardens and on truck farms and are generally known and sold under the name of vegetable or herb seeds in this state. "Vegetable seeds" includes, but is not limited to, cabbage seeds, carrot seeds, onion seeds, tomato seeds, and spinach seeds. Vegetable seeds do not include grain seeds, cereal seeds, fruit seeds, flower seeds, tree seeds, and other similar properties.
(c) What is "research and development" for purposes of this rule? "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun, but only when such activities are intended to ultimately result in the production of a new, different, or useful substance or article of tangible personal property. (Chapter 16, Laws of 2010.) For purposes of this rule, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(102) What is eligible for the sales and use tax deferral program? This deferral program applies to an eligible investment project for sales and use taxes imposed on the construction, expansion, or renovation of qualified buildings and acquisition of qualified machinery and equipment.
(a) What is an "eligible investment project" for purposes of this rule? "Eligible investment project" means an investment project in an eligible area. Refer to (g) of this subsection for more information on eligible area. "Eligible investment project" does not include an investment project undertaken by a light and power business as defined in RCW 82.16.010, other than 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. It also does not include an investment project that has already received a deferral under chapter 82.60 RCW.
(b) What is an "investment project" for purposes of this rule? "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project.
(c) What is "qualified buildings" for purposes of this rule? "Qualified buildings" means construction of new structures, and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity, used for manufacturing or research and development activities.
(i) "Qualified buildings" is limited to structures used for manufacturing and research and development activities. "Qualified buildings" includes plant offices and warehouses if such facilities are essential to or an integral part of a factory, mill, plant, or laboratory used for manufacturing or research and development.
(A) "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. An office may be located in a separate building from the building used for manufacturing or research and development activities, but the office must be located at the same site as the qualified building in order to qualify. Each individual office may only qualify or disqualify in its entirety.
(B) "Warehouse" means buildings or facilities used for the storage of raw materials or finished goods. A warehouse may be located in a separate building from the building used for manufacturing or research and development activities, but the warehouse must be located at the same site as the qualified building in order to qualify. Warehouse space may be apportioned based upon its qualifying use.
(C) A site is one or more immediately adjacent parcels of real property. Adjacent parcels of real property separated only by a public road comprise a single site.
(ii) "Qualified buildings" does not include construction of landscaping or most other work outside the building itself, even though the landscaping or other work outside the building may be required by the city or county government in order for the city or county to issue a permit for the construction of a building.
However, "qualified buildings" includes construction of specialized sewerage pipes connected to a qualified building that are specifically designed and used exclusively for manufacturing or research and development.
Also, "qualified buildings" includes construction of parking lots connected to or adjacent to the building if the parking lots are for the use of workers performing manufacturing or research and development in the building. Parking lots may be apportioned based upon its qualifying use.
(d) When is apportionment of qualified buildings appropriate? The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of an existing building used in manufacturing or research and development. Where a building(s) is used partly for manufacturing or research and development and partly for purposes that do not qualify for deferral under this rule, apportionment is necessary.
(e) What are the apportionment methods? The deferral is determined by one of the following two apportionment methods. The first method of apportionment is based on square footage and does not require tracking the costs of materials for the qualifying/nonqualifying areas of a building. The second method of apportionment tracks the costs of materials used in the qualifying/nonqualifying areas, and it is primarily used by those industries with specialized building requirements.
(i) First method. The applicable tax deferral can be determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing or research and development purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent Eligible
Total square feet of building(s)
Percent Eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" means cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation. Common areas, such as hallways, bathrooms, and conference rooms, are not included in the square feet figure for either the numerator or the denominator. The cost of the common areas is multiplied by the percent eligible to determine the portion of the common area that is eligible for deferral.
Eligible Costs x Tax Rate = Eligible Tax Deferred.
(ii) Second method. If the applicable tax deferral is not determined by the first method, it will be determined by tracking the cost of construction of qualifying/nonqualifying areas as follows:
(A) Tax on the cost of construction of areas devoted solely to manufacturing or research and development may be deferred.
(B) Tax on the cost of construction of areas not used at all for manufacturing or research and development may not be deferred.
(C) Tax on the cost of construction of areas used in common for manufacturing or research and development and for other purposes, such as hallways, bathrooms, and conference rooms, may be deferred by apportioning the costs of construction on a square footage basis. The apportioned costs of construction eligible for deferral are established by using the ratio, expressed as a percentage, of the square feet of the construction, expansion, or renovation devoted to manufacturing or research and development, excluding areas used in common, to the total square feet of the construction, expansion, or renovation, excluding areas used in common. That percentage is applied to the cost of construction of the common areas to determine the costs of construction eligible for tax deferral. Expressed as a formula, apportionment of the cost of the common areas is determined by:
Square feet devoted to manufacturing or research and development, excluding square feet of common areas
=
Percentage of total cost of construction of common areas eligible for deferral
Total square feet, excluding square feet of common areas
(f) What is "qualified machinery and equipment" for purposes of this rule? "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing or research and development operation. "Qualified machinery and equipment" includes computers, desks, filing cabinets, photocopiers, printers, software, data processing equipment, laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
For purposes of this rule, "industrial fixture" means an item attached to a building or to land. Examples of "industrial fixtures" are fuel oil lines, boilers, craneways, and improvements to land such as concrete slabs.
(i) Are qualified machinery and equipment subject to apportionment? Qualified machinery and equipment are not subject to apportionment.
(ii) To what extent is leased equipment eligible for the deferral? The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date, the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(g) What is an "eligible area" for purposes of this rule? "Eligible area" means:
(i) Rural county. A rural county is a county with fewer than 100 persons per square mile or a county smaller than 225 square miles as determined annually by the office of financial management and published by the department of revenue effective for the period July 1st through June 30th; or
(ii) Community empowerment zone (CEZ). A "community empowerment zone" means an area meeting the requirements of RCW 43.31C.020 and officially designated as a CEZ by the director of the department of commerce, or a county containing a CEZ.
(h) What if an investment project is located in an area that qualifies both as a rural county and as a CEZ? If an investment project is located in an area that qualifies under more than one type of eligible area, the department will automatically assign the project to the eligible area that imposes the least burden on the taxpayer and with the greatest benefit to the taxpayer. If the applicant elects to be bound by the requirements of the other potential eligible area, the applicant must make a written statement to that effect. For example, on October 1, 2004, the city of Yakima qualifies as a CEZ, and the entire county of Yakima has fewer than 100 persons per square mile. The CEZ requirements are more restrictive than counties containing fewer than 100 persons per square mile. The department will assign the project to the "fewer than 100 persons per square mile designation" unless the applicant elects to be bound by the CEZ requirements. Refer to subsection (104) of this rule for more information on the application process.
(i) Are there any hiring requirements for an investment project? There may or may not be a hiring requirement, depending on the location of the project.
(i) Rural county. There are no hiring requirements for qualifying projects located in rural counties.
(ii) Community empowerment zone (CEZ). There are hiring requirements for qualifying projects located in CEZs or in counties containing CEZs. The applicant applies for a deferral of investment that correlates to the estimated number of persons to be hired based on the following formula:
Number of qualified employment positions to be hired x $750,000 = amount of investment eligible for deferral
Applicants must make good faith estimates of anticipated hiring. Refer to subsection (104) of this rule for more information on the application process. The recipient must fill the positions by persons who at the time of hire are residents of the CEZ. The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's website at dor.wa.gov. A recipient must fill the qualified employment positions by the end of the calendar year following the year in which the project is certified as operationally complete and retain the position during the entire tax year. Refer to subsection (107) of this rule for more information on certification of an investment project as operationally complete. If the recipient does not fill the qualified employment positions by the end of the second calendar year following the year in which the project is certified as operationally complete, all deferred taxes are immediately due.
(A) What is a "qualified employment position" for purposes of this rule? "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. "Full-time" means at least 35 hours a week, 455 hours a quarter, or 1,820 hours a year.
(B) Who are residents of the CEZ? "Resident" means the person who fills the qualified employment position makes his or her home in the CEZ. A mailing address alone is insufficient to establish that a person is a resident.
(103) What are the application and review processes? An application for sales and use tax deferral under this program must be made prior to the initiation of construction, prior to the acquisition of machinery and equipment, and prior to the filling of qualified employment positions. Persons who apply after construction is initiated or finished or after acquisition of machinery and equipment are not eligible for the program. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify. Applications for persons subject to hiring requirements must include information regarding the estimated total project cost and the qualified employment positions.
(a) What is "initiation of construction" for purposes of this rule? "Initiation of construction," in regards to the construction, expansion, or renovation of buildings, means the commencement of on-site construction work. Neither planning nor land clearing prior to excavation of the building site constitutes the commencement of on-site construction work.
(b) What is "acquisition of machinery and equipment" for purposes of this rule? "Acquisition of machinery and equipment" means the machinery and equipment is under the dominion and control of the recipient or its agent.
(c) How may a taxpayer obtain an application form? Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705. Applications received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. RCW 82.60.100.
For purposes of this rule, "applicant" means a person applying for a tax deferral under chapter 82.60 RCW, and "department" means the department of revenue.
(d) Will the department approve the deferral application? In considering whether to approve or deny an application for a deferral, the department will not approve an application for a project involving construction unless:
(i) The construction will begin within one year from the date of the application; or
(ii) The applicant shows proof that, if the construction will not begin within one year of construction, there is a specific and active program to begin construction of the project within two years from the date of application. Proof may include, but is not limited to:
(A) Affirmative action by the board of directors, governing body, or other responsible authority of the applicant toward an active program of construction;
(B) Itemized reasons for the proposed construction;
(C) Clearly established plans for financing the construction; or
(D) Building permits.
Similarly, after an application has been granted, a deferral certificate is no longer valid and should not be used if construction has not begun within one year from the date of application or there is not a specific and active program to begin construction within two years from the date of application. However, the department will grant requests to extend the period for which the certificate is valid if the holder of the certificate can demonstrate that the delay in starting construction is due to circumstances beyond the certificate holder's control such as the acquisition of building permit(s). Refer to subsection (106) of this rule for more information on the use of tax deferral certificate.
(e) What is the date of application? "Date of application" means the date of the U.S. Post Office postmark, fax, or electronic transmittal, or when the application is hand delivered to the department. The statute in effect on the "date of application" will determine the program criteria the applicant must satisfy.
(f) When will the department notify approval or disapproval of the deferral application? The department will verify the information contained in the application and approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval.
(g) May an applicant request a review of department disapproval of the deferral application? The applicant may seek administrative review of the department's disapproval of an application within 30 days from the date of notice of the disallowance pursuant to the provisions of WAC 458-20-10001 (Adjudicative proceedings—Brief adjudicative proceedings—Certificate of registration (tax registration endorsement) revocation). The filing of a petition for review with the department starts a review of departmental action.
(104) What happens after the department approves the deferral application? The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral for which the recipient is eligible. Recipients must keep track of how much tax is deferred.
For purposes of this rule, "recipient" means a person receiving a tax deferral under this program.
(105) How should a tax deferral certificate be used? A tax deferral certificate issued under this program is for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified buildings or qualified machinery and equipment as defined in this rule. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment. In addition, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller will be relieved of the responsibility for collection of the sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales.
For purposes of this rule, "certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(106) What are the processes of an investment project that is certified by the department as operationally complete? An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a tax deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
For purposes of this rule, "operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(a) What should a certificate holder do if its investment project reaches the estimated costs but the project is not yet operationally complete? If a certificate holder has an investment project that has reached its level of estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount upon which the deferral taxes are requested. Requests must be mailed or faxed to the department.
(b) What should a certificate holder do when its investment project is operationally complete? The certificate holder must notify the department in writing when the construction project is operationally complete. The department will certify the date on which the project is operationally complete. The certificate holder of the deferral must maintain the manufacturing or research and development activity for eight years from this date.
(107) Is a recipient of tax deferral required to submit annual surveys? Each recipient of a tax deferral granted under chapter 82.60 RCW after June 30, 1994, must complete an annual survey. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.60.020(4), the lessee must agree to complete the annual survey and the applicant is not required to complete the annual survey. Refer to WAC 458-20-268 (Annual surveys for certain tax adjustments) for more information on the requirements to file annual surveys.
(108) Is a recipient of tax deferral required to repay deferred taxes? Repayment of tax deferred under chapter 82.60 RCW is excused, except as otherwise provided in RCW 82.60.070 and this subsection.
(a) Is repayment required for machinery and equipment exempt under RCW 82.08.02565 or 82.12.02565? Repayment of tax deferred under chapter 82.60 RCW is not required, and interest and penalties under RCW 82.60.070 will not be imposed, on machinery and equipment that qualifies for exemption under RCW 82.08.02565 or 82.12.02565.
(b) When is repayment required? The following subsections describe the various circumstances under which repayment of the deferral may occur. Outstanding taxes are determined by reference to the following table. The table presumes the taxpayer maintained eligibility for the entire year.
Repayment Year
 
Percentage of
Deferred Tax Waived
1
(Year operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
Any action taken by the department to disqualify a recipient for tax deferral or assess interest will be subject to administrative review pursuant to the provisions of WAC 458-20-10001 (Adjudicative proceedings—Brief adjudicative proceedings—Certificate of registration (tax registration endorsement) revocation). The filing of a petition for review with the department starts a review of departmental action.
(i) Failure of investment project to satisfy general conditions. If, on the basis of the recipient's annual survey or other information, including that submitted by the employment security department, the department of revenue finds that an investment project is not eligible for tax deferral for reasons other than failure to create the required number of qualified employment positions, the department will declare the amount of deferred taxes outstanding to be immediately due. An example of a disqualification under this rule is a facility not being used for a manufacturing or research and development operation. No penalties or interest will be assessed on the deferred sales/use tax; however, all other penalties and interest applicable to excise tax assessments may be assessed and imposed.
(ii) Failure of investment project to satisfy required employment positions conditions. If, on the basis of the recipient's annual survey or other information, the department finds that an investment project has been operationally complete and has failed to create the required number of qualified employment positions under subsection (102)(i) of this rule, the amount of taxes deferred will be immediately due. There is no proration of the amount owed under this subsection. No penalties or interest will be assessed on the deferred sales/use tax; however, all other penalties and interest applicable to excise tax assessments may be assessed and imposed.
(109) When will the tax deferral program expire? No applications for deferral of taxes will be accepted after June 30, 2010.
(110) Is debt extinguishable because of insolvency or sale? Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes.
(111) Does transfer of ownership terminate tax deferral? Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of chapter 82.60 RCW, for the remaining periods of the deferral. Any person who becomes a successor (see WAC 458-20-216) to such investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral.
PART II
Applications from August 1, 1999, to March 31, 2004
(201) Definitions. The following definitions apply to applications made on and after August 1, 1999, and before April 1, 2004:
(a) "Acquisition of equipment or machinery" means the equipment and machinery is under the dominion and control of the recipient.
(b) "Applicant" means a person applying for a tax deferral under chapter 82.60 RCW.
(c) "Certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(d) "Computer-related services" means activities such as programming for the manufactured product. It includes creating operating systems, software, and other similar goods that will be copied and sold as canned software. "Computer-related services" does not include information services, such as data or information processing. The activities performed by the manufacturer to test, correct, revise, or upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services.
(e) "Date of application" means the date of the U.S. Post Office postmark, fax, or electronic transmittal, or when the application is hand delivered to the department. The statute in effect on the "date of application" will determine the program criteria the applicant must satisfy.
(f) "Department" means the department of revenue.
(g) "Eligible area" means:
(i) Rural county. A rural county is a county with fewer than 100 persons per square mile as determined annually by the office of financial management and published by the department of revenue effective for the period July 1st through June 30th; or
(ii) Community empowerment zone (CEZ). A "community empowerment zone" means an area meeting the requirements of RCW 43.31C.020 and officially designated as a CEZ by the director of the department of community, trade, and economic development or a county containing a CEZ.
(h) "Eligible investment project" means an investment project in an eligible area. "Eligible investment project" does not include an investment project undertaken by a light and power business as defined in RCW 82.16.010, other than 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. It also does not include an investment project that has already received a deferral under chapter 82.60 RCW.
(i) "Industrial fixture" means an item attached to a building or to land. Examples of "industrial fixtures" are fuel oil lines, boilers, craneways, and improvements to land such as concrete slabs.
(j) "Initiation of construction," in regards to the construction, expansion, or renovation of buildings, means the commencement of on-site construction work. Neither planning nor land clearing prior to excavation of the building site constitutes the commencement of on-site construction work.
(k) "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify.
(l) "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing also includes computer programming, the production of computer software, and other computer-related services, but only when the computer programming, production of computer software, or other computer-related services are performed by a manufacturer as defined in RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article of tangible personal property for sale; and the activities performed by research and development laboratories and commercial testing laboratories. (Chapter 16, Laws of 2010.)
(m) "Operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(n) "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.60 RCW. The lessor/owner of the structure is not eligible for deferral unless the underlying ownership of the buildings, machinery, or equipment vests in the lessor/owner, or unless the lessor has by written contract agreed to pass the economic benefit of the deferral to the lessee in the form of reduced rent payments.
(o) "Qualified buildings" means construction of new structures and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity, used for manufacturing and research and development activities.
"Qualified buildings" are limited to structures used for manufacturing and research and development activities. "Qualified buildings" include plant offices and warehouses if such facilities are essential to or an integral part of a factory, mill, plant, or laboratory. "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. "Warehouse" means buildings or facilities used for the storage of raw materials or finished goods.
(p) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. Full-time means at least 35 hours a week, 455 hours a quarter, or 1,820 hours a year.
(q) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing or research and development operation. "Qualified machinery and equipment" includes computers, desks, filing cabinets, photocopiers, printers, software, data processing equipment, laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
(r) "Recipient" means a person receiving a tax deferral under this program.
(s) "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun. As used in this subsection, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(t) "Resident" means the person who fills the qualified employment position makes his or her home in the CEZ. A mailing address alone is insufficient to establish that a person is a resident.
(202) Issuance of deferral certificate. The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral for which the recipient is eligible. Recipients must keep track of how much tax is deferred.
(203) Eligible investment amount. There may or may not be a hiring requirement, depending on the location of the project.
(a) No hiring requirements. There are no hiring requirements for qualifying projects located in counties with fewer than 100 persons per square mile. Monitoring and reporting procedures are explained in subsection (210) of this rule. Buildings that will be used partly for manufacturing or research and development and partly for other purposes are eligible for a deferral on a proportionate basis. Subsection (204) of this rule explains the procedure for apportionment.
(b) Hiring requirements. There are hiring requirements for qualifying projects located in CEZs or in counties containing CEZs. The applicant applies for a deferral of investment that correlates to the estimated number of persons to be hired based on the following formula:
Number of qualified employment positions to be hired x $750,000 = amount of investment eligible for deferral
Applicants must make good faith estimates of anticipated hiring. The recipient must fill the positions by persons who at the time of hire are residents of the CEZ. The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's internet website at http://www.dor.wa.gov. A recipient must fill the qualified employment positions by the end of the calendar year following the year in which the project is certified as operationally complete and retain the position during the entire tax year. If the recipient does not fill the qualified employment positions by the end of the second calendar year following the year in which the project is certified as operationally complete, all deferred taxes are immediately due.
(204) Apportionment of costs between qualifying and nonqualifying investments. The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of existing buildings used in manufacturing, research and development, or commercial testing laboratories.
(a) Where a building(s) is used partly for manufacturing or research and development and partly for purposes that do not qualify for deferral under this rule, the deferral will be determined by one of the following apportionment methods. The first method of apportionment is based on square footage and does not require tracking the costs of materials for the qualifying/nonqualifying areas of a building. The second method of apportionment tracks the costs of materials used in the qualifying/nonqualifying areas and is primarily used by those industries with specialized building requirements.
(i) The applicable tax deferral will be determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing or research and development purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent Eligible
Total square feet of building(s)
Percent Eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" means cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation. Common areas, such as hallways and bathrooms, are not included in the square feet figure for either the numerator or the denominator. The cost of the common areas is multiplied by the percent eligible to determine the portion of the common area that is eligible for deferral.
Eligible Tax Deferred = Eligible Cost x Tax Rate.
(ii) If a building is used partly for manufacturing, research and development, or commercial testing and partly for other purposes, the applicable tax deferral shall be determined as follows:
(A) Tax on the cost of construction of areas devoted solely to manufacturing, research and development, or commercial testing may be deferred.
(B) Tax on the cost of construction of areas not used at all for manufacturing, research and development, or commercial testing may not be deferred.
(C) Tax on the cost of construction of areas used in common for manufacturing, research and development, or commercial testing and for other purposes, such as hallways, bathrooms, and conference rooms, may be deferred by apportioning the costs of construction on a square footage basis. The apportioned costs of construction eligible for deferral are established by using the ratio, expressed as a percentage, of the square feet of the construction, expansion, or renovation devoted to manufacturing, research and development, or commercial testing, excluding areas used in common to the total square feet of the construction, expansion, or renovation, excluding areas used in common. That percentage is applied to the cost of construction of the common areas to determine the costs of construction eligible for tax deferral. Expressed as a formula, apportionment of the cost of the common areas is determined by:
Square feet devoted to manufacturing, research and development, or commercial testing, excluding square feet of common areas
=
Percentage of total cost of construction of common areas eligible for deferral
Total square feet, excluding square feet of common areas
(b) Qualified machinery and equipment is not subject to apportionment.
(205) Leased equipment. The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(206) Application procedure and review process. An application for sales and use tax deferral under this program must be made prior to the initiation of construction, prior to the acquisition of machinery and equipment, and prior to the filling of qualified employment positions. Persons who apply after construction is initiated or finished or after acquisition of machinery and equipment are not eligible for the program. Applications for persons subject to hiring requirements must include information regarding the estimated total project cost and the qualified employment positions.
(a) Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705.
Applications and reports received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. (RCW 82.60.100.)
(b) In considering whether to approve or deny an application for a deferral, the department will not approve an application for a project involving construction unless:
(i) The construction will begin within one year from the date of the application; or
(ii) If the construction will not begin within one year of application, the applicant shows proof that there is a specific and active program to begin construction of the project within two years from the date of application. Proof may include, but is not limited to:
(A) Affirmative action by the board of directors, governing body, or other responsible authority of the applicant toward an active program of construction;
(B) Itemized reasons for the proposed construction;
(C) Clearly established plans for financing the construction; or
(D) Building permits.
Similarly, after an application has been granted, a deferral certificate is no longer valid and should not be used if construction has not begun within one year from the date of application or there is not a specific and active program to begin construction within two years from the date of application. However, the department will grant requests to extend the period for which the certificate is valid if the holder of the certificate can demonstrate that the delay in starting construction is due to circumstances beyond the certificate holder's control such as the acquisition of building permit(s).
(c) The department will verify the information contained in the application and approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval.
(d) The applicant may seek administrative review of the department's disapproval of an application within 30 days from the date of notice of the disallowance pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(207) Eligible area criteria. The office of financial management will determine annually the counties with fewer than 100 persons per square mile. The department will update and distribute the list each year. The list will be effective on July 1 of each year.
If an investment project is located in an area that qualifies under more than one type of eligible area, the department will automatically assign the project to the eligible area that imposes the least burden on the taxpayer and with the greatest benefit to the taxpayer. If the applicant elects to be bound by the requirements of the other potential eligible area, the applicant must make a written statement to that effect. For example, on October 1, 1999, the city of Yakima qualifies as a CEZ, and the entire county of Yakima has fewer than 100 persons per square mile. The CEZ requirements are more restrictive than counties containing fewer than 100 persons per square mile. The department will assign the project to the "fewer than 100 persons per square mile designation" unless the applicant elects to be bound by the CEZ requirements.
(208) Use of the certificate. A tax deferral certificate issued under this program is for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified building or qualified machinery and equipment as defined in Part I. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment. In addition, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
The tax deferral certificate is to be used in a manner similar to that of a resale certificate as set forth in WAC 458-20-102, Resale certificates. The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller will be relieved of the responsibility for collection of the sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales.
(209) Project operationally complete. An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a tax deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
(a) If a certificate holder has reached its level of estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount upon which the deferral taxes are requested. Requests must be mailed or faxed to the department.
(b) The certificate holder must notify the department in writing when the construction project is operationally complete. The department will certify the date on which the project is operationally complete. The recipient of the deferral must maintain the manufacturing or research and development activity for eight years from this date.
(210) Reporting and monitoring procedure.
(a) Requirement to submit annual reports. Each recipient of a tax deferral under chapter 82.60 RCW must submit a report on December 31st of the year in which the investment project is certified by the department as having been operationally completed and on December 31st of each of the seven succeeding calendar years. The report must be made to the department in a form and manner prescribed by the department. If the recipient fails to submit a report or submits an inadequate or falsified report, the department may declare the amount of deferred taxes outstanding to be immediately due and payable. An inadequate or falsified report is one that contains material omissions or contains knowingly false statements and information.
(b) Requirement to submit annual surveys. Effective April 1, 2004, each recipient of a tax deferral granted under chapter 82.60 RCW after June 30, 1994, must complete an annual survey instead of an annual report. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.60.020(4), the lessee must agree to complete the annual survey and the applicant is not required to complete the annual survey. Refer to WAC 458-20-268 (Annual surveys for certain tax adjustments) for more information on the requirements to file annual surveys.
(211) Repayment of deferred taxes. Repayment of tax deferred under chapter 82.60 RCW is excused, except as otherwise provided in RCW 82.60.070 and this subsection.
(a) Repayment of tax deferred under chapter 82.60 RCW is not required, and interest and penalties under RCW 82.60.070 will not be imposed, on machinery and equipment that qualifies for exemption under RCW 82.08.02565 or 82.12.02565.
(b) The following subsections describe the various circumstances under which repayment of the deferral may occur. Outstanding taxes are determined by reference to the following table. The table presumes the taxpayer maintained eligibility for the entire year.
Repayment Year
 
Percentage of
Deferred Tax Waived
1
(Year operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
Any action taken by the department to disqualify a recipient for tax deferral or assess interest will be subject to administrative review pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(c) Failure of investment project to satisfy general conditions. If, on the basis of the recipient's annual report or other information, including that submitted by the employment security department, the department of revenue finds that an investment project is not eligible for tax deferral for reasons other than failure to create the required number of qualified employment positions, the department will declare the amount of deferred taxes outstanding to be immediately due. An example of a disqualification under this rule is a facility not being used for a manufacturing or research and development operation.
(d) Failure of investment project to satisfy required employment positions conditions. If, on the basis of the recipient's annual report or other information, the department finds that an investment project has been operationally complete and has failed to create the required number of qualified employment positions, the amount of taxes deferred will be immediately due. There is no proration of the amount owed under this subsection. No penalties or interest will be assessed on the deferred sales/use tax; however, all other penalties and interest applicable to excise tax assessments may be assessed and imposed.
(212) Debt not extinguished because of insolvency or sale. Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes. Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of chapter 82.60 RCW, for the remaining periods of the deferral. Any person who becomes a successor (see WAC 458-20-216) to such investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral.
(213) Disclosure of information. Applications and reports received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. (RCW 82.60.100.) Effective April 1, 2004, all information collected in annual surveys, except the amount of tax deferral taken, is confidential and not subject to disclosure. Information on the amount of tax deferral taken in annual surveys is not confidential and may be disclosed to the public upon request.
PART III
Applications from July 1, 1995, to July 31, 1999
(301) Definitions. For the purposes of this part, the following definitions apply for applications made on and after July 1, 1995, and before August 1, 1999:
(a) "Acquisition of equipment or machinery" means the equipment and machinery is under the dominion and control of the recipient.
(b) "Applicant" means a person applying for a tax deferral under chapter 82.60 RCW.
(c) "Certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(d) "Computer-related services" means services that are connected or interact directly in the manufacture of computer hardware or software or the programming of the manufactured hardware. This includes the manufacture of hardware such as chips, keyboards, monitors, any other hardware, and the components of these items. It includes creating operating systems and software that will be copied and sold as canned software. "Computer-related services" does not include information services. The activities performed by the manufacturer to test, correct, revise, or upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services.
(e) "Department" means the department of revenue.
(f) "Eligible area" means one of the areas designated according to the following classifications:
(i) Unemployment county. A county in which the average level of unemployment for the three calendar years preceding the year in which an application is filed exceeds the average state unemployment for those years by 20 percent. In making this calculation, the department will compare the county's average unemployment rate in the prior three years to 120 percent of the state's average unemployment rate based on official unemployment figures published by the department of employment security;
(ii) Median income county. On and after June 6, 1996, a county that has a median household income that is less than 75 percent of the state median income for the previous three years;
(iii) MSA. A metropolitan statistical area, as defined by the Office of Federal Statistical Policy and Standards, United States Department of Commerce, in which the average level of unemployment for the calendar year immediately preceding the year in which an application is filed under chapter 82.60 RCW exceeds the average state unemployment for such calendar year by 20 percent;
(iv) CEZ and county containing a CEZ. A designated community empowerment zone(CEZ) approved under RCW 43.63A.700 or a county containing such a community empowerment zone;
(v) Timber impact area towns. A town with a population of less than 1,200 persons that is located in a county that is a timber impact area, as defined in RCW 43.31.601, but that is not an unemployment county as defined in Part I;
(vi) Governor's designation county. A county designated by the governor as an eligible area under RCW 82.60.047; or
(vii) Contiguous county. A county that is contiguous to an unemployment county or a governor's designation county.
(g)(i) "Eligible investment project" means:
(A) An investment project in an unemployment county, a median income county, an MSA, a timber impact area town, or a governor's designation county; or
(B) That portion of an investment project in a CEZ, a county containing a CEZ, or a contiguous county, that is directly utilized to create at least one new full-time qualified employment position for each $750,000 of investment.
(ii) "Eligible investment project" does not include an investment project undertaken by a light and power business as defined in RCW 82.16.010, other than 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. It also does not include an investment project that has already received a deferral under chapter 82.60 RCW.
(h) "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.
(i) "Initiation of construction," in regards to the construction, expansion, or renovation of buildings, means the commencement of on-site construction work. Land clearing prior to excavation of the building site does not commence construction nor does planning commence construction.
(j) "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify.
(k) "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing, for purposes of the distressed area deferral program, also includes computer programming, the production of computer software, and other computer-related services, but only when the computer programming, production of computer software, or other computer-related services are performed by a manufacturer as defined under RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article of tangible personal property for sale; and the activities performed by research and development laboratories and commercial testing laboratories. (Chapter 16, Laws of 2010.)
(l) "Operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(m) "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.60 RCW. The lessor/owner of the structure is not eligible for deferral unless the underlying ownership of the buildings, machinery, or equipment vests exclusively in the lessor/owner, or unless the lessor has by written contract agreed to pass the economic benefit of the deferral to the lessee in the form of reduced rent payments.
(n) "Qualified buildings" means construction of new structures, and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity, used for manufacturing and research and development activities.
"Qualified buildings" are limited to structures used for manufacturing and research and development activities. "Qualified buildings" include plant offices and warehouses if such facilities are essential or an integral part of a factory, mill, plant, or laboratory. "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. "Warehouse" means facilities used for the storage of raw materials or finished goods.
(o) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. "Full time" means at least 35 hours a week, 455 hours a quarter, or 1,820 hours a year.
(p) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing or research and development operation. "Qualified machinery and equipment" includescomputers, desks, filing cabinets, photocopiers, printers, software, data processing equipment, laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
(q) "Recipient" means a person receiving a tax deferral under this program.
(r) "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun. As used in this subsection, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(302) Issuance of deferral certificate. The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral for which the recipient is eligible. Recipients must keep track of how much tax is deferred.
(303) Eligible investment amount. There may or may not be a hiring requirement, depending on the location of the project.
(a) No hiring requirements. There are no hiring requirements for qualifying projects located in distressed counties, MSAs, median income counties, governor-designated counties, or timber impact towns. Monitoring and reporting procedures are explained in subsection (310) of this rule. Buildings that will be used partly for manufacturing or research and development and partly for other purposes are eligible for a deferral on a proportionate basis. Subsection (304) of this rule explains the procedure for apportionment.
(b) Hiring requirements. There are hiring requirements for qualifying projects located in CEZs, in counties containing CEZs, or in contiguous counties. Total qualifying project costs, including any part of the project that would qualify under RCW 82.08.02565 and 82.12.02565, must be examined to determine the number of positions associated with the project. An applicant who knows at the time of application that he or she will not fill the required qualified employment positions is not eligible for the deferral. Applicants must make good faith estimates of anticipated hiring. The applicant applies for a deferral of investment that correlates to the estimated number of persons to be hired. The investment must include the sales price of machinery and equipment eligible for the sales and use tax exemption under RCW 82.08.02565 and 82.12.02565. An applicant can amend the number of persons hired until completion of the project. The qualified employment positions filled by December 31 of the year of completion are the benchmark to be used during the next seven years in determining hiring compliance.
(i) Total qualifying project costs are divided by 750,000, the result being the qualified employment positions.
(ii) In addition, the number of qualified employment positions created by an investment project will be reduced by the number of full-time employment positions maintained by the recipient in any other community in this state that are displaced as a result of the investment project. This reduction requires a reexamination of whether the 75 percent hiring requirement (as explained below) is met.
(iii) This number, which is the result of (i) and (ii) of this subsection, is the number of positions used as the benchmark over the life of the deferral. For recipients locating in a CEZ or a county containing a CEZ, 75 percent of the new positions must be filled by residents of a CEZ located in the county where the project is located. The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's internet website at http://www.dor.wa.gov. For recipients located in a contiguous county, residents of an adjacent unemployment or governor-designated county must fill 75 percent of the new positions.
(iv) The qualified employment positions are reviewed each year, beginning December 31st of the year the project is operationally complete and each year for seven years. If the recipient has failed to create the requisite number of positions, the department will issue an assessment as explained under subsection (311) of this rule.
(v) In addition to the hiring requirements for new positions under (b) of this subsection, the recipient of a deferral for an expansion or diversification of an existing facility must ensure that he or she maintains the same percentage of employment positions filled by residents of the contiguous county or the CEZ that existed prior to the application being made. This percentage must be maintained for seven years.
(vi) Qualified employment positions do not include those positions filled by persons hired in excess of the ratio of one employee per required dollar of investment for which a deferral is granted. In the event an employee is either voluntarily or involuntarily separated from employment, the employment position will be considered filled if the employer is either training or actively recruiting a replacement employee, so long as the position is not actually vacant for any period in excess of 30 consecutive days.
(304) Apportionment of costs between qualifying and nonqualifying investments. The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of existing buildings used in manufacturing, research and development, or commercial testing.
(a) Where a building(s) is used partly for manufacturing, research and development, or commercial testing and partly for purposes that do not qualify for deferral under this rule, the deferral will be determined by apportionment of the total project costs. The applicable tax deferral will be determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing, research and development, or commercial testing purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent Eligible
Total square feet of building(s)
Percent Eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" means cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation. Common areas, such as hallways and bathrooms, are not included in the square feet figure for either the numerator or the denominator. The cost of the common areas is multiplied by the percent eligible to determine the portion of the common area that is eligible for deferral.
Eligible Tax Deferred = Eligible Cost x Tax Rate.
(b) Qualified machinery and equipment is not subject to apportionment.
(305) Leased equipment. The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(306) Application procedure and review process. An application for sales and use tax deferral under this program must be made prior to the initiation of construction and the acquisition of machinery and equipment. Persons who apply after construction is initiated or after acquisition of machinery and equipment are not eligible for the program. Applications for persons subject to hiring requirements must include information regarding the estimated total project cost and the qualified employment positions.
(a) Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705.
(b) The department will verify the information contained in the application and approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval. The U.S. Post Office postmark or fax date will be used as the date of application.
(c) The applicant may seek administrative review of the department's disapproval of an application within 30 days from the date of notice of disallowance pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(307) Eligible area criteria. The statewide and county unemployment statistics last published by the department will be used to determine eligible areas based on unemployment. Median income county designation is based on data produced by the office of financial management and made available to the department on November 1 of each year. The timber impact town designation is based on information provided by the department of employment security.
If an investment project is located in an area that qualifies under more than one type of eligible area, the department will automatically assign the project to the eligible area that imposes the least burden on the taxpayer and with the greatest benefit to the taxpayer. If the applicant elects to be bound by the requirements of the other potential eligible area, the applicant must make a written statement to that effect. For example, on May 1, 1998, the city of Yakima qualifies as a CEZ, and the entire county of Yakima qualifies as an unemployment county. The CEZ requirements are more restrictive than the unemployment county requirements. The department will assign the project to the distressed area eligible area unless the applicant elected to be bound by the CEZ requirements.
(308) Use of the certificate. A tax deferral certificate issued under this program is for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified building or qualified machinery and equipment as defined in subsection (301) of this rule. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment. In addition, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
The tax deferral certificate is used in a manner similar to that of a resale certificate as set forth in WAC 458-20-102, Resale certificates. The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller is relieved of the responsibility for collection of the sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales.
(309) Project operationally complete. An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
(a)If a certificate holder has reached its level of estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount upon which the deferral is requested. Requests must be mailed or faxed to the department.
(b) The certificate holder must notify the department in writing when the construction project is operationally complete. The department will certify the date on which the project was operationally complete. The recipient of the deferral must maintain the manufacturing or research and development activity for eight years from this date.
(310) Reporting and monitoring procedure.
(a) Requirement to submit annual reports. Each recipient of a deferral granted after July 1, 1995, must submit a report to the department on December 31st of the year in which the investment project is certified by the department as having been operationally completed, and on December 31st of each of the seven succeeding calendar years. The report must be made to the department in a form and manner prescribed by the department. The report must contain information regarding the actual employment related to the project and any other information required by the department. If the recipient fails to submit a report or submits an inadequate or falsified report, the department may declare the amount of deferred taxes outstanding to be immediately due and payable. An inadequate or falsified report is one that contains material omissions or contains knowingly false statements and information.
(b) Requirement to submit annual surveys. Effective April 1, 2004, each recipient of a tax deferral granted under chapter 82.60 RCW after June 30, 1994, must complete an annual survey instead of an annual report. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.60.020(4), the lessee must agree to complete the annual survey and the applicant is not required to complete the annual survey. Refer to WAC 458-20-268 (Annual surveys for certain tax adjustments) for more information on the requirements to file annual surveys.
(311) Repayment of deferred taxes. Repayment of tax deferred under chapter 82.60 RCW is excused, except as otherwise provided in RCW 82.60.070 and this subsection, on an investment project for which a deferral has been granted under chapter 82.60 RCW after June 30, 1994.
(a) Taxes deferred under this chapter need not be repaid on machinery and equipment for lumber and wood product industries, and sales of or charges made for labor and services, of the type which qualified for exemption under RCW 82.08.02565 or 82.12.02565.
(b) The following describes the various circumstances under which repayment of the deferral may be required. Outstanding taxes are determined by reference to the following table. The table presumes the taxpayer maintained eligibility for the entire year.
Repayment Year
 
Percentage of
Deferred Tax Waived
1
(Year operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
Any action taken by the department to disqualify a recipient for tax deferral or require payment of all or part of deferred taxes is subject to administrative review pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action. See subsection (24)(d) of this rule for repayment and waiver for deferrals with hiring requirements.
(c) Failure of investment project to satisfy general conditions. If, on the basis of the recipient's annual report or other information, including that submitted by the department of employment security, the department finds that an investment project is not eligible for tax deferral for reasons other than failure to create the required number of qualified employment positions, the department will declare the amount of deferred taxes outstanding to be immediately due. For example, a reason for disqualification would be that the facilities are not used for a manufacturing or research and development operation.
(d) Failure of investment project to satisfy required employment positions conditions. If, on the basis of the recipient's annual report or other information, the department finds that an investment project has been operationally complete for three years and has failed to create the required number of qualified employment positions, the amount of taxes deferred will be immediately due. The department will assess interest at the rate and as provided for delinquent excise taxes under RCW 82.32.050 (retroactively to the date the application was filed). There is no proration of the amount owed under this subsection. No penalties will be assessed.
(e) Failure of investment project to satisfyemployee residency requirements. If, on the basis of the recipient's annual report or other information, the department finds that an investment project under RCW 82.60.040 (1)(b) or (c) has failed to comply with any requirement of RCW 82.60.045 for any calendar year for which reports are required under this subsection, 12.5 percent of the amount of deferred taxes will be immediately due. For each year a deferral's requirements are met 12.5 percent of the amount of deferred taxes will be waived. The department will assess interest at the rate provided for delinquent excise taxes under RCW 82.32.050, retroactively to the date the application was filed. Each year the employment requirement is met, 12.5 percent of the deferred tax will be waived, if all other program requirements are met. No penalties will be assessed.
(f) The department of employment security makes and certifies to the department all determinations of employment and wages required under this subsection.
(312) Debt not extinguished because of insolvency or sale. Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes. Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of this chapter, for the remaining periods of the deferral. Any person who becomes a successor (see WAC 458-20-216) to such investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient.
(313) Disclosure of information. Applications and reports received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. (RCW 82.60.100.) Effective April 1, 2004, all information collected in annual surveys, except the amount of tax deferral taken, is confidential and not subject to disclosure. Information on the amount of tax deferral taken in annual surveys is not confidential and may be disclosed to the public upon request.
PART IV
Applications from July 1, 1994, to June 30, 1995
(401) Definitions. For the purposes of this part, the following definitions apply for applications made on and after July 1, 1994, and before July 1, 1995.
(a) "Acquisition of equipment or machinery" means the date the equipment and machinery is under the dominion and control of the recipient.
(b) "Applicant" means a person applying for a tax deferral under chapter 82.60 RCW.
(c) "Certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(d) "Computer-related services" means services that are connected or interact directly in the manufacture of computer hardware or software or the programming of the manufactured hardware. This includes the manufacture of hardware such as chips, keyboards, monitors, any other hardware, and the components of these items. It includes creating operating systems and software that will be copied and sold as canned software. "Computer-related services" does not include information services. The activities performed by the manufacturer to test, correct, revise, and upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services in this instance.
(e) "Department" means the department of revenue.
(f) "Eligible area" means:
(i) Unemployment county. A county in which the average level of unemployment for the three calendar years preceding the year in which an application is filed exceeds the average state unemployment for those years by 20 percent. The department may compare the county's average unemployment rate in the prior three years to 120 percent of the state's average unemployment rate based on official unemployment figures published by the department of employment security;
(ii) MSA. A metropolitan statistical area, as defined by the Office of Federal Statistical Policy and Standards, United States Department of Commerce, in which the average level of unemployment for the calendar year immediately preceding the year in which an application is filed under chapter 82.60 RCW exceeds the average state unemployment for such calendar year by 20 percent;
(iii) CEZ. A designated community empowerment zone approved under RCW 43.63A.700;
(iv) Timber impact area towns. A town with a population of less than 1,200 persons that is located in a county that is a timber impact area, as defined in RCW 43.31.601, but that is not an unemployment county as defined in this subsection;
(v) Contiguous county. A county that is contiguous to an unemployment county or a governor's designation county; or
(vi) Governor's designation county. A county designated by the governor as an eligible area under RCW 82.60.047.
(g)(i) "Eligible investment project" means that portion of an investment project which:
(A) Is directly utilized to create at least one new full-time qualified employment position for each $750,000 of investment on which a deferral is requested; and
(B) Either initiates a new operation, or expands or diversifies a current operation by expanding, equipping, or renovating an existing facility with costs in excess of 25 percent of the true and fair value of the facility prior to improvement. "Improvement" means the physical alteration by significant expansion, modernization, or renovation of an existing facility, excluding land, where the cost of such expansion, etc., exceeds 25 percent of the true and fair value of the existing facility prior to the initiation of the expansion or renovation. The term "improvement" is further defined to include those portions of an existing facility which do not increase the usable floor space, but is limited to the renovation, modernization, or any other form of alteration or addition and the equipment and machinery installed therein during the course of construction. The 25 percent test may be satisfied by considering the value of both the building and machinery and equipment; however, at least 40 percent of the total renovation costs must be attributable to the physical renovation of the building structure alone. "True and fair value" means the value listed on the assessment roles as determined by the county assessor for the buildings or equipment for ad valorem property tax purposes at the time of application.
(ii) "Eligible investment project" does not include either an investment project undertaken by a light and power business as defined in RCW 82.16.010, other than cogeneration projects that are both an integral part of a manufacturing facility and owned at least 50 percent by the manufacturer, or investment projects that have already received deferrals under chapter 82.60 RCW.
(h) "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.
(i) "Initiation of construction," in regards to the construction of new buildings, means the commencement of on-site construction work.
(j) "Initiation of construction," in regards to the construction of expanding or renovating existing structures for the purpose of increasing floor space or production capacity used for manufacturing and research and development, means the commencement of the new construction by renovation, modernization, or expansion, by physical alteration.
(k) "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project. A person who does not build or remodel his or her own building, but leases from a third party, is eligible for sales and use tax deferral on the machinery and equipment provided that an investment in qualified machinery and equipment is made by such person and a new structure used to house the manufacturing activities is constructed.
(l) "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing, for purposes of the distressed area deferral program, also includes computer programming, the production of computer software, and other computer-related services, but only when the computer programming, production of computer software, or other computer-related services are performed by a manufacturer as defined in RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article of tangible personal property for sale; and the activities performed by research and development laboratories and commercial testing laboratories. (Chapter 16, Laws of 2010.)
(m) "Operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(n) "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.60 RCW. The lessor/owner of the structure is not eligible for deferral unless the underlying ownership of the buildings, machinery, or equipment vests exclusively in the lessor/owner, or unless the lessor has by written contract agreed to pass the economic benefit of the deferral to the lessee in the form of reduced rent payments.
(o) "Qualified buildings" are limited to structures used for manufacturing and research and development activities. "Qualified buildings" include plant offices and warehouses if such facilities are essential or an integral part of a factory, mill, plant, or laboratory. "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. "Warehouse" means facilities used for the storage of raw materials or finished goods.
(p) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. "Full time" means at least 35 hours per week, 455 hours a quarter, or 1,820 hours a year.
(q) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing operation or research and development operation. "Qualified machinery and equipment" includes: Computers, software, data processing equipment, laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
(r) "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun. As used in this subsection, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(s) "Recipient" means a person receiving a tax deferral under this program.
(402) Issuance of deferral certificate. The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral for which the recipient is eligible. Recipients must keep track of how much tax is deferred.
(403) Eligible investment amount.
(a) Projects located in unemployment counties, MSAs, governor-designated counties, or timber impact towns are eligible for a deferral on the portion of the investment project that represents one new qualified employment position for each $750,000 of investment. The eligible amount is computed by dividing the total qualifying project costs by 750,000, the result being the qualified employment positions. In addition, the number of qualified employment positions created by an investment project will be reduced by the number of full-time employment positions maintained by the recipient in any other community in this state that are displaced as a result of the investment project. This is the number of positions used as the hiring benchmark. The qualified employment positions must be filled by the end of year three. Monitoring and reporting procedures are set forth in subsection (410) of this rule. In addition, buildings that will be used partly for manufacturing or research and development and partly for other purposes are eligible for a deferral on a proportionate basis. Subsection (404) of this rule explains the procedure for apportionment.
(b) Projects located in CEZs, counties containing CEZs, or counties contiguous to an eligible county, are eligible for a deferral if the project meets specific hiring requirements. The recipient is eligible for a deferral on the portion of the investment project that represents one new qualified employment position for each $750,000 of investment. The eligible amount is computed by dividing the total qualifying project costs by 750,000, the result being the qualified employment positions. This is the number of positions used as the hiring benchmark over the life of the deferral. The qualified employment positions are reviewed each year, beginning December 31st of the year the project is operationally complete and each year for seven years. Monitoring and reporting procedures are set forth in subsection (410) of this rule. In addition, buildings that will be used partly for manufacturing or research and development and partly for other purposes are eligible for a deferral on a proportionate basis. Subsection (404) of this rule explains the procedure for apportionment.
(c) In addition to the hiring requirements for new positions under (b) of this subsection, the recipient of a deferral for an expansion or diversification of an existing facility must ensure that he or she maintains the same percentage of employment positions filled by residents of the contiguous county or the CEZ that existed prior to the application being made. This percentage must be maintained for seven years. The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's internet website at www.dor.wa.gov.
(d) Qualified employment positions does not include those persons hired in excess of the ratio of one employee per required dollar of investment for which a deferral is granted. In the event an employee is either voluntarily or involuntarily separated from employment, the employment position will be considered filled if the employer is either training or actively recruiting a replacement employee so long as the position is not actually vacant for any period in excess of 30 consecutive days.
(404) Apportionment of costs between qualifying and nonqualifying investments. The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of existing buildings used in manufacturing, research and development.
(a) Where a building(s) is used partly for manufacturing or research and development and partly for purposes which do not qualify for deferral under this rule, the deferral will be determined by apportionment of the total project costs. The applicable tax deferral will be determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing or research and development purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent Eligible
Total square feet of building(s)
Percent Eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" means cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation. Common areas, such as hallways and bathrooms, are not included in the square feet figure for either the numerator or the denominator. The cost of the common areas is multiplied by the percent eligible to determine the portion of the common area that is eligible for deferral.
Eligible Tax Deferred = Eligible Cost x Tax Rate.
(b) Qualified machinery and equipment is not subject to apportionment.
(405) Leased equipment. The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(406) Application procedure and review process. An application for sales and use tax deferral under this program must be made prior to the initiation of construction and the acquisition of machinery and equipment. Persons who apply after construction is initiated or after acquisition of machinery and equipment are not eligible for the program.
(a) Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705.
(b) The department will verify the information contained in the application and approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval. The U.S. Post Office postmark or fax date will be used as the date of application.
(c) The applicant may seek administrative review of the department's disapproval of an application within 30 days from the date of notice of disallowance pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(407) Eligible area criteria. The department will use the statewide and county unemployment statistics as last published by the department. Timber impact town designation is based on information provided by the department of employment security. The department will update the list of eligible areas by county, annually.
(408) Use of the certificate. A tax deferral certificate issued under this program will be for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified buildings or qualified machinery and equipment as defined in subsection (401) of this rule. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment. In addition, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient. The tax deferral certificate is be used in a manner similar to that of a resale certificate as set forth in WAC 458-20-102, Resale certificates. The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller will be relieved of the responsibility for collection of the sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales.
(409) Project operationally complete. An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a tax deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
(a) If a certificate holder has reached its level of estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount upon which the deferral of sales and use taxes is requested. Requests must be mailed or faxed to the department.
(b) The certificate holder must notify the department in writing when the construction project is operationally complete. The department will certify the date on which the project was operationally complete. The recipient of the deferral must maintain the manufacturing or research and development activity for eight years from this date.
(c) The recipient will be notified in writing of the total amount of deferred taxes, the date(s) upon which the deferred taxes must be paid, and any reports required to be submitted in the subsequent years. If the department disallows any portion of the amount of sales and use taxes requested for deferral, the recipient may seek administrative review of the department's action within 30 days from the date of the notice of disallowance pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(410) Reporting and monitoring procedure.
(a) Requirement to submit annual reports. Each recipient of a sales and use tax deferral must submit a report to the department on December 31st of the year in which the investment project is certified by the department as having been operationally completed, and on December 31st of each of the seven succeeding calendar years. The report must be made to the department in a form and manner prescribed by the department. The report must contain information regarding the actual employment related to the project and any other information required by the department. If the recipient fails to submit a report or submits an inadequate or falsified report, the department may declare the amount of deferred taxes outstanding to be immediately due and payable. An inadequate or falsified report is one that contains material omissions or contains knowingly false statements and information.
(b) Requirement to submit annual surveys. Effective April 1, 2004, each recipient of a tax deferral granted under chapter 82.60 RCW after June 30, 1994, must complete an annual survey instead of an annual report. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.60.020(4), the lessee must agree to complete the annual survey and the applicant is not required to complete the annual survey. Refer to WAC 458-20-268 (Annual surveys for certain tax adjustments) for more information on the requirements to file annual surveys.
(411) Repayment of deferred taxes. Repayment of tax deferred under chapter 82.60 RCW is excused, except as otherwise provided in RCW 82.60.070 and this subsection on an investment project for which a deferral has been granted under chapter 82.60 RCW after June 30, 1994.
(a) The following describes the various circumstances under which repayment of the deferral may be required. Outstanding taxes are determined by reference to the following table. The table presumes the taxpayer maintained eligibility for the entire year. See subsection (c) for repayment and waiver for deferrals with hiring requirements.
Repayment Year
 
Percentage of
Deferred Tax Waived
1
(Year operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
Any action taken by the department to disqualify a recipient for tax deferral or require payment of all or part of deferred taxes is subject to administrative review pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(b) Failure of investment project to satisfy general conditions. If, on the basis of the recipient's annual report or other information, including that submitted by the department of employment security, the department finds that an investment project is not eligible for tax deferral, other than failure to create the required number of positions, the department will declare the amount of deferred taxes outstanding to be immediately due. For example, a reason for disqualification would be that the facility is not used for manufacturing or research and development operations.
(c) Failure of investment project to satisfy employment positions conditions. If, on the basis of the recipient's annual report or other information, the department finds that an investment project has been operationally complete for three years and has failed to create the required number of qualified employment positions, the amount of taxes deferred will be immediately due. The department will assess interest at the rate and as provided for delinquent excise taxes under RCW 82.32.050 (retroactively to the date of deferral). No penalties will be assessed.
(d) Failure of investment project to satisfy employee residency requirements. If, on the basis of the recipient's annual report or other information, the department finds that an investment project under RCW 82.60.040 (1)(b) or (c) has failed to comply with the special hiring requirements of RCW 82.60.045 for any calendar year for which reports are required under this subsection, 12.5 percent of the amount of deferred taxes will be immediately due. For each year a deferral's requirements are met 12.5 percent of the amount of deferred taxes will be waived. The department will assess interest at the rate provided for delinquent excise taxes under RCW 82.32.050, retroactively to the date of deferral. No penalties will be assessed.
(e) The department of employment security makes and certifies to the department all determinations of employment and wages required under this subsection, per request.
(412) Debt not extinguished because of insolvency or sale. Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes. Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of this chapter, for the remaining periods of the deferral. Any person who becomes a successor (see WAC 458-20-216) to such investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient.
(413) Disclosure of information. Applications and reports received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. (RCW 82.60.100.) Effective April 1, 2004, all information collected in annual surveys, except the amount of tax deferral taken, is confidential and not subject to disclosure. Information on the amount of tax deferral taken in annual surveys is not confidential and may be disclosed to the public upon request.
PART V
Applications from July 1, 1992, to June 30, 1994
(501) Definitions. For the purposes of this part, the following definitions apply for applications made after July 1, 1992, but before July 1, 1994:
(a) "Acquisition of equipment or machinery" means the equipment and machinery is under the dominion and control of the recipient.
(b) "Applicant" means a person applying for a tax deferral under chapter 82.60 RCW.
(c) "Certificate holder" means an applicant to whom a tax deferral certificate has been issued.
(d) "Computer-related services" means services that are connected or interact directly in the manufacture of computer hardware or software or the programming of the manufactured hardware. This includes the manufacture of hardware such as chips, keyboards, monitors, any other hardware, and the components of these items. It includes creating operating systems and software that will be copied and sold as canned software. "Computer-related services" does not include information services. The activities performed by the manufacturer to test, correct, revise, and upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services in this instance.
(e) "Department" means the department of revenue.
(f) "Eligible area" means:
(i) Unemployment county. A county in which the average level of unemployment for the three calendar years preceding the year in which an application is filed exceeds the average state unemployment for those years by 20 percent. The department may compare the county's average unemployment rate in the prior three years to 120 percent of the state's average unemployment rate based on official unemployment figures published by the department of employment security;
(ii) MSA. A metropolitan statistical area, as defined by the Office of Federal Statistical Policy and Standards, United States Department of Commerce, in which the average level of unemployment for the calendar year immediately preceding the year in which an application is filed under chapter 82.60 RCW exceeds the average state unemployment for such calendar year by 20 percent; or
(iii) CEZ. Beginning July 1, 1993, a designated community empowerment zone approved under RCW 43.63A.700.
(g)(i) "Eligible investment project" means that portion of an investment project which:
(A) Is directly utilized to create at least one new full-time qualified employment position for each $300,000 of investment on which a deferral is requested; and
(B) Either initiates a new operation, or expands or diversifies a current operation by expanding, or renovating an existing building with costs in excess of 25 percent of the true and fair value of the plant complex prior to improvement. "Improvement" means the physical alteration by significant expansion, modernization, or renovation of an existing plant complex, excluding land, where the cost of such expansion, etc., exceeds 25 percent of the true and fair value of the existing plant complex prior to the initiation of the expansion or renovation. The term "improvement" is further defined to include those portions of an existing building which do not increase the usable floor space, but is limited to the renovation, modernization, or any other form of alteration or addition and the equipment and machinery installed therein during the course of construction. The 25 percent test may be satisfied by considering the value of both the building and machinery and equipment; however, at least 40 percent of the total renovation costs must be attributable to the physical renovation of the building structure alone. "True and fair value" means the value listed on the assessment rolls as determined by the county assessor for the land, buildings, or equipment for ad valorem property tax purposes at the time of application; or
(C) Acquires machinery and equipment to be used for either manufacturing or research and development. The lessor/owner of the structure is not eligible for a deferral unless the underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person.
(ii) "Eligible investment project" does not include any portion of an investment project undertaken by a light and power business as defined in RCW 82.16.010 or investment projects that have already received deferrals under chapter 82.60 RCW.
(h) "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.
(i) "Initiation of construction," in regards to the construction of new buildings, means the commencement of on-site construction work.
(j) "Initiation of construction," in regards to the construction of expanding or renovating existing structures for the purpose of increasing floor space or production capacity used for manufacturing and research and development, means the commencement of new construction by renovation, modernization, or expansion, by physical alteration.
(k) "Investment project" means an investment in qualified buildings and qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project.
(l) "Manufacturing" has the meaning given in RCW 82.04.120. Manufacturing, for purposes of the distressed area deferral program, also includes computer programming, the production of computer software, and other computer-related services, but only when the computer programming, production of computer software, or other computer-related services are performed by a manufacturer as defined in RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article of tangible personal property for sale; and the activities performed by research and development laboratories and commercial testing laboratories. (Chapter 16, Laws of 2010.)
(m) "Operationally complete" means the project is capable of being used for its intended purpose as described in the application.
(n) "Person" has the meaning given in RCW 82.04.030. "Person" does not include the state of Washington or its institutions. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of this chapter. The lessor/owner of the structure is not eligible for deferral unless the underlying ownership of the buildings, machinery, or equipment vests in the lessor/owner.
(o) "Qualified buildings" are limited to structures used for manufacturing and research and development activities. "Qualified buildings" include plant offices and warehouses if such facilities are essential or an integral part of a factory, mill, plant, or laboratory. "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building, its use must be essential or integral to the manufacturing or research and development operation. Office space that is used by supervisors and their staff, by technicians, by payroll staff, by the safety officer, and by the training staff are examples of qualifying office space. "Warehouse" means facilities used for the storage of raw materials or finished goods.
(p) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The "entire tax year" means the full-time position is filled for a period of 12 consecutive months. "Full time" means at least 35 hours a week, 455 hours a quarter, or 1,820 hours a year.
(q) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a manufacturing operation or research and development operation. "Qualified machinery and equipment" includes: Computers, software, data processing equipment, laboratory equipment; manufacturing components such as belts, pulleys, shafts and moving parts; molds, tools and dies; operating structures; and all equipment used to control or operate machinery. It also includes machinery and equipment acquired under the terms of a long- or short-term lease by the recipient. "New" as used in this subsection means either new to the taxing jurisdiction of the state or new to the certificate holder.
(r) "Recipient" means a person receiving a tax deferral under this program.
(s) "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun. As used in this subsection, "commercial sales" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(502) Issuance of deferral certificate. The department will issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW for an eligible investment project. The department will state on the certificate the amount of tax deferral for which the recipient is eligible. Recipients must keep track of how much deferral is taken.
(503) Eligible investment amount. Recipients are eligible for a deferral on investment used to create employment positions.
(a) Total qualifying project costs must be examined to determine the number of positions associated with the project. Total qualifying project costs are divided by 300,000, the result being the qualified employment positions. This is the number of positions used as the hiring benchmark at the end of year three. The qualified employment positions are reviewed in the third year, following December 31st of the year the project is operationally complete. If the recipient has failed to create the requisite number of positions, the department will issue an assessment under subsection (511) of this rule. Buildings that will be used partly for manufacturing or research and development and partly for other purposes are eligible for a deferral on a proportionate basis. Subsection (504) of this rule explains the procedure for apportionment.
(b) Qualified employment positions does not include those persons hired in excess of the ratio of one employee per required dollar of investment for which a deferral is granted. In the event an employee is either voluntarily or involuntarily separated from employment, the employment position will be considered filled if the employer is either training or actively recruiting a replacement employee so long as the position is not actually vacant for any period in excess of 30 consecutive days.
(504) Apportionment of costs between qualifying and nonqualifying investments. The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of existing buildings directly used in manufacturing, research and development, or commercial testing laboratories.
(a) Where a building(s) is used partly for manufacturing or research and development, or commercial testing and partly for purposes, which do not qualify for deferral under this rule, the deferral will be determined by apportionment of the total project costs. The applicable tax deferral will be determined by apportionment according to the ratio of the square footage of that portion of the building(s) directly used for manufacturing or research and development purposes bears to the square footage of the total building(s).
Apportionment formula:
Eligible square feet of building(s)
=
Percent Eligible
Total square feet of building(s)
Percent Eligible x Total Project Costs = Eligible Costs.
"Total Project Costs" means cost of multipurpose buildings and other improvement costs associated with the deferral project. Machinery and equipment are not included in this calculation. Common areas, such as hallways and bathrooms, are not included in the square feet figure for either the numerator or the denominator. The cost of the common areas is multiplied by the percent eligible to determine the portion of the common area that is eligible for deferral.
Eligible Tax Deferred = Eligible Cost x Tax Rate.
(b) Qualified machinery and equipment is not subject to apportionment.
(505) Leased equipment. The amount of tax deferral allowable for leased equipment is the amount of the consideration paid by the recipient to the lessor over the initial term of the lease, excluding any period of extension or option to renew, up to the last date for repayment of the deferred taxes. After that date the recipient must pay the appropriate sales taxes to the lessor for the remaining term of the lease.
(506) Application procedure and review process. An application for sales and use tax deferral under this program must be made prior to the initiation of construction and the acquisition of equipment or machinery. Persons who apply after construction is initiated or finished or after acquisition of machinery and equipment are not eligible for the program.
(a) Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705.
(b) The department will verify the information contained in the application and either approve or disapprove the application within 60 days. If approved, the department will issue a tax deferral certificate. If disapproved, the department will notify the applicant as to the reason(s) for disapproval. The U.S. Post Office postmark or fax date will be used as the date of application.
(c) The applicant may seek administrative review of the department's refusal to issue a certificate pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews), within 30 days from the date of notice of the department's refusal, or within any extension of such time granted by the department. The filing of a petition for review with the department starts a review of departmental action.
(507) Unemployment criteria. For purposes of making application for tax deferral and of approving such applications, the statewide and county unemployment statistics last published by the department will be used to determine eligible areas. The department will update the list of eligible areas by county, on an annual basis.
(508) Use of the certificate. A tax deferral certificate issued under this program is for the use of the recipient for deferral of sales and use taxes due on each eligible investment project. Deferral is limited only to investment in qualified buildings or qualified machinery and equipment as defined in subsection (501) of this rule. Thus, sales and use taxes cannot be deferred on items that do not become part of the qualified buildings, machinery, or equipment.
The tax deferral certificate is to be used in a manner similar to that of a resale certificate as set forth in WAC 458-20-102, Resale certificates. The certificate holder must provide a copy of the tax deferral certificate to the seller at the time goods or services are purchased. The seller will be relieved of the responsibility for collection of the sales or use tax upon presentation of the certificate. The seller must retain a copy of the certificate as part of its permanent records for a period of at least five years. A blanket certificate may be provided by the certificate holder and accepted by the seller covering all such purchases relative to the eligible project. The seller is liable for business and occupation tax on all tax deferral sales. The deferral certificate is to defer the taxes of the recipient. For example, the deferral is not to be used to defer the taxes of the persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
(509) Project operationally complete. An applicant must provide the department with the estimated cost of the investment project at the time the application is made. Following approval of the application and issuance of a tax deferral certificate, a certificate holder must notify the department, in writing, when the value of the investment project reaches the estimated cost as stated on the tax deferral certificate.
(a) If a certificate holder has reached its level of estimated costs and the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount upon which the deferral of sales and use taxes is requested. Requests must be mailed or faxed to the department.
(b) The certificate holder must notify the department in writing when the construction project is operationally complete. The department will certify the date on which the project was operationally complete. The recipient of the deferral must maintain the manufacturing or research and development activity for eight years from this date.
(c) The recipient will be notified in writing of the total amount of deferred taxes, the date(s) upon which the deferred taxes must be paid, and any reports required to be submitted in the subsequent years. If the department disallows all or any portion of the amount of sales and use taxes requested for deferral, the recipient may seek administrative review of the department's action pursuant to the provisions of WAC 458-20-100, within 30 days from the date of the notice of disallowance.
(510) Reporting and monitoring procedure. Requirement to submit annual reports. Each recipient of a sales and use tax deferral must submit a report to the department on December 31st of each year during the repayment period until the tax deferral is repaid. The report must be made to the department in a form and manner prescribed by the department. The report must contain information regarding the actual employment related to the project and any other information required by the department. If the recipient fails to submit a report or submits an inadequate or falsified report, the department may declare the amount of deferred taxes outstanding to be immediately assessed and payable. An inadequate or falsified report is one that contains material omissions or contains knowingly false statements and information.
(511) Repayment of deferred taxes. The recipient must begin paying the deferred taxes in the third year after the date certified by the department as the date on which the construction project has been operationally completed.
(a) The first payment will be due on December 31st of the third calendar year after such certified date, with subsequent annual payments due on December 31st of the following four years, with amounts of payment scheduled as follows:
Repayment Year
 
Percentage of
Deferred Tax Repaid
1
(Year certified operationally complete)
0%
2
 
0%
3
 
0%
4
 
10%
5
 
15%
6
 
20%
7
 
25%
8
 
30%
(b) The department may authorize an accelerated repayment schedule upon request of the recipient. Interest will not be charged on any taxes deferred under this part during the period of deferral, although other penalties and interest applicable to delinquent excise taxes may be assessed and imposed for any delinquent payments during the repayment period pursuant to chapter 82.32 RCW.
(c)Taxes deferred on the sale or use of labor directly applied in the construction of an investment project for which deferral has been granted need not be repaid, provided eligibility for the granted tax deferral has been perfected by meeting all of the eligibility requirements, based upon the recipient's annual December 31st reports and any other information available to the department. The recipient must establish, by clear and convincing evidence, the value of all construction and installation labor for which repayment of sales tax is sought to be excused. Such evidence must include, but is not limited to: A written, signed, and dated itemized billing from construction/installation contractors or independent third party labor providers which states the value of labor charged separately from the value of materials. This information must be maintained in the recipient's permanent records for the department's review and verification. In the absence of such itemized billings in its permanent records, no recipient may be excused from repayment of sales tax on the value of labor in an amount exceeding 30 percent of its gross construction or installation contract charges. The value of labor for which an excuse from repayment of sales or use tax may be received will not exceed the value which is subject to such taxes under the general provisions of chapters 82.08 and 82.12 RCW.
(d) Failure of investment project to satisfy general conditions. If, on the basis of the recipient's annual report or other information, including that submitted by the department of employment security, the department finds that an investment project is not eligible for tax deferral for reasons other than failure to create the required number of qualified employment positions, the department will declare the amount of deferred taxes outstanding to be immediately due. For example, a reason for disqualification would be the facility is not used for a manufacturing or research and development operation.
(e) Failure of investment project to satisfy required employment positions. If, on the basis of the recipient's annual report or other information, the department finds that an investment project has been operationally complete for three years and has failed to create the required number of qualified employment positions, the department will assess interest but not penalties, on the deferred taxes for the project. The department will assess interest at the rate provided for delinquent excise taxes under RCW 82.32.050, retroactively to the date of the date of deferral. No penalties will be assessed.
(f) The department of employment security makes and certifies to the department all determinations of employment and wages required under this subsection, per request.
(g) Any action taken by the department to assess interest or disqualify a recipient for tax deferral will be subject to administrative review pursuant to the provisions of WAC 458-20-100 (Informal administrative reviews). The filing of a petition for review with the department starts a review of departmental action.
(512) Debt not extinguished because of insolvency or sale. Insolvency or other failure of the recipient does not extinguish the debt for deferred taxes nor will the sale, exchange, or other disposition of the recipient's business extinguish the debt for the deferred taxes. Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of this chapter, for the remaining periods of the deferral. Any person who becomes a successor (see WAC 458-20-216) to such investment project will be liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient.
(513) Disclosure of information. Applications and reports received by the department under chapter 82.60 RCW are not confidential and are subject to disclosure. (RCW 82.60.100.)
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-24001A, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-24001A, filed 5/27/16, effective 6/27/16; WSR 10-21-052, § 458-20-24001A, filed 10/14/10, effective 11/14/10; WSR 06-17-007, § 458-20-24001A, filed 8/3/06, effective 9/3/06; WSR 04-01-127, § 458-20-24001A, filed 12/18/03, effective 1/18/04. Statutory Authority: RCW 82.32.300. WSR 01-12-041, § 458-20-24001A, filed 5/30/01, effective 6/30/01.]


PDF458-20-24003

Tax incentives for high technology businesses.

(1) Introduction. This rule explains the tax incentives, contained in chapter 82.63 RCW and RCW 82.04.4452, which apply to businesses engaged in research and development or pilot scale manufacturing in Washington in five high technology areas: Advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology. Eligibility for high technology or research and development tax incentives offered by the federal government or any other jurisdiction does not establish eligibility for Washington's programs.
This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results in all situations must be determined after a review of all facts and circumstances. Assume all the examples below occur on or after June 10, 2004, unless otherwise indicated.
(2) Organization of the rule. The information provided in this rule is divided into three parts.
(a) Part I provides information on the sales and use tax deferral program under chapter 82.63 RCW.
(b) Part II provides information on the sales and use tax exemption available for persons engaged in certain construction activities for the federal government under RCW 82.04.190(6).
(c) Part III provides information on the business and occupation tax credit on research and developing spending under RCW 82.04.4452.
PART I
SALES AND USE TAX DEFERRAL PROGRAM
(3) Who is eligible for the sales and use tax deferral program? A person engaged in qualified research and development or pilot scale manufacturing in Washington in the five high technologies areas is eligible for this deferral program for its eligible investment project.
(a) What does the term "person" mean for purposes of this deferral program? "Person" has the meaning given in RCW 82.04.030. Effective June 10, 2004, "person" also includes state universities as defined in RCW 28B.10.016. "Person" can be either a lessee or a lessor, who can apply separately for individual investment projects at the same site, if they comply with the other requirements of chapter 82.63 RCW.
(i) Effective June 10, 2004, the lessor or owner of the qualified building is not eligible for a deferral unless:
(A) The underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person; or
(B) All of the following conditions are met:
(I) The lessor by written contract agrees to pass the economic benefit of the deferral to the lessee;
(II) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual tax performance report required under RCW 82.63.020(2);
(III) The lessee must receive an economic benefit from the lessor no less than the amount of tax deferred by the lessor; and
(IV) Upon request, the lessor must provide the department with written documentation to support the eligibility of the deferral, including any type of payment, credit, or other financial arrangement between the lessor or owner of the qualified building and the lessee.
For example, economic benefit of the deferral is passed through to the lessee when evidenced by written documentation that the amounts paid to the lessor for construction of tenant improvements are reduced by the amount of the sales tax deferred, or that the lessee receives more tenant improvements through a credit for tenant improvements or other mechanism in the lease equal to the amount of the sales tax deferred.
(ii) Prior to June 10, 2004, the lessor or owner of the qualified building is not eligible for a deferral unless the underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person, or unless the lessor by written contract agrees to pass the economic benefit of the deferral to the lessee in the form of reduced rent payments.
(iii) The lessor of the qualified building who receives a letter of intent from a qualifying lessee may be eligible for deferral, assuming that all other requirements of chapter 82.63 RCW are met. At the time of application, the lessor must provide to the department a letter of intent by the lessee to lease the qualified building and any other information to prove that the lessee will engage in qualified research and development or pilot scale manufacturing once the building construction is complete. After the investment project is certified as operationally complete, the lessee must actually occupy the building as a lessee and engage in qualified research and development or pilot scale manufacturing. Otherwise, deferred taxes will be immediately due to the lessor, and interest will be assessed retroactively from the date of deferral.
(b) What is "qualified research and development" for purposes of this rule? "Qualified research and development" means research and development performed within this state in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.
(c) What is "research and development" for purposes of this rule? "Research and development" means 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.
(i) A person need not both discover technological information and translate technological information into new or improved products, processes, techniques, formulas, inventions, or software in order to engage in research and development. A person may perform either activity alone and be engaged in research and development.
(ii) To discover technological information means to gain knowledge of technological information through purposeful investigation. The knowledge sought must be of something not previously known or, if known, only known by persons who have not made the knowledge available to the public.
(iii) Technological information is information related to the application of science, especially with respect to industrial and commercial objectives. Industrial and commercial objectives include both sale and internal use (other than internal use software). The translation of technological information into new or improved products, processes, techniques, formulas, inventions, or software does not require the use of newly discovered technological information to qualify as research and development.
(iv) The translation of technological information requires both technical and nonroutine activities.
(A) An activity is technical if it involves the application of scientific, engineering, or computer science methods or principles.
(B) An activity is nonroutine if it:
(I) Is undertaken to achieve a new or improved function, performance, reliability, or quality; and
(II) Is performed by engineers, scientists, or other similarly qualified professionals or technicians; and
(III) Involves a process of experimentation designed to evaluate alternatives where the capability or the method of achieving the new or improved function, performance, reliability, or quality, or the appropriate design of the desired improvement, is uncertain at the beginning of the taxpayer's research activities. A process of experimentation must seek to resolve specific uncertainties that are essential to attaining the desired improvement.
(v) A product is substantially improved when it functions fundamentally differently because of the application of technological information. This fundamental difference must be objectively measured. Examples of objective measures include increased value, faster operation, greater reliability, and more efficient performance. It is not necessary for the improvement to be successful for the research to qualify.
(vi) Computer software development may qualify as research and development involving both technical and nonroutine activities concerned with translating technological information into new or improved software, when it includes the following processes: Software concept, software design, software design implementation, conceptual freeze, alpha testing, beta testing, international product localization process, and other processes designed to eliminate uncertainties prior to the release of the software to the market for sale. Research and development ceases when the software is released to the market for sale.
Postrelease software development may meet the definition of research and development under RCW 82.63.010(16), but only if it involves both technical and nonroutine activities concerned with translating technological information into improved software. All facts and circumstances are considered in determining whether postrelease software development meets the definition of research and development.
(vii) Computer software is developed for internal use if it is to be used only by the person by whom it is developed. If it is to be available for sale, lease, or license, it is not developed for internal use, even though it may have some internal applications. If it is to be available for use by persons, other than the person by whom it is developed, who access or download it remotely, such as through the internet, it is not usually deemed to be developed for internal use. However, remotely accessed software is deemed to be developed for internal use if its purpose is to assist users in obtaining goods, services, or information provided by or through the person by whom the software is developed. For example, software is developed for internal use if it enables or makes easier the ordering of goods from or through the person by whom the software is developed. On the other hand, a search engine used to search the world wide web is an example of software that is not developed for internal use because the search engine itself is the service sought.
(viii) Research and development is complete when the product, process, technique, formula, invention, or software can be reliably reproduced for sale or commercial use. However, the improvement of an existing product, process, technique, formula, invention, or software may qualify as research and development.
(d) What is "pilot scale manufacturing" for purposes of this rule? "Pilot scale manufacturing" means design, construction, and testing of preproduction prototypes and models in the fields of biotechnology, advanced computing, electronic device technology, advanced materials, and environmental technology other than for commercial sale. "Commercial sale" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(e) What are the five high technology areas? The five high technology areas are as follows:
(i) Advanced computing. "Advanced computing" means technologies used in the designing and developing of computing hardware and software, including innovations in designing the full spectrum of hardware from hand-held calculators to super computers, and peripheral equipment.
(ii) Advanced materials. "Advanced materials" means materials with engineered properties created through the development of specialized processing and synthesis technology, including ceramics, high value-added metals, electronic materials, composites, polymers, and biomaterials.
(iii) Biotechnology. "Biotechnology" means the application of technologies, such as recombinant DNA techniques, biochemistry, molecular and cellular biology, genetics, including genomics, gene expression and genetic engineering, cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms, to produce or modify products, to improve plants or animals, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes and products or to develop microorganisms for specific uses.
(iv) Electronic device technology. "Electronic device technology" means technologies involving microelectronics; semiconductors; electronic equipment and instrumentation; radio frequency, microwave, and millimeter electronics; optical and optic-electrical devices; and data and digital communications and imaging devices.
(v) Environmental technology. "Environmental technology" means assessment and prevention of threats or damage to human health or the environment, environmental cleanup, and the development of alternative energy sources.
(A) The assessment and prevention of threats or damage to human health or the environment concerns assessing and preventing potential or actual releases of pollutants into the environment that are damaging to human health or the environment. It also concerns assessing and preventing other physical alterations of the environment that are damaging to human health or the environment.
For example, a research project related to salmon habitat restoration involving assessment and prevention of threats or damages to the environment may qualify as environmental technology, if such project is concerned with assessing and preventing potential or actual releases of water pollutants and reducing human-made degradation of the environment.
(I) Pollutants include waste materials or by-products from manufacturing or other activities.
(II) Environmental technology includes technology to reduce emissions of harmful pollutants. Reducing emissions of harmful pollutants can be demonstrated by showing the technology is developed to meet governmental emission standards. Environmental technology also includes technology to increase fuel economy, only if the taxpayer can demonstrate that a significant purpose of the project is to increase fuel economy and that such increased fuel economy does in fact significantly reduce harmful emissions. If the project is intended to increase fuel economy only minimally or reduce emissions only minimally, the project does not qualify as environmental technology. A qualifying research project must focus on the individual components that increase fuel economy of the product, not the testing of the entire product when everything is combined, unless the taxpayer can separate out and identify the specific costs associated with such testing.
(III) Environmental technology does not include technology for preventive health measures for, or medical treatment of, human beings.
(IV) Environmental technology does not include technology aimed to reduce impact of natural disasters such as floods and earthquakes.
(V) Environmental technology does not include technology for improving safety of a product.
(B) Environmental cleanup is corrective or remedial action to protect human health or the environment from releases of pollutants into the environment.
(C) Alternative energy sources are those other than traditional energy sources such as fossil fuels, nuclear power, and hydroelectricity. However, when traditional energy sources are used in conjunction with the development of alternative energy sources, all the development will be considered the development of alternative energy sources.
(4) What is eligible for the sales and use tax deferral program? This deferral program applies to an eligible investment project for sales and use taxes imposed on the construction, expansion, or renovation of qualified buildings and acquisition of qualified machinery and equipment.
(a) What is an "eligible investment project" for purposes of this rule? "Eligible investment project" means an investment project which either initiates a new operation, or expands or diversifies a current operation by expanding, renovating, or equipping an existing facility.
(b) What is an "investment project" for purposes of this rule? "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction or improvement of the project. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify.
(c) What is "qualified buildings" for purposes of this rule? "Qualified buildings" means construction of new structures, and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity, used for pilot scale manufacturing or qualified research and development.
(i) "Qualified buildings" is limited to structures used for pilot scale manufacturing or qualified research and development. "Qualified buildings" includes plant offices and other facilities that are an essential or an integral part of a structure used for pilot scale manufacturing or qualified research and development.
(A) "Office" means space used by professional, clerical, or administrative staff. For plant office space to be a qualified building, its use must be essential or integral to pilot scale manufacturing or qualified research and development. An office may be located in a separate building from the building used for pilot scale manufacturing or qualified research and development, but the office must be located at the same site as the qualified building in order to qualify. Each individual office may only qualify or disqualify in its entirety.
(B) A site is one or more immediately adjacent parcels of real property. Adjacent parcels of real property separated only by a public road comprise a single site.
(ii) "Qualified buildings" does not include construction of landscaping or most other work outside the building itself, even though the landscaping or other work outside the building may be required by the city or county government in order for the city or county to issue a permit for the construction of a building.
However, "qualified buildings" includes construction of specialized sewerage pipes connected to a qualified building that are specifically designed and used exclusively for pilot scale manufacturing or qualified research and development.
Also, "qualified buildings" includes construction of parking lots connected to or adjacent to the building if the parking lots are for the use of workers performing pilot scale manufacturing or qualified research and development in the building. Parking lots may be apportioned based upon its qualifying use.
(d) What is "multiple qualified buildings" for purposes of this rule? "Multiple qualified buildings" means "qualified buildings" leased to the same person when such structures:
(i) Are located within a five-mile radius; and
(ii) The initiation of construction of each building begins within a 60-month period.
(e) When is apportionment of qualified buildings appropriate? The deferral is allowable only in respect to investment in the construction of a new building or the expansion or renovation of an existing building used in pilot scale manufacturing or qualified research and development. Where a building(s) is used partly for pilot scale manufacturing or qualified research and development and partly for purposes that do not qualify for deferral under this rule, apportionment is necessary.
(f) What is the apportionment method? The applicable tax deferral will be determined as follows:
(i) Tax on the cost of construction of areas devoted solely to pilot scale manufacturing or qualified research and development may be deferred.
(ii) Tax on the cost of construction of areas not used at all for pilot scale manufacturing or qualified research and development may not be deferred.
(iii) Tax on the cost of construction of areas used in common for pilot scale manufacturing or qualified research and development and for other purposes, such as hallways, bathrooms, and conference rooms, may be deferred by apportioning the costs of construction on a square footage basis. The apportioned costs of construction eligible for deferral are established by using the ratio, expressed as a percentage, of the square feet of the construction, expansion, or renovation devoted to pilot scale manufacturing or qualified research and development, excluding areas used in common to the total square feet of the construction, expansion, or renovation, excluding areas used in common. That percentage is applied to the cost of construction of the common areas to determine the costs of construction eligible for tax deferral. Expressed as a formula, apportionment of the cost of the common areas is determined by:
Square feet devoted to research and development or pilot scale manufacturing, excluding square feet of common areas
=
Percentage of
total cost of
construction of common areas eligible for deferral
Total square feet, excluding square feet of common areas
(iv) The apportionment method described in (f)(i), (ii), and (iii) of this subsection must be used unless the applicant or recipient can demonstrate that another method better represents a reasonable apportionment of costs, considering all the facts and circumstances. An example is to use the number of employees in a qualified building that is engaged in pilot scale manufacturing or qualified research and development as the basis for apportionment, if this method is not easily manipulated to reflect a desired outcome, and it otherwise represents a reasonable apportionment of costs under all the facts and circumstances. This method may take into account qualified research and development or pilot scale manufacturing activities that are shifted within a building or from one building to another building. If assistance is needed to a tax-related question specific to your business under this subsection, you may request a tax ruling. To make a tax ruling request contact the department at 360-705-6705 or go to the department's website at dor.wa.gov.
(v) Example. A building to be constructed will be partially devoted to research and development and partially devoted to marketing, a nonqualifying purpose. The total area of the building is 100,000 square feet. Sixty thousand square feet are used only for research and development, 20,000 square feet are used only for marketing, and the remaining 20,000 square feet are used in common by research and development employees and marketing employees. Tax on the cost of constructing the 60,000 square feet used only for research and development may be deferred. Tax on the cost of constructing the 20,000 square feet used only for marketing may not be deferred. Tax on 75% of the cost of constructing the common areas may be deferred. (Sixty thousand square feet devoted solely to research and development divided by 80,000 square feet devoted solely to research and development and marketing results in a ratio expressed as 75%.)
(g) What is "qualified machinery and equipment" for purposes of this rule? "Qualified machinery and equipment" means fixtures, equipment, and support facilities that are an integral and necessary part of a pilot scale manufacturing or qualified research and development operation. "Qualified machinery and equipment" includes: Computers; software; data processing equipment; laboratory equipment, instrumentation, and other devices used in a process of experimentation to develop a new or improved pilot model, plant process, product, formula, invention, or similar property; manufacturing components such as belts, pulleys, shafts, and moving parts; molds, tools, and dies; vats, tanks, and fermenters; operating structures; and all other equipment used to control, monitor, or operate the machinery. For purposes of this rule, qualified machinery and equipment must be either new to the taxing jurisdiction of the state or new to the certificate holder, except that used machinery and equipment may be treated as qualified machinery and equipment if the certificate holder either brings the machinery and equipment into Washington or makes a retail purchase of the machinery and equipment in Washington or elsewhere.
(i) What are "integral" and "necessary"? Machinery and equipment is an integral and necessary part of pilot scale manufacturing or qualified research and development if the pilot scale manufacturing or qualified research and development cannot be accomplished without it. For example, a laboratory table is integral and necessary to qualified research and development. Likewise, telephones, computer hardware (e.g., cables, scanners, printers, etc.), and computer software (e.g., Word, Excel, Windows, Adobe, etc.) used in a typical workstation for an R&D personnel are integral and necessary to qualified research and development. Decorative artwork, on the other hand, is not integral and necessary to qualified research and development.
(ii) Must qualified machinery and equipment be used exclusively for qualifying purposes in order to qualify? Qualified machinery and equipment must be used exclusively for pilot scale manufacturing or qualified research and development to qualify for the deferral. Operating system software shared by accounting personnel, for example, is not used exclusively for qualified research and development. However, de minimis nonqualifying use will not cause the loss of the deferral. An example of de minimis use is the occasional use of a computer for personal email.
(iii) Is qualified machinery and equipment subject to apportionment? Unlike buildings, if machinery and equipment is used for both qualifying and nonqualifying purposes, the costs cannot be apportioned. Sales or use tax cannot be deferred on the purchase or use of machinery and equipment used for both qualifying and nonqualifying purposes.
(iv) To what extent is leased equipment eligible for the deferral? In cases of leases of qualifying machinery and equipment, deferral of tax is allowed on payments made during the initial term of the lease, but not for extensions or renewals of the lease. Deferral of tax is not allowed for lease payments for any period after the seventh calendar year following the calendar year for which the project is certified as operationally complete.
(5) What are the application and review processes? Applicants must apply for deferral to the department of revenue before the initiation of construction of, or acquisition of equipment or machinery for the investment project. When an application for sales and use tax deferral is timely submitted, costs incurred before the application date are allowable, if they otherwise qualify. In the case of an investment project consisting of "multiple qualified buildings," applications must be made for, and before the initiation of construction of, each qualified building.
(a) What is "initiation of construction" for purposes of this rule?
(i) Initiation of construction means the date that a building permit is issued under the building code adopted under RCW 19.27.031 for:
(A) Construction of the qualified building, if the underlying ownership of the building vests exclusively with the person receiving the economic benefit of the deferral;
(B) Construction of the qualified building, if a lessor passes the economic benefits of the deferral to a lessee as provided in RCW 82.63.010(7); or
(C) Tenant improvements for a qualified building, if a lessor passes the economic benefits of the deferral to a lessee as provided in RCW 82.63.010(7).
(ii) Initiation of construction does not include soil testing, site clearing and grading, site preparation, or any other related activities that are initiated before the issuance of a building permit for the construction of the foundation of the building.
(iii) If the investment project is a phased project, initiation of construction must apply separately to each building. For purposes of this rule, a "phased project" means construction of multiple buildings in different phases over the life of a project. A taxpayer may file a separate application for each qualified building, or the taxpayer may file one application for all qualified buildings. If a taxpayer files one application for all qualified buildings, initiation of construction must apply separately to each building.
(b) What is "acquisition of machinery and equipment" for purposes of this rule? "Acquisition of machinery and equipment" means the machinery and equipment is under the dominion and control of the recipient or its agent.
(c) Lessor and lessee examples.
(i) Prior to the initiation of construction, Owner/Lessor A enters into an agreement with Lessee B, a company engaged in qualified research and development. Under the agreement, A will build a building to house B's research and development activities, will apply for a tax deferral on construction of the building, will lease the building to B, and will pass on the entire value of the deferral to B. B agrees in writing with the department to complete annual tax performance reports. A applies for the deferral before the date the building permit is issued. A is entitled to a deferral on building construction costs.
(ii) After construction has begun, Lessee C asks that certain tenant improvements be added to the building. Lessor D and Lessee C each agree to pay a portion of the cost of the improvements. D agrees with C in a written agreement that D will pass on the entire value of D's portion of the tax deferral to C, and C agrees in writing with the department to complete annual tax performance reports. C and D each apply for a deferral on the costs of the tenant improvements they are legally responsible for before the date the building permit is issued for such tenant improvements. Both applications will be approved. While construction of the building was initiated before the applications were submitted, tenant improvements on a building under construction are deemed to be the expansion or renovation of an existing structure. Also, lessees are entitled to the deferral only if they are legally responsible and actually pay contractors for the improvements, rather than merely reimbursing lessors for the costs.
(iii) After construction has begun but before machinery or equipment has been acquired, Lessee E applies for a deferral on machinery and equipment. The application will be approved, and E is required to complete annual tax performance reports. Even though it is too late to apply for a deferral of tax on building costs, it is not too late to apply for a deferral for the machinery and equipment.
(d) How may a taxpayer obtain an application form? Application forms may be obtained from the department's website at dor.wa.gov, or by contacting the department at 360-705-6705. Only those applications which are approved by the department in connection with the deferral program are not confidential and are subject to public disclosure.
For purposes of this rule, "applicant" means a person applying for a tax deferral under chapter 82.63 RCW, and "department" means the department of revenue.
(e) What should an application form include? The application form should include information regarding the location of the investment project, the applicant's average employment in Washington for the prior year, estimated or actual new employment related to the project, estimated or actual wages of employees related to the project, estimated or actual costs, and time schedules for completion and operation. The application form may also include other information relevant to the project and the applicant's eligibility for deferral.
(f) What is the date of application? The date of application is the earlier of the postmark date or the date of receipt by the department.
(g) When will the department notify approval or disapproval of the deferral application? The department must rule on an application within 60 days. If an application is denied, the department must explain in writing the basis for the denial. An applicant may seek review of a denial within 30 days under WAC 458-20-100 (Informal administrative reviews).
(6) Can a lessee leasing "multiple qualified buildings" elect to treat the "multiple qualified buildings" as a single investment project? Yes. If a lessee will conduct qualified research and development or pilot scale manufacturing within the "multiple qualified buildings" and desires to treat the "multiple qualified buildings" as a single investment project, the lessee may do so by making both a preliminary election and a final election therefore.
(a) When must the lessee make the preliminary election to treat the "multiple qualified buildings" as a single investment project? The lessee must make the preliminary election before a temporary certificate of occupancy, or its equivalent, is issued for any of the buildings within the "multiple qualified buildings."
(b) When must the lessee make the final election to treat the "multiple qualified buildings" as a single investment project? All buildings included in the final election must have been issued a temporary certificate of occupancy or its equivalent. The lessee must then make the final election for such buildings by the date that is the earlier of:
(i) Sixty months following the date that the lessee made the preliminary election; or
(ii) Thirty days after the issuance of the temporary certificate of occupancy, or its equivalent, for the last "qualified building" to be completed that will be included in the final election.
(c) What occurs if the final election is not made by the deadline? When a final election is not made by the deadline in (b)(i) or (ii) of this subsection, the qualified buildings will each be treated as individual investment projects under the original applications for those buildings.
(d) How are preliminary and final elections made? The preliminary and final elections must be made in the form and manner prescribed by the department. For information concerning the form and manner for making these elections contact the department at 360-705-6705.
(e) Before the final election is made, can the lessee choose to exclude one or more of the buildings included in its preliminary election? Yes. Before the final election is made, the lessee may remove one or more of the qualified buildings included in the preliminary election from the investment project. When a qualified building under the preliminary election is, for any reason, not included in the final election, the qualified building will be treated as an individual investment project under the original application for that building.
(f) Application. This subsection (6) applies to deferral applications received by the department after June 30, 2007.
(7) What happens after the department approves the deferral application? If an application is approved, the department must issue the applicant a sales and use tax deferral certificate.
The certificate provides for deferral of state and local sales and use taxes on the eligible investment project. The certificate will state the amount of tax deferral for which the recipient is eligible. It will also state the date by which the project will be operationally complete. The deferral is limited to investment in qualified buildings or qualified machinery and equipment. The deferral does not apply to the taxes of persons with whom the recipient does business, persons the recipient hires, or employees of the recipient.
For purposes of this rule, "recipient" means a person receiving a tax deferral under chapter 82.63 RCW.
(8) How should a tax deferral certificate be used? A successful applicant, hereafter referred to as a recipient, must present a copy of the certificate to sellers of goods or retail services provided in connection with the eligible investment project in order to avoid paying sales or use tax. Sellers who accept these certificates in good faith are relieved of the responsibility to collect sales or use tax on transactions covered by the certificates. Sellers must retain copies of certificates as documentation for why sales or use tax was not collected on a transaction.
The certificate cannot be used to defer tax on repairs to, or replacement parts for, qualified machinery and equipment.
(9) May an applicant apply for new deferral at the site of an existing deferral project?
(a) The department must not issue a certificate for an investment project that has already received a deferral under chapter 82.60, 82.61, or 82.63 RCW. For example, replacement machinery and equipment that replaces qualified machinery and equipment is not eligible for the deferral. Also, if renovation is made from an existing building that has already received a deferral under chapter 82.60, 82.61, or 82.63 RCW for the construction of the building, the renovation is not eligible for the deferral.
(b) If expansion is made from an existing building that has already received a deferral under chapter 82.60, 82.61, or 82.63 RCW for the construction of the building, the expanded portion of the building may be eligible for the deferral. Acquisition of machinery and equipment to be used for the expanded portion of the qualified building may also be eligible.
(c) An investment project for qualified research and development that has already received a deferral may also receive an additional deferral certificate for adapting the investment project for use in pilot scale manufacturing.
(d) A certificate may be amended or a certificate issued for a new investment project at an existing facility.
(10) May an applicant or recipient amend an application or certificate? Applicants and recipients may make written requests to the special programs division to amend an application or certificate.
(a) Grounds for requesting amendment include, but are not limited to:
(i) The project will exceed the costs originally stated;
(ii) The project will take more time to complete than originally stated;
(iii) The original application is no longer accurate because of changes in the project; and
(iv) Transfer of ownership of the project.
(b) The department must rule on the request within 60 days. If the request is denied, the department must explain in writing the basis for the denial. An applicant or recipient may seek review of a denial within 30 days under WAC 458-20-100 (Informal administrative reviews).
(11) What should a recipient of a tax deferral do when its investment project is operationally complete?
(a) When the building, machinery, or equipment is ready for use, or when a final election is made to treat "multiple qualified buildings" as single investment project, the recipient must notify the special programs division in writing that the eligible investment project is operationally complete. The department must, after appropriate investigation: Certify that the project is operationally complete; not certify the project; or certify only a portion of the project. The certification will include the year in which the project is operationally complete. If the department certifies as an operationally complete investment project consisting of "multiple qualifying buildings," the certification is deemed to have occurred in the calendar year in which the final election is made.
(b) If all or any portion of the project is not certified, the recipient must repay all or a proportional part of the deferred taxes. The department will notify the recipient of the amount due, including interest, and the due date.
(c) The department must explain in writing the basis for not certifying all or any portion of a project. The decision of the department to not certify all or a portion of a project may be reviewed under WAC 458-20-100 (Informal administrative reviews) within 30 days.
(d) An investment project consisting of "multiple qualifying buildings" may not be certified as operationally complete unless the lessee furnishes the department with a bond, letter of credit, or other security acceptable to the department in an amount equal to the repayment obligation as determined by the department. The department may decrease the secured amount each year as the repayment obligation decreases under the provisions of RCW 82.63.045. If the lessee does not furnish the department with a bond, letter of credit, or other acceptable security equal to the amount of deferred tax, the qualified buildings will each be treated as individual investment projects under the original applications for those buildings.
(12) Is a recipient of a tax deferral required to submit annual tax performance reports? Each recipient of a tax deferral granted under chapter 82.63 RCW must complete an annual tax performance report. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.63.010(7), the lessee must agree to complete the annual tax performance report and the applicant is not required to complete the annual tax performance report. See WAC 458-20-267 (Annual tax performance reports for certain tax preferences) for more information on the requirements to file annual tax performance reports.
(13) Is a recipient of tax deferral required to repay deferred taxes?
(a) When is repayment required? Deferred taxes must be repaid if an investment project is used for purposes other than qualified research and development or pilot scale manufacturing during the calendar year for which the department certifies the investment project as operationally complete or at any time during any of the succeeding seven calendar years. Taxes are immediately due according to the following schedule:
Year in which
nonqualifying use occurs
% of deferred taxes due
1
100%
 
2
87.5%
 
3
75%
 
4
62.5%
 
5
50%
 
6
37.5%
 
7
25%
 
8
12.5%
 
Interest on the taxes, but not penalties, must be paid retroactively to the date of deferral. For purposes of this rule, the date of deferral is the date tax-deferred items are purchased.
The lessee of an investment project consisting of "multiple qualified buildings" is solely liable for payment of any deferred tax determined to be due and payable beginning on the date the department certifies the product as operationally complete. This does not relieve any lessor of its obligation under RCW 82.63.010(7) and subsection (3)(a) of this rule to pass the economic benefit of the deferral to the lessee.
(b) When is repayment not required?
(i) Deferred taxes need not be repaid if the investment project is used only for qualified research and development or pilot scale manufacturing during the calendar year for which the department certifies the investment project as operationally complete and during the succeeding seven calendar years.
(ii) Deferred taxes need not be repaid on particular items if the purchase or use of the item would have qualified for the machinery and equipment sales and use tax exemptions provided by RCW 82.08.02565 and 82.12.02565 (discussed in WAC 458-20-13601) at the time of purchase or first use.
(iii) Deferred taxes need not be repaid if qualified machinery and equipment on which the taxes were deferred is destroyed, becomes inoperable and cannot be reasonably repaired, wears out, or becomes obsolete and is no longer practical for use in the project. The use of machinery and equipment which becomes obsolete for purposes of the project and is used outside the project is subject to use tax at the time of such use.
(14) When will the tax deferral program expire? The authority of the department to issue deferral certificates expires January 1, 2015.
(15) Is debt extinguishable because of insolvency or sale? The debt for deferred taxes will not be extinguished by the insolvency or other failure of the recipient.
(16) Does transfer of ownership terminate tax deferral? Transfer of ownership does not terminate the deferral. The deferral may be transferred to the new owner if the new owner meets all eligibility requirements for the remaining periods of the deferral. The new owner must apply for an amendment to the deferral certificate. If the deferral is transferred, the new owner is liable for repayment of deferred taxes under the same terms as the original owner. If the new owner is a successor to the previous owner under the terms of WAC 458-20-216 (Successors, quitting business) and the deferral is not transferred, the new owner's liability for deferred taxes is limited to those that are due for payment at the time ownership is transferred.
PART II
SALES AND USE TAX EXEMPTION FOR PERSONS ENGAGED IN CERTAIN CONSTRUCTION ACTIVITIES FOR THE FEDERAL GOVERNMENT
(17) Persons engaged in construction activities for the federal government. Effective June 10, 2004, persons engaged in the business of constructing, repairing, decorating, or improving new or existing buildings or other structures under, upon, or above real property of or for the United States, or any instrumentality thereof, are not liable for sales and use tax on tangible personal property incorporated into, installed in, or attached to such building or other structure, if the investment project would qualify for sales and use tax deferral under chapter 82.63 RCW if undertaken by a private entity. RCW 82.04.190(6).
PART III
BUSINESS AND OCCUPATION TAX CREDIT FOR RESEARCH AND DEVELOPMENT SPENDING
(18) Who is eligible for the business and occupation tax credit? RCW 82.04.4452 provides for a business and occupation tax credit for persons engaging in research and development in Washington in five areas of high technology: Advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.
A person is eligible for the credit if its research and development spending in the calendar year for which credit is claimed exceeds 0.92 percent of the person's taxable amount for the same calendar year.
(a) What does the term "person" mean for purposes of this credit? "Person" has the meaning given in RCW 82.04.030.
(b) What is "research and development spending" for purposes of this rule? "Research and development spending" means qualified research and development expenditures plus 80 percent of amounts paid to a person other than a public educational or research institution to conduct qualified research and development.
(c) What is "taxable amount" for purposes of this rule? "Taxable amount" means the taxable amount subject to business and occupation tax required to be reported on the person's combined excise tax returns for the year for which the credit is claimed, less any taxable amount for which a multiple activities tax credit is allowed under RCW 82.04.440. See WAC 458-20-19301 (Multiple activities tax credits) for information on the multiple activities tax credit.
(d) What are "qualified research and development expenditures" for purposes of this rule? "Qualified research and development expenditures" means operating expenses, including wages, compensation of a proprietor or a partner in a partnership, benefits, supplies, and computer expenses, directly incurred in qualified research and development by a person claiming the business and occupation tax credit provided by RCW 82.04.4452. The term does not include amounts paid to a person other than a public educational or research institution to conduct qualified research and development. Nor does the term include capital costs and overhead, such as expenses for land, structures, or depreciable property.
(i) In order for an operating expense to be a qualified research and development expenditure, it must be directly incurred in qualified research and development. If an employee performs qualified research and development activities and also performs other activities, only the wages and benefits proportionate to the time spent on qualified research and development activities are qualified research and development expenditures under this rule. The wages of employees who supervise or are supervised by persons performing qualified research and development are qualified research and development expenditures to the extent the work of those supervising or being supervised involves qualified research and development.
(ii) The compensation of a proprietor or a partner is determined in one of two ways:
(A) If there is net income for federal income tax purposes, the amount reported subject to self-employment tax is the compensation.
(B) If there is no net income for federal income tax purposes, reasonable cash withdrawals or cash advances are the compensation.
(iii) Depreciable property is any property with a useful life of at least a year. Expenses for depreciable property will not constitute qualified research and development expenditures even if such property may be fully deductible for federal income tax purposes in the year of acquisition.
(iv) Computer expenses do not include the purchase, lease, rental, maintenance, repair or upgrade of computer hardware or software. They do include internet subscriber fees, run time on a mainframe computer, and outside processing.
(v) Training expenses for employees are qualified research and development expenditures if the training is directly related to the research and development being performed. Training expenses include registration fees, materials, and travel expenses. Although the research and development must occur in Washington, training may take place outside of Washington.
(vi) Qualified research and development expenditures include the cost of clinical trials for drugs and certification by Underwriters Laboratories.
(vii) Qualified research and development expenditures do not include legal expenses, patent fees, or any other expense not incurred directly for qualified research and development.
(viii) Stock options granted as compensation to employees performing qualified research and development are qualified research and development expenditures to the extent they are reported on the W-2 forms of the employees and are taken as a deduction for federal income tax purposes by the employer.
(ix) Preemployment expenses related to employees who perform qualified research and development are qualified research and development expenditures. These expenses include recruiting and relocation expenses and employee placement fees.
(e) What does it mean to "conduct" qualified research and development for purposes of this rule? A person is conducting qualified research and development when:
(i) The person is in charge of a project or a phase of the project; and
(ii) The activities performed by that person in the project or the phase of the project constitute qualified research and development.
(iii) Examples.
(A) Company C is conducting qualified research and development. It enters into a contract with Company D requiring D to provide workers to perform activities under the direction of C. D is not entitled to the credit because D is not conducting qualified research and development. Its employees work under the direction of C. C is entitled to the credit if all other requirements of the credit are met.
(B) Company F enters into a contract with Company G requiring G to perform qualified research and development on a phase of its project. The phase of the project constitutes qualified research and development. F is not entitled to the credit because F is not conducting qualified research and development on that phase of the project. G, however, is entitled to the credit if all other requirements of the credit are met.
(f) What is "qualified research and development" for purposes of this rule? "Qualified research and development" means research and development performed within this state in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.
(g) What is "research and development" for purposes of this rule? See subsection (3)(c) of this rule for more information on the definition of research and development.
(i) Example. A company that engages in environmental cleanup contracted to clean up a site. It had never faced exactly the same situation before, but guaranteed at the outset that it could do the job. It used a variety of existing technologies to accomplish the task in a combination it had never used before. The company was not engaged in qualified research and development in performing this contract. While the company applied existing technologies in a unique manner, there was no uncertainty to attain the desired or necessary specifications, and therefore the outcome of the project was certain.
(ii) Example. Same facts as (g)(i) of this subsection, except that the company performed research on a technology that had been applied in other contexts but never in the context where the company was attempting to use it, and it was uncertain at the outset whether the technology could achieve the desired outcome in the new context. If the company failed, it would have to apply an existing technology that is much more costly in its cleanup effort. The company was engaged in qualified research and development with respect to the research performed in developing the technology.
(iii) Example. Company A is engaged in research and development in biotechnology and needs to perform standard blood tests as part of its development of a drug. It contracts with a lab, B, to perform the tests. The costs of the tests are qualified research and development expenditures for A, the company engaged in the research and development. Although the tests themselves are routine, they are only a part of what A is doing in the course of developing the drug. B, the lab contracted to perform the testing, is not engaged in research and development with respect to the drug being developed. B is neither discovering technological information nor translating technological information into new or improved products, processes, techniques, formulas, inventions, or software. B is not entitled to a credit on account of the compensation it receives for conducting the tests.
(h) What are the five high technology areas? See subsection (3)(e) of this rule for more information.
(19) How is the business and occupation tax credit calculated?
(a) On or after July 1, 2004. The amount of the credit is calculated as follows:
(i) A person must first determine the greater of:
The person's qualified research and development expenditures;
or
Eighty percent of amounts received by a person other than a public educational or research institution as compensation for conducting qualified research and development.
(ii) Then the person subtracts, from the amount determined under (a)(i) of this subsection, 0.92 percent of its taxable amount. If 0.92 percent of the taxable amount exceeds the amount determined under (a)(i) of this subsection, the person is not eligible for the credit.
(iii) The credit is calculated by multiplying the amount determined under (a)(ii) of this subsection by the following:
(A) For the periods of July 1, 2004, to December 31, 2006, the person's average tax rate for the calendar year for which the credit is claimed;
(B) For the periods of January 1, 2007, to December 31, 2007, the greater of the person's average tax rate for the calendar year or 0.75 percent;
(C) For the periods of January 1, 2008, to December 31, 2008, the greater of the person's average tax rate for the calendar year or 1.0 percent;
(D) For the periods of January 1, 2009, to December 31, 2009, the greater of the person's average tax rate for the calendar year or 1.25 percent; and
(E) For the periods after December 31, 2009, 1.50 percent.
(iv) For the purposes of this rule, "average tax rate" means a person's total business and occupation tax liability for the calendar year for which the credit is claimed, divided by the person's total taxable amount for the calendar year for which the credit is claimed.
(v) For purposes of calculating the credit, if a person's reporting period is less than annual, the person may use an estimated average tax rate for the calendar year for which the credit is claimed, by using the person's average tax rate for each reporting period. When the person files its last return for the calendar year, the person must make an adjustment to the total credit claimed for the calendar year using the person's actual average tax rate for the calendar year.
(vi) Examples.
(A) A business engaging in qualified research and development has a taxable amount of $10,000,000 in a year. It pays $80,000 in that year in wages and benefits to employees directly engaged in qualified research and development. The business has no other qualified research and development expenditures. Its qualified research and development expenditures of $80,000 are less than $92,000 (0.92 percent of its taxable amount of $10,000,000). If a business's qualified research and development expenditures (or 80 percent of amounts received for the conduct of qualified research and development) are less than 0.92 percent of its taxable amount, it is not eligible for the credit.
(B) A business engaging in qualified research and development has a taxable amount of $10,000,000 in 2005. Seven million dollars of this amount is taxable at the rate of 0.015 under the B&O tax classification for services and $3,000,000 is taxable at the rate of 0.00484 under the B&O tax classification for royalties. The business pays $119,520 in B&O tax for this reporting period. It pays $200,000 in that year to employees directly engaged in qualified research and development. The business has no other qualified research and development expenditures.
In order to determine the amount of its credit, the business subtracts $92,000 (0.92 percent of its taxable amount of $10,000,000) from $200,000, its qualified research and development expenditures. The resulting amount of $108,000 multiplied by the business's average tax rate equals the amount of the credit.
The business's average tax rate in 2005 is determined by dividing its B&O tax of $119,520 by its taxable amount of $10,000,000. The result, 0.01195, is multiplied by $108,000 to determine the amount of the credit. The credit is $1,291 ($1,290.60 rounded to the nearest whole dollar).
(b) From July 1, 1998 to June 30, 2004. The amount of the credit is equal to the greater of:
The person's qualified research and development expenditures;
or
Eighty percent of amounts received by a person other than a public educational or research institution as compensation for conducting qualified research and development
multiplied by 0.00484 in the case of a nonprofit corporation or association; and
multiplied by 0.015 in the case of all other persons.
(c) Prior to July 1, 1998. The amount of the credit is equal to the greater of:
The person's qualified research and development expenditures;
or
Eighty percent of amounts received by a person other than a public educational or research institution as compensation for conducting qualified research and development
multiplied by 0.00515 in the case of a nonprofit corporation or association; and
multiplied by 0.025 in the case of all other persons.
(d) The credit for any calendar year may not exceed the lesser of $2,000,000 or the amount of business and occupation tax otherwise due for the calendar year.
(e) Credits may not be carried forward or carried back to other calendar years.
(20) Is the person claiming the business and occupation tax credit required to submit annual tax performance reports? Each person claiming the credit granted under RCW 82.04.4452 must complete an annual tax performance report. See WAC 458-20-267 (Annual tax performance reports for certain tax preferences) for more information on the requirements to file annual tax performance reports.
(21) Is the business and occupation tax credit assignable? A person entitled to the credit because of qualified research and development conducted under contract for another person may assign all or a portion of the credit to the person who contracted for the performance of the qualified research and development.
(a) Both the assignor and the assignee must be eligible for the credit for the assignment to be valid.
(b) The total of the credit claimed and the credit assigned by a person assigning credit may not exceed the lesser of $2,000,000 or the amount of business and occupation tax otherwise due from the assignor in any calendar year.
(c) The total of the credit claimed, including credit received by assignment, may not exceed the lesser of $2,000,000 or the amount of business and occupation tax otherwise due from the assignee in any calendar year.
(22) What happens if a person has claimed the business and occupation tax credit earlier but is later found ineligible? If a person has claimed the credit earlier but is later found ineligible for the credit, then the department will declare the taxes against which the credit was claimed to be immediately due and payable. Interest on the taxes, but not penalties, must be paid retroactively to the date the credit was claimed.
(23) When will the business and occupation tax credit program expire? The business and occupation tax credit program for high technology businesses expires January 1, 2015.
(24) Do staffing companies qualify for the business and occupation tax credit program? A staffing company may be eligible for the credit if its research and development spending in the calendar year for which credit is claimed exceeds 0.92 percent of the person's taxable amount for the same calendar year.
(a) Qualifications of the credit. In order to qualify for the credit, a staffing company must meet the following criteria:
(i) It must conduct qualified research and development through its employees;
(ii) Its employees must perform qualified research and development activities in a project or a phase of the project, without considering any activity performed:
(A) By the person contracting with the staffing company for such performance; or
(B) By any other person;
(iii) It must complete an annual tax performance report by March 31st following any year in which the credit was taken; and
(iv) It must document any claim of the B&O tax credit.
(b) Examples.
(i) Company M, a staffing company, furnishes three employees to Company N for assisting a research project in electronic device technology. N has a manager and five employees working on the same project. The work of M's employees and N's employees combined as a whole constitutes qualified research and development. M's employees do not perform sufficient activities themselves to be considered performing qualified research and development. M does not qualify for the credit.
(ii) Company V, a staffing company, furnishes three employees to Company W for performing a phase of a research project in advanced materials. W has a manager and five employees working on other phases of the same project. V's employees are in charge of a phase of the project that results in discovery of technological information. The work of V's employees alone constitutes qualified research and development. V qualifies for the credit if all other requirements of the credit are met.
(iii) Same as (b)(ii) of this subsection, except that the phase of the research project involves development of computer software for W's internal use. The work of V's employees alone constitutes qualified research and development. V qualifies for the credit if all other requirements of the credit are met.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-24003, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-24003, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-24003, filed 5/27/16, effective 6/27/16; WSR 10-21-044, § 458-20-24003, filed 10/13/10, effective 11/13/10; WSR 10-07-136, § 458-20-24003, filed 3/23/10, effective 4/23/10; WSR 06-18-059, § 458-20-24003, filed 8/31/06, effective 10/1/06. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.63.010. WSR 03-12-053, § 458-20-24003, filed 5/30/03, effective 6/30/03.]


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PDF458-20-240A

Manufacturer's new employee tax credits—Applications filed prior to July 1, 2010.

(1) Introduction. Chapter 82.62 RCW provides business and occupation (B&O) tax credits to certain persons engaged in manufacturing and research and development activities. These credits are intended to stimulate the economy by creating employment opportunities in specific rural counties and community empowerment zones of this state. The credits are as much as $4,000 per qualified employment position. This rule explains the eligibility requirements and application procedures for this program. It is important to note that an application for the tax credits must be submitted to the department of revenue before the actual hiring of qualified employment positions. See subsection (6) of this rule for additional information regarding this application requirement. This tax credit program is a companion to the tax deferral program under chapter 82.60 RCW; however, the eligible geographic areas in the two programs are not identical.
The department of employment security and the department of commerce administer programs for rural counties and job training. These agencies should be contacted directly for information concerning those programs.
(2) Who is eligible for these tax credits? Subject to certain qualifications, an applicant (person applying for a tax credit under chapter 82.62 RCW) who is engaged in an eligible business project is entitled to the tax credits provided by chapter 82.62 RCW.
(a) What is an eligible business project? An "eligible business project" means manufacturing, commercial testing, or research and development activities conducted by an applicant in an eligible area at a specific facility, subject to the restriction noted in the following paragraph. An "eligible business project" does not include any portion of a business project undertaken by a light and power business or any portion of a business project creating employment positions outside an eligible area.
To be considered an "eligible business project," the applicant's number of average full-time qualified employment positions at the specific facility must be at least 15 percent greater in the calendar year for which credit is being sought than the number of positions at the same facility in the immediately preceding calendar year. Subsection (4) of this rule explains how to determine whether this threshold is satisfied.
(b) What is an eligible area? As noted above, the facility must be located in an eligible area to be considered an eligible business project. An "eligible area" is:
(i) A rural county, which is a county with fewer than 100 persons per square mile or, on and after April 1, 2004, a county smaller than 225 square miles, as determined annually by the office of financial management and published by the department of revenue effective for the period of July 1st through June 30th (see RCW 82.62.010(3)); or
(ii) A community empowerment zone (CEZ). CEZ means an area meeting the requirements of RCW 43.31C.020 and officially designated by the director of the department of commerce.
(iii) How to determine whether an area is an eligible area. Rural county designation information can be obtained from the office of financial management internet website at www.ofm.wa.gov/popden/rural.htm. The department has instituted a geographic information system (GIS) to assist taxpayers in determining taxing jurisdiction boundaries, local tax rates, and a mapping and address lookup system to determine whether a specific address is within a CEZ. The system is available on the department's internet website at www.dor.wa.gov.
(c) What are manufacturing and research and development activities? Manufacturing or research and development activities must be conducted at the facility to be considered an eligible business project.
(i) Manufacturing. "Manufacturing" has the meaning given in RCW 82.04.120. In addition, for the purposes of chapter 82.62 RCW "manufacturing" also includes computer programming, the production of computer software, other computer-related services, but only when the computer-related services are performed by a manufacturer as defined under RCW 82.04.110 and contribute to the production of a new, different, or useful substance or article of tangible personal property for sale; and the activities performed by research and development laboratories and commercial testing laboratories. (Chapter 16, Laws of 2010.)
(ii) Research and development. "Research and development" means the development, refinement, testing, marketing, and commercialization of a product, service, or process before commercial sales have begun. "Commercial sales" does not include sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed $1,000,000.
(iii) Computer-related services. "Computer-related services" for the purposes of chapter 82.62 RCW, the definition of "manufacturing" means services that are connected with or interact directly in the manufacture of computer hardware or software or the programming of the manufactured hardware. "Computer-related services" includes the manufacture of hardware such as chips, keyboards, monitors, and any other hardware, and the components of these items. "Computer-related services" also includes creating operating systems and software that will be copied and sold as canned software. The activities performed by the manufacturer to test, correct, revise, or upgrade software or hardware before they are approved for sale to the consumer are considered computer-related services. "Computer-related services" does not include services such as information services.
(3) What are the hiring requirements? The average full-time qualified employment positions at the specific facility during the calendar year for which credits are claimed must be at least 15 percent greater than the average full-time qualified employment positions at the same facility for the preceding calendar year.
(a) What is a qualified employment position? A "qualified employment position" means a position filled by a permanent full-time employee employed atan eligible business project for 12 consecutive months. Once a full-time position is established and filled it will continue to qualify for 12 consecutive periods so long as any person fills the position. The position is considered "filled" even during periods of vacancy, provided these periods do not exceed 30 consecutive days and the employer is training or actively recruiting a replacement employee.
(b) What is a "permanent full-time employee"? A "permanent full-time employee" is a position that is filled by an employee who satisfies any one of the following minimum thresholds:
(i) Works 35 hours per week for 52 consecutive weeks;
(ii) Works 455 hours, excluding overtime, each quarter for four consecutive quarters; or
(iii) Works 1,820 hours, excluding overtime, during a period of 12 consecutive months.
(c) "Permanent full-time employee" - Seasonal operations. For applicants that regularly operate on a seasonal basis only and that employ more than 50 percent of their employees for less than a full 12 month continuous period, a "permanent full-time employee" is a permanent full-time employee as described above or an equivalent in full-time equivalent (FTE) work hours.
(4) How to determine if the 15 percent employment increase requirement is met. Qualification for tax credits depends upon whether the applicant hires enough new positions to meet the 15 percent average increase requirement.
(a) Determining the 15 percent increase. To determine the projected number of permanent full-time qualified employment positions necessary to satisfy the 15 percent employment increase requirement:
(i) Determine the average number of permanent full-time qualified employment positions that existed at the facility during the calendar year prior to the year in which tax credit is being claimed.
(ii) Multiply the average number of full-time positions from subsection (i) by .15 or 15 percent. The resulting number equals the number of positions that must be filled to meet the 15 percent increase. Numbers are rounded up to the nearest whole number at point five (.5).
(b) When does hiring have to occur? All hiring increases must occur during the calendar year for which credits are being sought for purposes of meeting the 15 percent threshold test. Positions hired in a calendar year prior to making an application are not eligible for a credit but the positions are used to calculate whether the 15 percent threshold has been met.
(c) The department will assist applicants to determine their hiring requirements. Accompanying the tax credit application is a worksheet to assist the applicant in determining if the 15 percent qualified employment threshold is satisfied. Based upon the information provided in the application, the department will advise applicants of their minimum number of hiring needs for which credits are being sought.
(d) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax status of each situation must be determined after a review of all of the facts and circumstances.
(i) ABC Company anticipates increasing employment during the 2001 calendar year at a manufacturing facility by an average of 15 full-time qualified employment positions for a total of 113 positions. The average number of full-time qualified employment positions during the 2000 calendar year was 98. To qualify for the tax credit program the minimum average number of full-time qualified employment positions required for the 2001 calendar year is 98 x .15 = 14.7 (rounding up to 15 positions). Therefore, ABC Company's plan to hire 15 full-time qualified employment positions for 2001 meets the 15% employment increase requirement.
(ii) ABC anticipates increasing employment at this same manufacturing facility by an average of 15 additional full-time qualified employment positions during the 2002 calendar year to a total of 128 positions. To qualify for the tax credit program the minimum average number of full-time qualified employment positions required for the 2002 calendar year is 17 (113 x .15 = 16.95, rounding up to 17). Therefore, ABC Company's plan to hire 15 full-time qualified employment positions for 2002 does not meet the 15% employment increase requirement.
(5) Restriction against displacing existing jobs within Washington. The law provides that no recipient may use tax credits approved under this program to decertify a union or to displace existing jobs in any community of the state. Thus, the average expected increase of employment positions at the specific facility for which application is made must reflect a gross increase in the applicant's employment of persons at all locations in this state. Transfers of personnel from existing positions outside of an eligible area to new positions at the specific facility within an eligible area will not be allowed for purposes of approving tax credits. Also, layoffs or terminations of employment by the recipient at other locations in Washington but outside an eligible area for the purpose of hiring new positions within an eligible area will result in the withdrawal of any credits taken or approved.
(6) Application procedures. A taxpayer must file an application with and obtain approval from the department of revenue to receive tax credits under this program. A separate application must be submitted for each calendar year for which credits are claimed. RCW 82.62.020 requires that application for the tax credits be made prior to the actual hiring of qualified employment positions. Applications failing to satisfy this statutory requirement will be disapproved.
(a) How to obtain and file applications. Rural Area Application for New Employee B&O Tax Credit form is available at the department's internet website, dor.wa.gov. The completed application may be sent by fax or mail to the address provided in the application.
The U.S. Post Office postmark or fax date will be used as the date of application. For questions and assistance with the application, call 360-705-6214.
(b) Confidentiality. Applications, reports, or any other information received by the department in connection with this tax credit program, except applications not approved by the department, are not confidential and are subject to disclosure. All other taxpayer information is subject to the confidentiality provisions in RCW 82.32.330.
(c) Department to act upon application within 60 days. The department will determine if the applicant qualifies for tax credits on the basis of the information provided in the application and will approve or disapprove the application within 60 days. If approved, the department will issue a credit approval notice containing the dollar amount of tax credits available for use and the procedures for taking the credit. If disapproved, the department will notify the applicant in writing of the specific reasons for disapproval. The applicant may seek administrative review of the department's disapproval of an application by filing a petition for review with the department. The petition must be filed within 30 days from the date of notice of the disallowance pursuant to the provisions of WAC 458-20-100, Appeals, small claims and settlements.
(d) No adjustment of credit after approval. After an application is approved and tax credits are granted, no upward adjustment or amendments of the application will be made for that calendar year.
(7) How much is the tax credit? The amount of tax credit is based on the number of and the wages and benefits paid to qualified employment positions created.
(a) How much tax credit may I claim for each qualified employment position? The amount of tax credit that may be claimed for each position created is as follows:
(i) Two thousand dollars for each qualified employment position that pays $40,000 or less in wages and benefits annually and is employed in an eligible business project; and
(ii) Four thousand dollars for each qualified employment position that pays more than $40,000 in wages and benefits annually and is employed in an eligible business project.
(b) What qualifies as wages and benefits? For the purposes of chapter 82.62 RCW, "wages" means compensation paid to an individual for personal services, whether denominated as wages, salary, commission, bonus, or otherwise. "Benefits" means compensation not paid as wages and includes Social Security, retirement, health care, life insurance, industrial insurance, unemployment compensation, vacation, holiday, sick leave, military leave, and jury duty. "Benefits" does not include any amount reported as wages.
(8) How to claim approved credits. The recipients must take the tax credits approved under this program on their regular combined excise tax return for their regular assigned tax reporting period. These tax credits may not exceed the B&O tax liability. The amount of credit taken should be entered into the "credit" section of the return form, with a copy of the credit approval notice issued to the recipient attached to the return.
(a) When can credits be used? The credits may be used as soon as hiring of the projected qualified employment positions begins or may accrue until they are most beneficial for the recipient's use. For example, if a recipient has been approved for $12,000 of tax credits based upon projections to hire five new positions, that recipient may use $2,000 or $4,000 of tax credit at the time it hires each new employee, depending on the wage/benefit level of the position filled.
(b) No refunds for unused credits. No tax refunds will be made for any tax credits which exceed tax liability during the life of this program. If tax credits derived from qualified hiring exceed the recipients' business and occupation tax liability in any one calendar year under this program, they may be carried forward to the next calendar year(s), until used.
(9) Annual report to be filed by recipient. A recipient of tax credits under this program must complete and submit an annual report of employment activities to substantiate that he or she has complied with the hiring and retention requirements for approved credits. RCW 82.62.050. This report must be filed with the department by January 31st of the year following the calendar year for which credit was approved by the department. Based upon this report the department will verify that the recipient is entitled to the tax credits approved by the department when the application was reviewed. Rural Area Annual Report for New Employee B&O Tax Credit form is provided by the department at the department's website, dor.wa.gov. The completed annual report may be sent by fax or mail to the address provided in the report form.
The U.S. Post Office postmark or fax date will be used as the date of filing. For questions or assistance with filing the annual report, call 360-705-6214.
(a) Verification of annual report. The department will use the same report the recipient provides to the department of employment security, which is known as the quarterly employment security report, to verify the recipient's eligibility for tax credits. The recipient must maintain copies of the quarterly employment report for the year prior to the year for which credits are claimed, the year credits are claimed, and for the four quarters following the hiring of persons to fill the qualified employment positions. (The recipient does not have to forward copies of the quarterly employment report to the department each quarter.) The department may use other wage information provided to the department by the department of employment security. The taxpayer must provide additional information to the department, as the department finds necessary to calculate and verify wage eligibility.
(b) Failure to file report. The law provides that if any recipient fails to submit a report or submits an inadequate report, the department may declare the amount of taxes for which credit has been used to be immediately due and payable. An inadequate report is one which fails to provide information necessary to confirm that the requisite number of employment positions has been created and maintained for 12 consecutive months.
(10) What if the required number of positions is not created? The law provides that if the department finds that a recipient is not eligible for tax credits for any reason, other than failure to create the required number of qualified employment positions, the amount of taxes for which any credit has been used will be immediately due. No interest or penalty will be assessed in such cases. However, if the department finds that a recipient has failed to create the specified number of qualified employment positions, the department will assess interest, but not penalties, on the taxes against which the credit has been used. This interest on the assessment is mandatory and will be assessed at the statutory rate under RCW 82.32.050, retroactively to the date the tax credit was used. The interest will accrue until the taxes for which the credit was used are fully repaid. RCW 82.32.050. The interest rates under RCW 82.32.050 can be obtained from the department's internet website at www.dor.wa.gov or by calling the department's information center at 360-705-6705.
(11) Program thresholds. The department cannot approve any credits that will cause the total credits approved to exceed $7,500,000 in any fiscal year. RCW 82.62.030. A "fiscal year" is the 12-month period of July 1st through June 30th. If all or part of an application for credit is disallowed due to cap limitations, the disallowed portion will be carried over for approval the next fiscal year. However, the applicant's carryover into the next fiscal year is only permitted if the total credits approved for the next fiscal year does not exceed the cap for that fiscal year as of the date on which the department has disallowed the application.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-240A, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0293, and 82.12.0293. WSR 10-23-035, § 458-20-240A, filed 11/9/10, effective 12/10/10.]


PDF458-20-241

Radio and television broadcasting.

(1) Introduction.
(a) This section provides tax reporting instructions for persons in the radio and television broadcasting industry. It explains the application of business and occupation (B&O) tax, retail sales tax, and use tax to the industry and provides an explanation of the various deductions available.
(b) For a discussion of the tax liabilities of subscriber television services, see WAC 458-20-227.
(c) For a discussion of the taxability of digital products, see WAC 458-20-15503.
(2) Definitions. For the purpose of this rule:
(a) "Broadcast" or "broadcasting" includes both radio and television commercial broadcasting stations unless it clearly appears from the context to refer only to radio or television.
(b) "Local advertising" means all broadcast advertising other than national, network, or regional advertising as herein defined.
(c) "National advertising" means broadcast advertising paid for by sponsors that supply goods or services on a national or international basis.
(d) "Network advertising" means broadcast advertising originated by national or regional broadcast networks from outside the state of Washington, the broadcast advertising being supplied by national or regional network broadcasting companies.
(e) "Regional advertising" means broadcast advertising paid for by sponsors that supply goods or services on a regional basis over two or more states.
(3) Business and occupation tax classifications. Persons in the radio and television broadcasting industry must report business and occupation (B&O) tax based on the B&O classification of their income, as follows:
(a) Radio and television broadcasting. Gross income from the sale of radio or television advertising is taxable under the radio and television broadcasting classification, subject to the deduction authorized under RCW 82.04.280 (1)(f)(i) or (ii). (See subsection (4)(b) of this section for more information on the deduction);
(b) Service and other activities. Gross income from personal or professional services not taxed under a different classification, such as gross income from producing and making custom commercials or special programs, fees for providing writers, directors, artists, and technicians, and granting a license to use facilities (as distinct from the leasing or renting of tangible personal property, see WAC 458-20-211) is taxable under the service and other classification;
(c) Royalties. Gross income from charges to other broadcasters for granting the right to use intangible property (e.g., the right to use broadcast material) is taxable under the royalties classification;
(d) Retailing or wholesaling. Gross income from sales of tangible personal property to consumers, including gross proceeds from sales of films and tape produced for general distribution and from sales of copies of commercials, programs, films, etc., is taxable under the retailing classification even though the original was not subject to retail sales tax. Gross income from sales of tangible personal property to persons other than consumers is taxable under the wholesaling classification. Gross income from the sale of custom-made programs, commercials, films, etc., is taxable under the service and other activities classification; and
(e) Manufacturing. The value of special programs, such as public affairs, religious, travelogues, and other general programming, which are distributed via tangible media to other broadcasters under a lease or contract granting a mere license to use, is taxable under the manufacturing classification. (For a discussion of the taxability of digital products transferred electronically, see WAC 458-20-15503.)  Manufacturing B&O tax does not apply to a recording made for the broadcaster's own use, including news, delayed programs, commercials and promotions, special and syndicated programming, and "entire day" programming.
(4) Deductions from gross income from advertising.
(a) Agency fees. It is a general trade practice in the broadcasting industry to make allowances to advertising agencies in the form of the deduction or exclusion of a certain percentage of the gross charge made for advertising ordered by the agency for the advertiser. This allowance is deductible as a discount in the computation of the broadcaster's tax liability in the event that the allowance is shown as a discount or price reduction in the billing or that the billing is on a net basis, i.e., less the discount.
(b) Gross receipts from national, network, and regional advertising. The broadcasting station may deduct actual gross receipts from national, network, and regional advertising, as included in the gross amount reported under radio and television broadcasting, either by using the "standard deduction" or by itemization of the individual broadcasting station's actual receipts.
(i) The "standard deduction" for gross receipts from national, network, and regional advertising as provided by RCW 82.04.280, is a percentage based on the national average of national, network, and regional advertising as reported by the United States Census Bureau's economic census. The standard deduction percentage must be published by the department by rule by September 30, 2020, and by September 30th of every fifth year thereafter. The standard deduction percentage as of September 30, 2020, is sixty-two percent.
(ii) As an alternative to using the standard deduction in (b)(i) of this subsection, a broadcasting station may opt to deduct gross receipts from national, network, and regional advertising by itemizing the actual receipts therefrom.
(c) Allocation of local advertising revenues. Revenues from local advertising may be allocated to remove from the tax base the gross income from advertising that is intended to reach potential customers of the advertiser who are located outside the state of Washington.
(i) Presumption. It will be presumed that the entire gross income of radio and television stations located within the state of Washington from local advertising is subject to tax unless the taxpayer submits proof to the department that some portion of such income is exempt according to the principles set forth herein and until a specific allocation formula has been approved by the department.
(ii) Method of allocation.
(A) When the total daytime listening area of a radio or television station extends beyond the boundaries of the state of Washington, the allowable deduction is that portion of revenue represented by the out-of-state audience computed as a ratio to the broadcasting station's total audience as measured by the .5 millivolt/meter signal strength contour for AM radio, the one millivolt/meter or sixty dBu signal strength contour for FM radio, the twenty-eight dBu signal strength contour for television channels two through six, the thirty-six dBu signal strength contour for television channels seven through thirteen, and the forty-one dBu signal strength contour for television channels fourteen through sixty-nine with delivery by wire, satellite, or any other means, if any. The out-of-state audience may therefore be determined by delivery "over the air" and by community antenna television systems. However, community antenna television audiences may not be claimed by a station in the same area in which it claims an audience served over the air, thus eliminating a claim for double exemption.
(B) The most current United States and Canadian census figures must be used to determine the in-state and out-of-state audience.
(C) In the event that community antenna television subscribers are claimed as part of the out-of-state audience, the name of the systems, the location, and the number of subscribers must be provided to the department upon request. The number of subscribers will be multiplied by a factor of 2.5, representing the average size household.
(D) Upon request by the department, the broadcasting station must submit documentation substantiating the computation of the out-of-state exclusion to the department, as directed.
(5) Retail sales tax.
(a) Purchases by broadcasters of equipment, supplies and materials for the broadcaster's own use and not for resale are subject to the retail sales tax. This includes purchases of raw or unprocessed film, magnetic tape, DVDs, and other transcription material.
(b) If the tapes, films, etc., upon which the sales tax has been paid are later sold by the broadcaster in the regular course of business, the provisions of WAC 458-20-102 concerning purchases for dual purposes will apply.
(c) The broadcaster must collect retail sales tax on sales to consumers of packaged films, programs, etc., produced for general distribution, including training and industrial films, and also on sales of copies of films, commercials, programs, etc., even though the original was not subjected to retail sales tax.
(6) Use tax.
(a) Acquisition or exercise of the right to broadcast material under a right or license granted by lease or contract is not the use of tangible personal property by the broadcaster and the use tax is not applicable.
(b) Broadcasters of radio and television programs are subject to use tax on the value of articles manufactured or produced by them for their own use (excluding custom produced commercials or special programs which include, but is not necessarily limited to, recordings of news, delayed programs, commercials and promotions, special and syndicated programming, and "entire day" programming) and on the use of tangible personal property purchased or acquired under conditions whereby the retail sales tax has not been paid. The broadcaster is liable for use tax on the value (cost of production) of programming when the broadcaster sells merely the right to broadcast such material under a right or license granted by lease or contract.
[Statutory Authority: RCW 82.04.280, 82.32.300 and 82.01.060. WSR 21-12-085, § 458-20-241, filed 6/1/21, effective 7/2/21; WSR 20-20-036, § 458-20-241, filed 9/30/20, effective 9/30/20. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 15-01-126, § 458-20-241, filed 12/19/14, effective 1/19/15. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-241, filed 3/30/83; Order ET 70-3, § 458-20-241 (Rule 241), filed 5/29/70, effective 7/1/70.]


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PDF458-20-242A

Pollution control exemption and/or credits for single purpose facilities added to existing production plants to meet pollution control requirements and which are separately identifiable equipment principally for pollution control.

Rule 242 deals with pollution control facilities and is published in two parts:
Part A.
Single purpose facilities added to existing production plants as separately identifiable equipment principally for pollution control and which are not designed for production of products other than recovered products which but for the facility would be released as pollutants.
Part B.
Dual purpose facilities which consist of new plant equipment which achieves pollution control in the process of production of the plant's products rather than through the add on of a pollution device to existing plant equipment at some point in processing or upon completion of processing.
Definition of Terms
For purposes of this rule:
(1) "Facility" shall mean an "air pollution control facility" or a "water pollution control facility" as herein defined:
(a) "Air pollution control facility" includes any treatment works, control devices and disposal systems, machinery, equipment, structures, property or any part or accessories thereof, installed or acquired for the primary purpose of reducing, controlling or disposing of industrial waste which if released to the outdoor atmosphere could cause air pollution. "Air pollution control facility" shall not mean any motor vehicle air pollution control devices used to control the emission of air contaminants from any motor vehicle.
(b) "Water pollution control facility" includes any treatment works, control device or disposal system, machinery, equipment, structures, property or any accessories thereof installed or acquired for the primary purpose of reducing, controlling or disposing of sewage and industrial waste, which if released to a water course could cause water pollution; provided, that the word "facility" shall not be construed to include any control device, machinery, equipment, structure, disposal system or other property installed or constructed for a municipal corporation or for the primary purpose of connecting any commercial establishment with the waste collecting facilities of public or privately owned utilities.
(c) For purposes of this exemption or credit, the terms "commercial establishment" and "other commercial establishment" do not include contractors or their suppliers who install pollution control equipment in facilities of and for another person.
(2) For the purpose of tax credit or exemption, "cost" shall be limited to capital expenditures directly related to the acquisition and installation of the control facility as described in the application. For the purposes of this definition, capital expenditures may include engineering, architecture, legal fees, overhead and other costs which may be directly attributed to the control facility.
(3) "Net commercial value of recovered products" shall mean the value of recovered products less the costs incurred in processing, including overhead costs, and costs attributable to their sale, or other disposition for value. The term shall not include a deduction for the cost or the depreciation of the facility.
(4) "Certificate" shall mean a pollution control tax exemption and credit certificate for which application has been timely made.
(5) "Appropriate control agency" shall mean the state department of ecology; or the operating local or regional air pollution control agency within whose jurisdiction a facility is or will be located.
(6) For the purposes of this rule "depreciation" shall be determined by the straight line method. That is, the cost of the facility, less the salvage or residual value, divided by months of useful life yields the amount by which the facility is depreciated monthly. In computing depreciation for purposes of obtaining a certificate, depreciation shall be computed through the last full month prior to the month in which the application for certificate is filed.
(7) "Department" shall mean the Washington state department of revenue.
Filing Application and Issuance of Certificates
An application for a certificate will be made available by the department to cover the following conditions:
(1) Existing facilities, to provide the basis for a tax credit and for sales tax paid.
(2) Proposed facilities
(a) To provide the basis for a tax exemption on the purchase of material and equipment;
(b) To provide the basis for a tax credit.
The application must show the cost of the facility, specifically stating costs of materials and equipment incorporated into it. When the certificate is for the purposes referred to in "2" above, estimated costs must be shown. The certificate issued on an application based on estimated costs will not permit the holder to claim the credit referred to in "2b" above until an application showing actual costs has been filed and a supplement to the certificate issued.
Applications showing actual costs must also show the total depreciation which is applicable to the facility to the date of the application, the net commercial value of all materials recovered or captured by the facility during the entire period of operation prior to the date of application, and the amount of federal tax credit taken on federal tax returns filed prior to the date of application.
If, subsequent to the issuance of a certificate for a facility, a determination is made to modify or replace such facility, the certificate holder may file an application for a new or a supplemental certificate covering the modification or replacement following the same procedures provided for making application for original certificate. After the issuance by the department of any new certificate or supplement, all subsequent tax exemption and credits for the modified replacement facility shall be based thereon.
The application will be submitted to the department which will forward it to the appropriate control agency within ten days of its receipt from the applicant. The determination that a facility is designed and operated or is intended to be operated primarily for the control, capture and removal of pollutants from the air, or for the control and reduction of water pollution, and that the facility is suitable and reasonably adequate, and meets the intent and purposes of chapter 70.94 RCW (air pollution) or chapter 90.48 RCW (water pollution) will be made by the appropriate control agency. The control agency will notify the department of its findings within thirty days of the date the application was received for approval. The department will make the final determination of cost.
In making a determination, the appropriate control agency will afford to the applicant an opportunity for a hearing. If the local or regional air pollution control agency fails to act or if the applicant feels aggrieved by the action of the local board, the applicant may appeal to the department of ecology pursuant to rules and regulations established by that department.
Upon notification of the action taken by the control agency the department will issue a certificate or notice of denial within thirty days of the receipt of the application from the control agency. The department will send a certificate or supplement, when issued, by certified mail. Notice of refusal to issue a certificate will likewise be sent by certified mail.
Time limitations. Application must be made no later than December 31, 1969, except that with respect solely to a facility required to be installed in an industrial, manufacturing, waste disposal, utility, or other commercial establishment which is in operation or under construction as of July 30, 1967, such application will be deemed timely if made within one year after the effective date of specific requirements for such facility promulgated by the appropriate control agency; whether or not the determination is made before or after the limitation date of December 31, 1969. The "effective date of specific requirements" refers to the compliance order's date for completion of engineering.
Revocation of certificate. The department may revoke an issued certificate upon subsequent discovery that it was improperly issued for reason of illegality, fraud, mistake, or the ineligibility of the applicant.
Utilization of Exemption and Credit
Sales tax exemption. The original acquisition of a facility, or the modification (meaning a substantial improvement resulting from added capacity in the removal of pollutants from the air or water) of an existing facility by the holder of a certificate shall be exempt from sales tax imposed by chapter 82.08 RCW and use tax subsequent to the effective date of the certificate. For applications filed subsequent to January 1, 1975 certificate holders shall receive credit for sales and use tax paid on acquisition of the facility prior to receiving certification. This exemption does not extend to servicing, maintenance, repairs or replacement parts after a facility is complete and placed in service.
Subsequent to July 30, 1967, a certificate holder may elect to pay sales or use tax on the acquisition and installation of a control facility and, subsequently, take a credit against future liability under business and occupation, use, or public utility tax to the extent of the foregoing exemption, except that a person so electing may not take any further manufacturing tax credit as provided in RCW 82.04.435 on the same facility.
Business and Occupation, Use, or Public Utility Tax Credit. With respect to a facility which has been placed in operation and for which a certificate has been issued, a tax credit not exceeding 2 percent of the cost of a new facility or of the depreciated cost of an existing facility may be taken for each year the certificate is in force. Such credit may be claimed against business and occupation, use, or public utility tax liability; however, it shall not exceed 50 percent of the tax liability for any reporting period for which it is claimed nor shall the cumulative amount of credit allowed for any facility exceed 50 percent of the cost of the facility.
Credits to be reduced. Credits claimed will be reduced by the net commercial value of materials captured or recovered by the pollution control facility. The value of such material shall first reduce the credit available in the current reporting period and then be applied against the cumulative credit balance which has been established but which may not be currently available to the certificate holder. Applicants and certificate holders shall provide the department with information required to establish the net commercial value of recovered or captured material and will be required to make books and records available to the department to verify the correctness of information furnished. The cumulative credit will also be reduced by the amount of federal investment tax credit or other federal tax credits allowed to the certificate holder which are applicable to the facility. The federal tax credits shall be taken as an offset against a pollution control tax credit claimed in the first reporting period following the date of filing the tax return on which the federal tax credit was taken, and thereafter as an offset against a credit hereunder as it becomes available to the certificate holder. The applicant shall advise the department of adjustments to the federal tax credits, either increase or decrease, resulting from either an audit by the internal revenue service, or otherwise. Adjustments to the credit allowable under this rule will be made by the department accordingly.
The department will issue instructions and forms to the certificate holder covering the accounting for the credit for which the certificate holder is eligible. Where a certificate holder is also eligible for manufacturing tax credit, the department may issue special instructions covering the separate accounting for the tax credits.
Credit will be allowable only in any period in which a certificate is in force.
[Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-242A, filed 3/30/83; Order ET 77-1, § 458-20-242A, filed 12/8/77 (formerly codified WAC 458-20-242); Order ET 70-3, § 458-20-242 (Rule 242), filed 5/29/70, effective 7/1/70.]


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PDF458-20-242B

Pollution control exemption and/or credits for dual purpose facilities which are constructed to meet pollution control requirements and which achieve pollution control in the process of production of the plant's products.

Rule 242 deals with pollution control facilities and is published in two parts:
Part A.
Single purpose facilities added to existing production plants as separately identifiable equipment principally for pollution control and which are not designed for production of products other than recovered products which but for the facility would be released as pollutants.
Part B.
Dual purpose facilities which consist of new plant equipment which achieves pollution control in the process of production of the plant's products rather than through the add on of a pollution device to existing plant equipment at some point in processing or upon completion of processing.
This rule sets out instructions for determining pollution control tax exemption and/or credit for a dual purpose pollution control facility.
A dual purpose pollution control facility is defined as a single, integrated facility which is installed to meet standards for air or water pollution, or both, and which is also necessary to the manufacture of products. It refers to a facility in which the portion of the total facility to be identified as for the purpose of pollution control is so integrated into the total facility that physical separation into identifiable component parts—that is, that which is for manufacturing and that which is for pollution control—is not possible. If these criteria are met, the following net cost approach shall be used to determine tax exemption and/or credit.
The application for certification shall be filed with the department of revenue in accordance with chapter 82.34 RCW and WAC 458-20-242A. Upon approval by the appropriate control agency, subject to the qualification that the facility described in the application is a dual purpose facility and that all requirements outlined in chapter 82.34 RCW are met, an exemption/credit certificate shall be issued. To determine the net cost attributable to the pollution control element of the dual function facility, the computations described in the following steps are required.
(1) Obtain cost estimates (for facilities under construction) and final cost figures (for completed facilities) directly related to the new dual function facility. (Actual allowable credits will be based on final costs of completed facilities.) Add to this final cost the amount of unrecovered depreciation on existing equipment replaced, if any. Subtract from this the salvage value of the replaced equipment, if and. Sales and use tax paid shall not be included as part of the facility cost.
(2) Determine the percentage that actual production capacity per unit of time of the existing plant equipment (before installation of the control facility) is of the actual capacity per unit of time of the new dual purpose facility. If the percentage so obtained is equal to or greater than 100 percent, use the figure obtained in step (1) for calculations commencing at step (3).
If the percentage so obtained is less than 100 percent, multiply that percentage times the figure derived in step (1) above. This figure represents the gross cost of constructing the new facility which meets pollution control requirements and obtains productive capacity of the existing plant. Productive capacity shall include all production of commercial or industrial value other than recovered or captured materials deductible from credits under provisions of RCW 82.34.060.
(3) All computations used to adjust the gross cost (as determined in step (2) above) shall be expressed in terms of current dollars at the start up date as defined in this step (3). To this end, a discount rate suitable for determining the present value of future income or expenditures is required. The basis of the discount rate will be the average cost of borrowed capital based on Aa Industrial Bonds as reported in Moody's Bond Record and the cost of equity capital as established by the price earnings ratio for the particular industry class as reported in the value line. This will be the average of amounts so reported for the 12 months preceding and 12 months succeeding the start up date. This date is the first date the new dual purpose facility is both in operation and in compliance with the requirements of the appropriate pollution control agency.
The discount rate to be applied will be a combination of these rates. The two rates shall be weighted 50/50. The same discount rate shall be used for all adjustments to the gross cost.
(4) The next step in the procedure is to calculate the present value of future capital that will not be spent at some specific future date due to the expenditure now of the amount determined in (2) above. This "specific future date" is the date determined by the department as the date of projected replacement of the existing plant absent the need to meet pollution control requirements. This will be the amount of expenditure calculated in (2) above multiplied by the discount factor (as determined by use of the discount rate as calculated in (3) above) which will equal the present worth of that amount of money received or expended on the date representing the end of the useful life of the existing plant by the new installation (the date of "projected replacement"). This calculated amount shall be reduced by the present value, if any, of the undepreciated balance that would remain after the end of the depreciation period for the new facility if construction had been delayed to the date used as the end of the useful life of the facility replaced. This net calculation is then subtracted from the amount computed as the "gross cost" in (2).
(5) From the amount determined in (4) deduct the present value, after deduction of a percentage equal to the maximum corporate federal income tax rate as of the start up date, of operating savings expected to accrue to the date of projected replacement used in (4) applying the discount factor for annual savings based on the discount rate calculated in (3). Operating savings shall not include the net commercial value of materials captured or recovered by virtue of the new installation deductible under RCW 82.34.060 (2)(b).
(6) The next step is to deduct from the balance as computed in (5) the present net value of federal income tax savings to be derived from depreciation of the gross cost of the dual purpose facility due to its construction sooner than at the date of projected replacement using straight line depreciation over the useful life of the facility. The determination of net present value of federal income tax reductions due to depreciation allowances will consist of three steps.
(a) Calculate the present value of depreciation allowances from date of completion of the new facility using straight line depreciation to the projected replacement date.
(b) Deduct from (a) the present value of depreciation that would have been allowable after the date of full depreciation of the new dual purpose facility if construction of the new facility had been delayed until the projected replacement date of the existing facility.
(c) Multiply the result of (a) minus (b) by the maximum corporate federal income tax rate as of the start up date.
The net amount of federal tax benefits arrived at in (c) shall then be deducted from the balance determined in step (5).
(7) The remaining amount from that calculated in (2) after adjustments provided for in steps (3) through (6) is the "net cost" of pollution control equipment to be used as the base for calculation of credits.
Calculation of credits
(A) Determine 2 percent of the amount computed in step 7. this is the gross annual credit.
(B) Multiply the amount shown in step (7) by 50 percent to determine maximum total credit allowable.
(C) The gross credit allowable per year must first be reduced by the net commercial value of captured or recovered materials. Captured or recovered materials means materials which, but for compliance with pollution control requirements, would be discharged into the air or water and which discharge is required to be reduced or eliminated by requirements of the appropriate pollution control agency. The result is the net credit allowable per year.
The formula for "C" is the value of materials captured or recovered from the new plant less the value of materials which would have been captured or recovered over a comparable period of time from the existing plant, but for compliance with pollution control requirements, multiplied by the percentage derived by dividing net cost (step 7) by total cost (step 1).
If the net commercial value of recovered materials exceeds the gross credit allowable per year, the excess must be carried forward for purposes of reducing credits for future years. The amount of the net commercial value of recovered materials reduces both the annual and total credit allowable.
(D) Determine the total amount of Federal Investment Tax Credit or other federal tax credit actually received. Then multiply this tax credit by the percentage which the net cost portion (step 7) is to the total cost of the facility (step 1) to arrive at the portion of the tax credit applicable to the pollution control element of the dual purpose facility.
(E) Deduct the amount determined in step (D) from the amount determined in step (C) until total federal tax credits are totally offset. This is to be an annual calculation.
(F) If the annual amount of net credit to be taken after computation through step (E) exceeds 50 percent of the firm's tax liability under chapters 82.04, 82.12, and 82.16 RCW, it must be reduced to 50 percent of such tax liability.
Adopted December 8, 1977.
[Order ET 77-1, § 458-20-242B (Rule 242 Part B), filed 12/8/77.]


PDF458-20-243

Litter tax.

(1) Introduction. Chapter 82.19 RCW imposes a litter tax on manufacturers, wholesalers, and retailers of certain products. Litter tax is imposed independently of the business and occupation (B&O) tax and retail sales and use taxes. RCW 82.19.010. This section provides detailed information about the litter tax, including the measure of the tax, the products to which the tax applies, and specific exemptions from the tax.
(2) Tax measure. For manufacturers, the measure of the tax is the value of products listed in subsection (4) of this section, including by-products manufactured in this state. For wholesalers and retailers, the measure of the tax is the gross proceeds of sales within this state of the products listed in subsection (4) of this section. In the case of publishers of newspapers and magazines, the measure of the tax is the gross proceeds of sales, and does not include advertising income.
Litter tax is imposed on subsequent sales of the same goods from the manufacturer to the wholesaler, from the wholesaler to the retailer, and from the retailer to the consumer, if the goods are listed in subsection (4) of this section, and the sales are not specifically exempt by law.
(a) Value of products and gross proceeds of sales. For purposes of the litter tax, "value of products" and "gross proceeds of sales" have the same meanings as defined in RCW 82.04.450 and 82.04.070, respectively. See also WAC 458-20-112 for more information regarding "value of products."
(b) Alternative method for grocery stores and drugstores. Instead of requiring grocery stores and drugstores to account for all items that are and are not subject to litter tax separately, the following alternative methods are allowed:
(i) Persons operating drugstores may report and pay litter tax measured by fifty percent of total sales in lieu of separately accounting for sales of nondrug drugstore sundry products. See subsection (4)(n) of this section for information about what constitutes nondrug drugstore sundry products. For purposes of this rule, "drug" has the same meaning as provided in RCW 82.08.0281.
(ii) Persons operating grocery stores may report and pay the litter tax measured by ninety-five percent of total sales in lieu of separately accounting for grocery and nongrocery products sold. See subsection (4)(b) of this section for information about what constitutes grocery products.
(3) When do I report and pay litter tax? The frequency of reporting and paying litter tax coincides with the reporting periods of taxpayers for their B&O tax. For example, a wholesaler who reports B&O tax monthly would also report any litter tax liability on the monthly return. For more information on tax reporting frequency, see WAC 458-20-22801 Tax reporting frequency.
(4) What products are subject to litter tax? Litter tax applies to the manufacture or sale of products listed in this subsection, unless a specific exemption applies. Litter tax applies whether these products are sold packaged, unpackaged, or in recyclable containers. See subsection (5) of this section for the litter tax exemptions available for the manufacture or sale of products in these categories.
(a) Food for human or pet consumption. Food for human or pet consumption is any substance, except drugs, where the chief, general use is for human or pet nourishment, regardless of whether the substance is sold in a consumable form. Food for human or pet consumption includes candy, chewing gum, condiments, packaged or unpackaged meat, bulk foods, shellfish, and ingredients used in processing food for human or pet consumption such as industrial chocolate, grain, barley, or hops. This category includes sales of meals, snacks, lunches, or other food and beverages at restaurants, drive-ins, snack bars, taverns, or by concessionaires.
(b) Groceries. Groceries are all products sold by persons in a place of business selling food and food ingredients, as defined in RCW 82.08.0293, for off-premises consumption, but excluding drugs, building materials, clothing, furniture, and appliances.
(c) Cigarettes and tobacco products. Cigarettes and tobacco products include all of the products subject to the excise taxes imposed by chapters 82.24 and 82.26 RCW.
(d) Soft drinks and carbonated waters. Soft drinks are nonalcoholic beverages that contain natural or artificial sweeteners. Soft drinks do not include beverages that contain milk or milk products, soy, rice or similar milk substitutes, or greater than fifty percent of vegetable or fruit juice by volume. Carbonated waters are nonalcoholic beverages, containing carbon dioxide, that do not contain natural or artificial sweeteners.
(e) Beer and other malt beverages. Beer and other malt beverages are all beverages defined as beer or malt liquor by RCW 66.04.010 or rules of the Washington state liquor and cannabis board.
(f) Wine. Wine includes all alcoholic beverages defined as wine in RCW 66.04.010 or rules of the Washington state liquor and cannabis board, but does not include "spirits" as defined in RCW 66.04.010.
(g) Newspapers and magazines. Newspapers and magazines are all daily and periodical publications, including real estate guides, vehicle trader publications, free community newspapers, and the like.
(h) Household paper and paper products. Household paper and paper products are materials or substances made into sheets or leaves from natural organic or synthetic fibrous material for home or other personal use. Household paper and paper products include products or articles made from such sheets or leaves for home or other personal use, such as toilet tissue, paper cups, plates, napkins, cards, wrapping paper, stationery, personal banking checks or deposit slips, computer printer or copier paper, and the like. Household paper and paper products do not include paper products manufactured or sold for business or commercial use. Business and commercial use requires that the paper products be consumed by the business or used by the business in the manufacturing of articles, substances, or commodities.
(i) Glass containers. Glass containers are articles made wholly or in substantial part of processed silicates that can be, or are, used to hold other things within themselves. Glass containers include only those containers that are sold with, and that contain, another product or products otherwise subject to litter tax, or containers that are produced so that they can later contain and be sold with another product or products otherwise subject to litter tax. Glass containers do not include containers that are produced to be sold at retail as empty reusable containers, such as drinking glasses, vases, and the like.
(j) Metal containers. Metal containers are articles made wholly or in substantial part of materials such as iron, steel, tin, aluminum, copper, zinc, lead, silver and any alloys thereof; and that can be, or are, used to hold other things within themselves. In addition, metal containers include only those containers that are sold with, and that contain, another product or products otherwise subject to litter tax, or containers that are produced so that they can later contain and be sold with another product or products otherwise subject to litter tax. Metal containers do not include containers that are produced to be sold at retail as empty reusable containers, such as pots and pans, or metal containers made for transporting other products.
(k) Plastic or fiber containers made of synthetic material. Plastic or fiber containers made of synthetic material will be referred to as plastic or fiber containers for purposes of this subsection (4)(k). Plastic or fiber containers are articles that can be, or are, used to hold other things within themselves, and that are made of synthetically produced ethylene derivatives, resins, waxes, adhesives, or polymers, or made by synthesis of fiber materials with adhesives, polymers, waxes, resins, or other materials. Plastic or fiber containers include containers made of paper, pasteboard, or cardboard consisting of fibrous substances synthesized with other materials. Synthetic material is produced by the process of making or building up by a composition or union of simpler parts or elements, as distinguished from the process of extraction or refinement. Plastic or fiber containers include only those containers that are sold with, and that contain, another product or products otherwise subject to litter tax, or containers that are produced so that they can later contain and be sold with another product or products otherwise subject to litter tax. Plastic or fiber containers do not include containers that are produced to be sold at retail as empty reusable containers.
(l) Cleaning agents. Cleaning agents are all soaps, detergents, solvents, or other cleansing substances used for cleaning buildings, places, persons, animals, or other things. Cleaning agents include packaged products and products sold in bulk form, as well as products sold in recyclable containers.
(m) Toiletries. Toiletries are all substances such as soap, powder, shampoo, cologne, perfume, cosmetics, toothpaste, and the like, used in connection with personal dressing or grooming.
(n) Nondrug drugstore sundry products. Nondrug drugstore sundry products are all products sold by persons in the business of selling prescription drugs to consumers, except the following: Drugs, building materials, clothing, furniture, and appliances.
(5) Exemptions. This subsection provides information about products listed under subsection (4) of this section that are exempt from litter tax as provided by RCW 82.19.050. A person claiming an exemption from the litter tax must maintain adequate records to substantiate the exempt status of the product being manufactured or sold.
The litter tax does not apply to the following categories of products:
(a) Products for use and consumption out-of-state. The manufacture or sale of products for use and consumption outside the state.
(b) Agricultural products exempt from B&O tax. The value of products or gross proceeds of the sales by farmers exempt from tax under RCW 82.04.330.
(c) Certain wholesale sales by qualified grocery distribution cooperatives. The sale of products for resale by a qualified grocery distribution cooperative to customer-owners of the grocery distribution cooperative. For the purposes of this section, "qualified grocery distribution cooperative" and "customer-owner" have the meanings given in RCW 82.04.298.
(d) Food or beverages sold for on-premises consumption. The sale of food or beverages by retailers that are sold solely for immediate consumption indoors at the seller's place of business, at a deck or patio at the seller's place of business, or at an eating area that is contiguous to the seller's place of business.
(e) Certain retail sales by caterers. The sale of prepared food or beverages by caterers where the food or beverages are to be served for immediate consumption in or on individual, nonsingle use containers at premises occupied or controlled by the customer. For the purposes of this section, "prepared food" has the same meaning as provided in RCW 82.08.0293. "Nonsingle use container" and "caterer" have the meanings given in RCW 82.19.050.
(6) Examples. Examples included in this rule identify a number of facts and then state a general conclusion; they should be used only as a general guide. The tax consequences of all situations must be determined after a review of all the facts and circumstances.
(a) Example 1. Tina's Burgers is a restaurant that operates in a food court. Tina's Burgers offers the option to dine-in or take the food to-go. Dine-in sales are for customers who will be immediately consuming their food purchases within the food court dining area. To-go sales will be taken from the food court area to be consumed off of the premises. If a customer orders a burger and indicates they will dine-in, the purchase is not subject to litter tax. If a customer indicates that they will take the burger to-go, the purchase is subject to litter tax. To qualify for the exemption, Tina's Burgers must maintain adequate records demonstrating which sales were dine-in, and which were to-go.
(b) Example 2. ABC Cinema sells popcorn and other food and beverage items at its concession stand. Customers purchase the concession items to consume at the theater while watching movies. The purchases from the theater's concession stand are not subject to litter tax.
(c) Example 3. Prairie Oaks Golf Course has a restaurant on site called Chipper's. The golf course does not own the restaurant. Chipper's has a dining area, but also has servers driving golf carts through the golf course to serve patrons as they golf. Sales for immediate consumption in the restaurant dining area are not subject to litter tax, but sales occurring on the golf course are subject to litter tax because the food is not being consumed on the premises of the restaurant.
[Statutory Authority: RCW 82.19.030. WSR 20-14-093, § 458-20-243, filed 6/30/20, effective 7/31/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.19 RCW. WSR 06-17-187, § 458-20-243, filed 8/23/06, effective 9/23/06. Statutory Authority: RCW 82.32.300. WSR 83-08-026 (Order ET 83-1), § 458-20-243, filed 3/30/83; Order ET 71-2, § 458-20-243, filed 10/27/71.]


PDF458-20-244

Food and food ingredients.

(1) Introduction. This rule provides guidelines for determining if food or food ingredients qualify for the retail sales tax and use tax exemptions under RCW 82.08.0293 and 82.12.0293 (collectively referred to in this rule as the "exemptions").
There is no corresponding business and occupation (B&O) tax exemption. Even if a sale of food or food ingredients is exempt from retail sales tax or use tax under the exemptions, gross proceeds from sales of food or food ingredients remain subject to the retailing B&O tax.
(2) Other rules that may apply. Rules in the following list may contain additional relevant information:
(a) WAC 458-20-119 Sales by caterers and food service contractors;
(b) WAC 458-20-124 Restaurants, cocktail bars, taverns and similar businesses;
(c) WAC 458-20-166 Hotels, motels, boarding houses, rooming houses, resorts, hostels, trailer camps, short-term rentals and similar lodging businesses;
(d) WAC 458-20-167 Educational institutions, school districts, student organizations, and private schools;
(e) WAC 458-20-168 Hospitals, nursing homes, assisted living facilities, adult family homes, and similar health care facilities. This rule also provides information on an exclusion from retail sales tax for certain food, drinks, or meals furnished by senior living communities;
(f) WAC 458-20-169 Nonprofit organizations;
(g) WAC 458-20-229 Refunds; and
(h) WAC 458-20-243 Litter tax.
(3) Items qualifying for the exemptions.
(a) In general. The exemptions apply to food and food ingredients. "Food and food ingredients" means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.
(b) Items not used solely for ingestion or chewing. Items that are commonly ingested or chewed by humans for their taste or nutritional value but which may also be used for other purposes are generally treated as food or food ingredients. For example, pumpkins are presumed to be a food or food ingredient unless the pumpkin is sold painted or is otherwise clearly for decorative purposes rather than consumption. This is true even though the purchaser may use an undecorated pumpkin for carving and display rather than for eating.
(4) Items not qualifying for the exemptions. The exemptions do not apply to the following items, which are not considered "food or food ingredients" or which are otherwise specifically excluded from the exemptions:
(a) Items sold for medical or hygiene purposes. Items commonly used for medical or hygiene purposes, such as cough drops, breath sprays, toothpaste, etc., are not ingested for taste or nutrition and are not considered a food or food ingredient. In contrast, breath mints are commonly ingested for taste and are considered a food or food ingredient.
(b) Bulk sales of ice. Ice sold in bags, containers, or units of greater than 10 pounds and blocks of ice of any weight are not considered a food or food ingredient. Ice sold in cubed, shaved, or crushed form in packages or quantities of 10 pounds or less is considered a food or food ingredient. Refer to WAC 458-20-120, Sales of ice, for additional guidance on the sale of ice.
(c) Alcoholic beverages. Alcoholic beverages are excluded from the definition of food and food ingredients. "Alcoholic beverages" means beverages that are suitable for human consumption and contain one-half of one percent or more of alcohol by volume.
(d) Tobacco. Tobacco is excluded from the definition of food and food ingredients. "Tobacco" includes cigarettes, cigars, chewing or pipe tobacco, or any other item that contains tobacco.
(e) Cannabis. Cannabis, useable cannabis, cannabis concentrates, or cannabis-infused products, as defined in RCW 69.50.101, are excluded from the definition of food and food ingredients. "Cannabis" means all parts of the plant Cannabis, whether growing or not, with a THC concentration greater than 0.3 percent on a dry weight basis.
(f) Bottled water. Bottled water is excluded from the exemptions for food and food ingredients. "Bottled water" means water that is placed in a safety sealed container or package for human consumption.
(i) Bottled water is calorie free and does not contain sweeteners or other additives except that it may contain:
(A) Antimicrobial agents;
(B) Fluoride;
(C) Carbonation;
(D) Vitamins, minerals, and electrolytes;
(E) Oxygen;
(F) Preservatives; and
(G) Only those flavors, extracts, or essences derived from a spice or fruit.
(ii) Exemptions for tax on bottled water. There are limited retail sales tax exemptions on bottled water. Sellers must collect the retail sales tax on all sales of bottled water, unless the bottled water is delivered to the buyer as described in (f)(ii)(C) of this subsection. Any buyer that has paid at least $25.00 in state and local taxes on purchases of bottled water subject to the exemptions described in (f)(ii)(A) and (B) of this subsection may apply for a refund of the taxes directly from the department.
(A) Prescription issued bottled water. Bottled water prescribed to patients for use in the cure, mitigation, treatment, or prevention of disease or other medical condition is exempt. RCW 82.08.9994. The bottled water must be prescribed, through an order, formula, or recipe issued in any form of oral, written, electronic, or other means of transmission, by a licensed practitioner authorized by Washington law to prescribe.
(B) Primary water source unsafe. Bottled water for human use by persons whose primary source of drinking water is unsafe is exempt. RCW 82.08.99941. A person's primary source of drinking water is unsafe if:
(I) The public water system providing the drinking water has issued a public notification that the drinking water may pose a health risk, and the notification is still in effect on the date that the bottled water was purchased;
(II) Test results on the person's drinking water, which are no more than 12 months old, from a laboratory certified to perform drinking water testing show that the person's drinking water does not meet safe drinking water standards applicable to public water systems; or
(III) The person otherwise establishes, to the department's satisfaction, that the person's drinking water does not meet safe drinking water standards applicable to public water systems.
(C) Bottled water delivered to the buyer in a reusable container not sold with the water. Buyers claiming an exemption listed in (f)(ii)(A) or (B) of this subsection that have the qualifying water delivered in a reusable container that is not sold with the water must complete a retail sales exemption certificate and provide it to the seller. The seller must retain a copy of the certificate.
(iii) For information regarding exemption certificates and refund requests, visit dor.wa.gov.
(g) Soft drinks. Soft drinks are excluded from the exemptions for food and food ingredients. "Soft drinks" means any nonalcoholic beverage that contains natural or artificial sweeteners, except beverages that contain:
(i) Milk or milk products;
(ii) Soy, rice, or similar milk substitutes; or
(iii) More than 50 percent by volume of vegetable or fruit juice.
For example, sweetened sports beverages are considered "soft drinks," but a sweetened soy beverage is a food or food ingredient.
Beverage mixes that are not sold in liquid form are not soft drinks even though they are intended to be made into a beverage by the customer. Examples include powdered fruit drinks, powdered tea or coffee drinks, and frozen concentrates. These items are food or food ingredients and are not subject to retail sales tax.
(h) Dietary supplements. Dietary supplements are excluded from the exemptions for food and food ingredients. "Dietary supplement" means any product intended to supplement the diet, other than tobacco, which meets all of the following requirements:
(i) Contains a vitamin; mineral; herb or other botanical; an amino acid; a substance for use by humans to increase total dietary intake; or a concentrate, metabolite, constituent, extract; or a combination of any of these ingredients;
(ii) Is intended for ingestion in tablet, capsule, powder, soft gel, gelcap, or liquid form, or if not intended for ingestion in such a form, is not represented as conventional food and is not represented for use as a sole item of a meal or of the diet; and
(iii) Is required to be labeled with a Food and Drug Administration "supplement facts" box. If a product is otherwise considered a food or food ingredient and labeled with both a "supplement facts" box and "nutrition facts" box, the product is treated as a food or food ingredient.
Nutrition products formulated to provide balanced nutrition as a sole source of a meal or of the diet are considered a food or food ingredient and not a dietary supplement. Refer to RCW 82.08.925 for information on the retail sales tax exemption applicable to dietary supplements dispensed under a prescription.
(i) Prepared food. Prepared food is excluded from the exemptions for food and food ingredients. Prepared food generally means heated foods, combined foods, or foods sold with utensils provided by the seller, as described in more detail in subsection (5) of this rule.
(5) Items designated as prepared foods. Food or food ingredients are "prepared foods" if any one of the following is true:
(a) Heated foods. Food or food ingredients are "prepared foods" if sold in a heated state or are heated by the seller, except bakery items. "Bakery items" include bread, rolls, buns, biscuits, bagels, croissants, pastries, donuts, Danish, cakes, tortes, pies, tarts, muffins, bars, cookies, and tortillas. Food is sold in a heated state or is heated by the seller when the seller provides the food to the customer at a temperature that is higher than the air temperature of the seller's establishment. Food is not sold in a heated state or heated by the seller if the customer, rather than the seller, heats the food in a microwave provided by the seller.
(b) Combined foods. Food or food ingredients are "prepared foods" if the item sold consists of two or more foods or food ingredients mixed or combined by the seller for sale as a single item, unless the food or food ingredients are any of the following:
(i) Bakery items (defined in (a) of this subsection);
(ii) Items that the seller only cuts, repackages, or pasteurizes;
(iii) Items that contain eggs, fish, meat, or poultry, in a raw or undercooked state requiring cooking as recommended by the federal Food and Drug Administration in chapter 3, part 401.11 of The Food Code, published by the Food and Drug Administration, as amended or renumbered as of January 1, 2003, so as to prevent foodborne illness; or
(iv) Items sold in an unheated state as a single item at a price that varies based on weight or volume.
(c) Food sold with utensils provided by the seller. Food or food ingredients are "prepared foods" if sold with utensils provided by the seller. Utensils include plates, knives, forks, spoons, glasses, cups, napkins, and straws. A plate does not include a container or packaging used to transport the food.
(i) Utensils are customarily provided by the seller. A food or food ingredient is "sold with utensils provided by the seller" if the seller's customary practice for that item is to physically deliver or hand a utensil to the customer with the food or food ingredient as part of the sales transaction. If the food or food ingredient is prepackaged with a utensil, the seller is considered to have physically delivered a utensil to the customer unless the food and utensil are prepackaged together by a food manufacturer classified under sector 311 of the NAICS. Examples of utensils provided by such manufacturers include juice boxes that are packaged with drinking straws, and yogurt or ice cream cups that are packaged with wooden or plastic spoons.
(ii) Utensils are necessary to receive the food. Individual food or food ingredient items are "sold with utensils provided by the seller" if a plate, glass, cup, or bowl is necessary to receive the food or food ingredient and the seller makes those utensils available to its customers. For example, items obtained from a self-serve salad bar are sold with utensils provided by the seller, because the customer must use a bowl or plate provided by the seller in order to receive the items.
(iii) More than 75 percent prepared food sales with utensils available. All food and food ingredients sold at an establishment, including foods prepackaged with a utensil by a manufacturer classified under sector 311 of the NAICS, are "sold with utensils provided by the seller" if the seller makes utensils available to its customers and the seller's gross retail sales of prepared food under (a), (b), and (c)(ii) of this subsection equal more than 75 percent of the seller's gross retail sales of all food and food ingredients, including prepared food, soft drinks, bottled water, and dietary supplements.
(A) Exception for four or more servings. Even if a seller has more than 75 percent prepared food sales, four servings or more of food or food ingredients packaged for sale as a single item and sold for a single price are not "sold with utensils provided by the seller" unless the seller's customary practice for the package is to physically hand or otherwise deliver a utensil to the customer as part of the sales transaction. Whenever available, the number of servings included in a package of food or food ingredients is to be determined based on the manufacturer's product label. If no label is available, the seller must reasonably determine the number of servings.
(B) Determining total sales of prepared foods. The seller must determine a single prepared food sales percentage annually for all the seller's establishments in the state based on the prior year of sales. The seller may elect to determine its prepared food sales percentage based either on the prior calendar year or on the prior fiscal year. A seller may not change its elected method for determining its prepared food percentage without the written consent of the department of revenue. The seller must determine its annual prepared food sales percentage as soon as possible after accounting records are available, but in no event later than 90 days after the beginning of the seller's calendar or fiscal year. A seller may make a good faith estimate of its first annual prepared food sales percentage if the seller's records for the prior year are not sufficient to allow the seller to calculate the prepared food sales percentage. The seller must adjust its good faith estimate prospectively if its relative sales of prepared foods in the first 90 days of operation materially depart from the seller's estimate.
(d) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(i) Example 1. Fast Cafe sells hot and cold coffee and mixed coffee and mixed milk beverages, cold soft drinks, milk and juice in single-serving containers, sandwiches, whole fruits, cold pasta salad, cookies and other pastries. Fast Cafe prepares the pasta salad on-site. It orders the pastries from a local bakery, including specialty cakes which it sells both as whole cakes and by the slice. It purchases its sandwiches from a local caterer. The sandwiches are delivered by the caterer prewrapped in plastic with condiments and a plastic knife. Fast Cafe makes straws, napkins and cup lids available for all customers by placing them on a self-service stand. In its first full year of operation, Fast Cafe's annual gross retail sales of all food and food ingredients, including prepared food, soft drinks, bottled water, and dietary supplements is $100,000. Of this gross retail sales total, $80,000 is from the sale of hot coffee and hot and cold mixed coffee and milk beverages, all sold in disposable paper or plastic cups with the Fast Cafe logo.
Because more than 75 percent of Fast Cafe's total retail sales of food and food ingredients, including prepared food, soft drinks, bottled water, and dietary supplements are sales of food or food ingredients that are heated or combined by the seller or sold with a utensil (cups) necessary to receive the food, Fast Cafe has more than 75 percent prepared food sales. Because Fast Cafe makes utensils available for its customers, all food and food ingredients sold by Fast Cafe are considered "prepared food," including the cold milk beverages, cookies and pastries, pasta salad, sandwiches and whole fruits. The only exception is the sale of whole specialty cakes. Because a whole cake contains four or more servings, it is not subject to retail sales tax unless Fast Cafe customarily hands a utensil to the customer as part of the sale transaction.
(ii) Example 2. Assume the same facts as in Example 1, but that only $60,000 of Fast Cafe's Year 1 gross retail sales were sales of hot coffee and hot and cold mixed coffee and milk beverages. The remainder of its retail sales were sales of sandwiches, whole fruits, cookies and other pastries. Under these facts, Fast Cafe does not have more than 75 percent prepared food sales. Thus, the items sold by Fast Cafe are taxed as follows:
(A) Hot coffee and milk beverages are heated by the seller and are also sold by Fast Cafe with a utensil (a paper cup) necessary to receive the food. The hot coffee and milk beverages are "prepared food" for either reason and are subject to retail sales tax.
(B) Cold mixed milk beverages are a combination of two or more foods or food ingredients and are also sold by Fast Cafe with a utensil (a paper or plastic cup) necessary to receive the food. The cold milk beverages are "prepared food" for either reason and are subject to retail sales tax.
(C) Cold soft drinks are not exempt and are subject to retail sales tax.
(D) Sandwiches prepared by the caterer are subject to retail sales tax. Even though the caterer, rather than the seller, combines the ingredients and includes a utensil, Fast Cafe is considered to have provided the utensil because the caterer is not a food manufacturer classified under sector 311 of the NAICS.
(E) Pasta salad is combined by the seller and is subject to retail sales tax. Note that if the pasta salad was sold by the pound, rather than by servings, it would not be subject to retail sales tax.
(F) Milk and juice in single serving containers, whole fruit, cookies, pastries, slices of cake, and whole cakes are not subject to retail sales tax unless the seller's customary practice is to hand a utensil to the customer as part of the sales transaction. None of these items are heated by the seller, combined by the seller, or require a plate, glass, cup, or bowl in order to receive the item. Even if Fast Cafe heats the pastries for its customers, the pastries are not subject to retail sales tax.
(iii) Example 3. A pizza restaurant sells whole hot pizzas, hot pizza by the slice, and unheated ready-to-bake pizzas. The whole hot pizzas and hot pizza sold by the slice, including delivered pizzas, are "prepared food" because these items are sold in a heated state. If the unheated ready-to-bake pizzas are prepared by the seller, they are "prepared food" because the seller has mixed or combined two or more food ingredients. This is true even though some ingredients in the unheated pizzas are raw or uncooked, because those ingredients do not require cooking to prevent foodborne illness. If the unheated ready-to-bake pizzas are prepared by a manufacturer other than the seller, they will be taxable as "prepared food" only if sold with utensils provided by the seller.
(6) Combined sales of taxable and exempt items. Where two or more distinct and identifiable items of tangible personal property, at least one of which is a food or food ingredient, are sold for one nonitemized price that does not vary based on the selection by the purchaser of items included in the transaction:
(a) The entire transaction is taxable if the seller's purchase price or sales price of the taxable items is greater than 50 percent of the combined purchase price or sales price; and
(b) The entire transaction is exempt from retail sales tax if the seller's purchase price or sales price of the taxable items is 50 percent or less of the combined purchase price or sales price.
The seller may make the determination based on either purchase price or sales price, but may not use a combination of the purchase price and sales price.
Example. A combination wine and cheese picnic basket contains four items packaged together: A bottle of wine, a wine opener, single-serving cheeses, and the picnic basket holding these items. The seller's purchase price for the wine, wine-opener, and picnic basket totals $10.00. The seller's purchase price for the cheeses is two dollars. The seller must collect retail sales taxes on the entire package, because the seller's purchase price for the taxable items ($10.00) is greater than 50 percent of the combined purchase price ($12.00).
(c) Incidental packaging. "Distinct and identifiable items" does not include packaging which is immaterial or incidental to the sale of another item or items. For example, a decorative bag sold filled with candy is not the sale of "distinct and identifiable" items where the bag is merely ornamental packaging immaterial in the sale of the candy.
(d) Free items. "Distinct and identifiable items" does not include items provided free of charge. An item is only provided free of charge if the seller's sales price does not vary depending on whether the item is included in the sale.
(7) Seller's accounting requirements. All sales of food and food ingredients at an establishment will be treated as taxable unless the seller separately accounts for sales of exempt and nonexempt food and food ingredients. It is sufficient separation for accounting purposes if cash registers or the like are programmed to identify items that are not tax exempt and to calculate and assess the proper sales tax accordingly.
(8) Other retail sales tax exemptions that may apply.
(a) Meals served to certain persons. The exemptions apply to food and food ingredients furnished, prepared, or served as meals:
(i) Under a state-administered nutrition program for the aged as provided for in the Older Americans Act (Public Law 95-478 Title III) and RCW 74.38.040(6);
(ii) Provided to senior citizens, individuals with disabilities, or low-income persons by a nonprofit organization organized under chapter 24.03A or 24.12 RCW; or
(iii) Provided to residents, 62 years of age or older, of a qualified low-income senior housing facility by the lessor or operator of the facility. The sale of a meal that is billed to both spouses of a marital community or both domestic partners of a domestic partnership meets the age requirement in this subsection (a)(iii) if at least one of the spouses or domestic partners is at least 62 years of age. For purposes of this subsection, "qualified low-income senior housing facility" means a facility:
(A) That meets the definition of a qualified low-income housing project under Title 26 U.S.C. Sec. 42 of the federal Internal Revenue Code, as existing on August 1, 2009;
(B) That has been partially funded under Title 42 U.S.C. Sec. 1485 of the federal Internal Revenue Code; and
(C) For which the lessor or operator has at any time been entitled to claim a federal income tax credit under Title 26 U.S.C. Sec. 42 of the federal Internal Revenue Code.
(b) Foods exempt under the Supplemental Nutrition Assistance Program (SNAP). Under RCW 82.08.0297, eligible foods purchased with food benefits under the SNAP or a successor program are exempt from the retail sales tax. This is a separate and broader exemption than the retail sales tax exemption for food and food ingredients under RCW 82.08.0293. For example, bottled water, soft drinks, garden seeds, and plants which produce food for the household to eat are "eligible foods" but are not "food or food ingredients." If such items are purchased with food benefits under SNAP or a successor program, they are exempt from the retail sales tax under RCW 82.08.0297, even though the items do not qualify for the exemption under RCW 82.08.0293.
(i) Use of food benefits combined with other means of payment. When both food benefits and other means of payment are used in the same sales transaction, for purposes of collecting retail sales taxes, the other means of payment must be applied first to items which are food and food ingredients exempt under RCW 82.08.0293. The intent is to apply the benefits and other means of payment in such a way as to provide the greatest possible exemption from retail sales tax.
(ii) Example. A customer purchases the following at a grocery store: Meat for three dollars, cereal for three dollars, canned soft drinks for five dollars, and soap for two dollars for a total of $13.00. The customer pays with seven dollars in benefits and six dollars in cash. The cash is applied first to the soap because the soap is neither exempt under RCW 82.08.0293 nor an eligible food under SNAP. The remaining cash (four dollars) is applied first to the meat and the cereal. The food benefits are applied to the balance of the meat and cereal (two dollars) and to the soft drinks (five dollars). Retail sales tax is due only on the soap.
(9) Vending machine sales. The exemptions do not apply to sales of food and food ingredients dispensed from vending machines. There are special requirements for reporting retail sales tax collected on vending machine sales, discussed in (a) of this subsection. "Honor box" sales (sales of snacks or other items from open display trays) are not considered vending machine sales.
(a) Calculating and reporting retail sales tax collected on vending machine sales. Vending machine owners do not need to state the retail sales tax amount separately from the selling price. See RCW 82.08.050 and 82.08.0293. Instead, vending machine owners must determine the amount of retail sales tax collected on the sale of food or food ingredients by using one of the following methods:
(i) Food or food ingredients dispensed in a heated state, soft drinks, and bottled water. For food or food ingredients dispensed from vending machines in a heated state (e.g., hot coffee, soups, tea, and hot chocolate) and vending machine sales of soft drinks and bottled water, a vending machine owner must calculate the amount of retail sales tax that has been collected ("tax in gross") based on the gross vending machine proceeds. The "tax in gross" is a deduction against the gross amount of both retailing B&O and retail sales. The formula is:
gross machine proceeds - [(gross machine proceeds)/(1 + sales tax rate)] = tax in gross
(ii) All other food or food ingredients. For all other food and food ingredients dispensed from vending machines, a vending machine owner must calculate the amount of retail sales tax that has been collected ("tax in gross") based on 57 percent of the gross vending machine proceeds. The "tax in gross" is a deduction against the gross amount of both retailing B&O and retail sales. The formula is:
(gross machine proceeds x .57) x sales tax rate = tax in gross
The remaining 43 percent of the gross vending machine proceeds, less the "tax in gross" amount, is reported as an exempt food sales deduction against retail sales proceeds only calculated as follows:
(gross machine proceeds x .43) - tax in gross = exempt food deduction
(b) Example. Jane owns a vending machine business with machines in Spokane and Seattle. In each location, she has a vending machine selling candy and a second vending machine selling hot cocoa and coffee drinks. Her annual sales for the vending machines and the combined retail sales tax rates for Seattle and Spokane are as follows:
 
 
Coffee Machine (cocoa & coffee)
Candy Machine
Combined Retail Sales Tax Rate
 
 
Seattle
$2,500
$10,000
.101
 
 
Spokane
$3,000
$6,000
.089
 
To determine the amount of retail sales tax she collected on the sale of cocoa and coffee (food dispensed in a heated state, subject to retail sales tax), Jane calculates the "tax in gross" deduction amount as follows:
gross machine proceeds - [(gross machine proceeds)/(1 + sales tax rate)] = tax in gross
$2,500 - ($2,500/ 1.101)
=
$229.34
(Seattle coffee machine)
$3,000 - ($3,000/ 1.089)
=
$245.18
(Spokane coffee machine)
 
 
$474.52
 
Thus, for both retailing B&O and retail sales, Jane must report her total gross coffee machine proceeds of $5,500 with a "tax in gross" deduction of $474.52.
To determine the amount of retail sales tax she collected on the sale of candy, Jane calculates the "tax in gross" deduction amount as follows:
(gross machine proceeds x .57) x sales tax rate = tax in gross
$10,000 x .57 x  .101
=
$575.70
(Seattle candy machine)
$6,000 x .57 x  .089
=
$304.38
(Spokane candy machine)
 
 
$880.08
 
Thus, for both retailing B&O and retail sales, Jane must report her total gross candy machine proceeds of $16,000 with a "tax in gross" deduction of $880.08.
Jane must also report an exempt food sales deduction representing the remaining 43 percent of the gross candy machine proceeds.
(43% x gross machine proceeds) - tax in gross = exempt food deduction
(.43 x $16,000) - $880.08 = $5999.92
Jane reports the exempt food sales deduction only against the gross amount of her retail sales. The deduction does not apply to retailing B&O.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 24-03-081, § 458-20-244, filed 1/16/24, effective 2/16/24; WSR 22-24-096, § 458-20-244, filed 12/6/22, effective 1/6/23; WSR 22-14-014, § 458-20-244, filed 6/23/22, effective 7/24/22. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0293, 82.12.0293, 82.08.9994, 82.08.99941, 82.12.9994, and 82.12.99941. WSR 19-20-061, § 458-20-244, filed 9/26/19, effective 10/27/19. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-01-006, § 458-20-244, filed 12/4/14, effective 1/4/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0293 and 82.12.0293. WSR 12-01-027, § 458-20-244, filed 12/12/11, effective 1/12/12; WSR 10-21-010, § 458-20-244, filed 10/7/10, effective 11/7/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 07-24-038, § 458-20-244, filed 11/30/07, effective 12/31/07; WSR 07-11-066, § 458-20-244, filed 5/14/07, effective 6/14/07; WSR 03-24-031, § 458-20-244, filed 11/25/03, effective 1/1/04. Statutory Authority: RCW 82.32.300. WSR 88-15-066 (Order 88-4), § 458-20-244, filed 7/19/88; WSR 87-19-139 (Order 87-6), § 458-20-244, filed 9/22/87; WSR 86-21-085 (Order ET 86-18), § 458-20-244, filed 10/17/86; WSR 86-02-039 (Order ET 85-8), § 458-20-244, filed 12/31/85; WSR 83-17-099 (Order ET 83-6), § 458-20-244, filed 8/23/83; WSR 82-16-061 (Order ET 82-7), § 458-20-244, filed 7/30/82. Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 78-05-041 (Order ET 78-1), § 458-20-244 (Rule 244), filed 4/21/78, effective 7/1/78.]
Reviser's note: The brackets and enclosed material in the text of the above section occurred in the copy filed by the agency.


PDF458-20-245

Taxation of competitive telephone service, telecommunications service, and ancillary service.

This rule identifies what constitutes competitive telephone services, telecommunications services, and ancillary services; how these products are taxed; and the statutes that apply for determining if the sale of these products are subject to taxation in Washington (sourcing and apportionment). The rule applies to tax periods commencing on or after July 1, 2008. This rule is divided into three parts as follows:
• Part I: What are competitive telephone services, telecommunications services, and ancillary services?
• Part II: How are competitive telephone services, telecommunications services, and ancillary services taxed in Washington?
• Part III: When is the sale of competitive telephone services, telecommunications services, or ancillary services subject to taxation in Washington (sourcing and apportionment)?
Part I: What are competitive telephone services, telecommunications services, and ancillary services?
(101) Introduction. Washington law imposes tax on the three following distinct products: Competitive telephone service, telecommunications service, and ancillary service. Subsections (102), (103), and (104) of this section describe these three services. The statutes for the 911 tax and the prepaid wireless 911 tax are not addressed in this rule and are found in chapter 82.14B RCW, with the definitions found in RCW 82.14B.020.
(102) What is a competitive telephone service? A "competitive telephone service" means the providing by any person of telecommunications equipment or apparatus, or service related to that equipment or apparatus such as installation, repair, or maintenance services, if the equipment or apparatus is of a type that can be provided by persons that are not subject to regulation as telephone companies under Title 80 RCW. See RCW 82.04.065.
(103) What is a telecommunications service? A "telecommunications service" means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points. Telecommunications service includes such transmission, conveyance, or routing in which computer processing applications are used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing without regard to whether such service is referred to as voice over internet protocol services or is classified by the federal communications commission as enhanced or value added. See RCW 82.04.065.
(a) What services are included within the definition of telecommunications service? Table A below provides a nonexclusive list of services considered to be telecommunications services in Washington.
Table A
Type of Service
Description
800 Service
A service that allows a caller to dial a toll-free number without incurring a charge for the call. The service is typically marketed under the name "800," "855," "866," "877," and "888" toll-free calling, and any subsequent numbers designated by the federal communications commission.
900 Service
An inbound toll service purchased by a subscriber that allows the subscriber's customers to call in to the subscriber's prerecorded announcement or live service. "900 service" does not include the charge for: Collection services provided by the seller of the telecommunications services to the subscriber or services or products sold by the subscriber to the subscriber's customer. The service is typically marketed under the name "900 service," and any subsequent numbers designated by the federal communications commission.
Fixed wireless service
A service that provides radio communication between fixed points.
Mobile telecommunications service
A commercial mobile radio service, as defined in Title 47 C.F.R., Section 20.3 as in effect on June 1, 1999.
Mobile wireless service
A service that is transmitted, conveyed, or routed regardless of the technology used, whereby the origination and/or termination points of the transmission, conveyance, or routing are not fixed including, by way of example only, telecommunications services that are provided by a commercial mobile radio service provider.
Paging service
A service that provides transmission of coded radio signals, which may include messages or sounds, for the purpose of activating specific pagers.
Private communications service
A service that entitles the customer to exclusive or priority use of a communications channel or group of channels between or among termination points, regardless of the manner in which the channel or channels are connected, and includes switching capacity, extension lines, stations, and any other associated services that are provided in connection with the use of the channel or channels.
Value-added nonvoice data service
A service that otherwise meets the definition of telecommunications services in which computer processing applications are used to act on the form, content, code, or protocol of the information or data primarily for a purpose other than transmission, conveyance, or routing.
Prepaid calling service
Means the right to access exclusively telecommunications services, which must be paid for in advance and which enable the origination of calls using an access number or authorization code, whether manually or electronically dialed, and that is sold in predetermined units or dollars of which the number declines with use in a known amount.
Prepaid telephone calling service
Means the right to purchase exclusively telecommunications services that must be paid for in advance, that enables the origination of calls using an access number, authorization code, or both, whether manually or electronically dialed, if the remaining amount of units of service that have been prepaid is known by the provider of the prepaid service on a continuous basis.
Prepaid wireless calling service
Means a service that provides the right to use mobile wireless service as well as other nontelecommunications services including the download of digital products delivered electronically, content, and ancillary services, which must be paid for in advance and that is sold in predetermined units or dollars of which the number declines with use in a known amount.
(b) What services or items are excluded from the definition of telecommunications service? Table B below provides a list of services or items not considered to be telecommunications services in Washington.
Table B
Item
Description
Data processing and information services
Data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser's primary purpose for the underlying transaction is the processed data or information.
Tangible personal property
Tangible personal property.
Advertising
Advertising services including, but not limited to, directory advertising.
Billing and collection
Billing and collection services provided to third parties.
Internet access
Internet access. See RCW 82.04.297.
Audio and video programming
Radio and television audio and video programming services, regardless of the medium, including furnishing of transmission, conveyance, and routing of such services by the programming service provider. Radio and television audio and video programming services include, but are not limited to, cable service as defined in 47 U.S.C. Section 522(6) and audio and video programming services delivered by commercial mobile radio service providers, as defined in Title 47 C.F.R., Section 20.3.
Ancillary services
Ancillary services. See subsection (104) of this section.
Digital products
Digital products delivered electronically including, but not limited to, music, video, reading materials, or ring tones.
Software
Software delivered electronically.
(104) What is an ancillary service? An ancillary service is a service associated with or incidental to the provision of a telecommunications service.
What services are considered to be ancillary services? Table C below provides a nonexclusive list of services considered to be ancillary services in Washington.
Table C
Type of Ancillary Service
Description
Conference bridging
A service that links two or more participants of an audio or video conference call and may include the provision of a telephone number. "Conference bridging service" does not include the telecommunications services used to reach the conference bridge.
Detailed telecommunications billing
A service of separately stating information pertaining to individual calls on a customer's billing statement.
Directory assistance
A service of providing telephone number information and/or address information.
Vertical service
A service that is offered in connection with one or more telecommunications services that offers advanced calling features allowing customers to identify callers and to manage multiple calls and call connections, including conference bridging services.
Voice mail
A service that enables the customer to store, send, or receive recorded messages. Voice mail service does not include any vertical services that the customer may be required to have in order to use the voice mail service.
Part II: How are competitive telephone services, telecommunications services, and ancillary services taxed in Washington?
(201) Introduction. Washington law imposes tax on the three following distinct products: Competitive telephone service, telecommunications service, and ancillary service.
(202) Are competitive telephone services, telecommunications services, and ancillary services taxable in Washington? Yes. The sale of a competitive telephone service, telecommunications service, and ancillary service to a consumer is a retail sale. See RCW 82.04.050. A sale of these same services that is not a retail sale constitutes a wholesale sale (a sale for resale). See RCW 82.04.060. Washington imposes taxes on retail and wholesale sales of these services as follows:
(a) Retail sales tax: The retail sale of any of these services is subject to the retail sales tax unless an exemption applies. See RCW 82.04.050, 82.04.190, and 82.08.020. Generally, the retail sales tax is paid by the consumer and collected and remitted by the seller. Exemptions for local service and coin-operated telephone service, previously provided by RCW 82.08.0289, expired August 1, 2013.
(b) Retailing business and occupation (B&O) tax classification: Persons making retail sales of any of these services are subject to the B&O tax on the gross proceeds of these sales under the retailing classification. See RCW 82.04.050, 82.04.190, and 82.04.250.
(c) Wholesaling B&O tax classification: Persons making sales of the services for resale in the regular course of business are subject to tax on the gross proceeds of these sales under the wholesaling classification. See RCW 82.04.060 and 82.04.270. See WAC 458-20-102 for information on how sales for resale are administered by the department.
(d) Deferred retail sales tax: If the seller does not collect retail sales tax, a buyer who is not reselling the products must pay the retail sales tax (commonly referred to as "deferred retail sales tax"), unless the specific services purchased are exempt under the law.
(e) Local retail sales tax: The services are subject to sales tax in local jurisdictions that impose a retail sales tax. See RCW 82.14.030.
(203) Tangible personal property used in providing competitive telephone service, telecommunications service, and ancillary service. The retail sales tax applies to sales to a provider of telecommunications service, competitive telephone service, or ancillary service of all tangible personal property used as a consumer in providing these services.
(204) How are "bundled transactions" containing telecommunications or ancillary services treated for sales tax purposes? The taxability of bundled transactions is addressed in RCW 82.08.190 and 82.08.195. This subsection (204)(a), (b), and (c) of this section briefly describe what a bundled transaction is and how these transactions are treated for sales tax purposes.
(a) What is a "bundled transaction"? A bundled transaction refers to the retail sale of two or more products, except real property and services to real property, if:
(i) The products are otherwise distinct and identifiable; and
(ii) The products are sold for one nonitemized price.
(b) What is not a "bundled transaction"? A bundled transaction does not include the sale of any products in which the sales price varies, or is negotiable, based on the selection by the purchaser of the products included in the transaction. There are a number of specified transactions that otherwise meet the definition of a bundled transaction, but that are not considered to be bundled transactions for Washington state tax purposes. For more information about these exclusions please see RCW 82.08.190(4).
(c) How are "bundled transactions" taxed? Under statute, if a transaction contains one or more products that is subject to retail sales tax, the entire bundled transaction will be subject to retail sales tax. Because both telecommunications service and ancillary service are subject to retail sales tax in Washington, a transaction that contains one of these services will generally be fully subject to retail sales tax. However, if the price of a bundled transaction includes charges for telecommunications service or ancillary service and products that are not retail sales taxable:
(i) Then the portion of the price attributable to the nontaxable products is subject to the retail sales tax;
(ii) Unless the seller can identify by reasonable and verifiable standards, the nontaxable portion from its books and records that are kept in the regular course of business for other purposes including, but not limited to, nontax purposes.
Part III: How is the sale of competitive telephone services, telecommunications services or ancillary services sourced?
(301) Sourcing and apportionment. This section provides references to the rules for determining if the sale of competitive telephone service, telecommunications service, or ancillary service is deemed to take place (sourced) in Washington and is subject to the retail sales tax and the rules for determining when the gross proceeds from the sale of these services is apportioned to and taxable under Washington's retailing and wholesaling B&O tax classifications.
(a) Retail sales tax: RCW 82.32.520 and 82.32.730 provide the rules that must be used for determining when a sale of competitive telephone services, telecommunications services, or ancillary services is sourced to and subject to retail sales tax in Washington.
(b) Retailing and wholesaling B&O tax: RCW 82.04.530 and 82.04.535 provide the rules for determining when gross proceeds from the sale of telecommunications service or ancillary service must be apportioned to and subject to Washington wholesaling and retailing B&O tax classifications.
(302) Does Washington's public utility tax apply? Persons engaged in providing competitive telephone services, telecommunications services, and ancillary services are not taxable under the public utility tax, except with respect to gross income from engaging in telegraph or any other public service business as defined in WAC 458-20-179. See RCW 82.04.310 and 82.16.020.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.065 and 82.08.190. WSR 14-14-092, § 458-20-245, filed 6/30/14, effective 7/31/14. Statutory Authority: RCW 82.32.300. WSR 83-17-099 (Order ET 83-6), § 458-20-245, filed 8/23/83.]


PDF458-20-246

Sales to or through a direct seller's representative.

(1) Introduction. The legislature passed chapter 23, Laws of 2010, (2ESSB 6143), which reaffirms and clarifies the legislature's intent in establishing the direct seller's exemption. The legislation also repeals the exemption provided by RCW 82.04.423 effective May 1, 2010.
Through April 30, 2010, RCW 82.04.423 provides an exemption from the business and occupation (B&O) tax on wholesale and retail sales by a person who does not own or lease real property in the state, is not incorporated in the state, does not regularly maintain inventory in this state, and makes sales in this state exclusively to or through a "direct seller's representative." This section explains the statutory elements that must be satisfied in order to be eligible to take this exemption.
(2) Federal law background. The statutory language describing the direct seller's representative is substantially the same language as contained in the federal Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, PL 97-248. See 26 U.S.C. 3508. The federal law designates types of statutory nonemployees for Social Security tax purposes. In the federal law, the "direct seller's representative," as used in this section and under RCW 82.04.423, is designated as the direct seller. The purpose of the direct seller provision in the federal tax law is to provide that a direct seller is not an employee of the direct selling company, thereby relieving the direct selling company of a tax duty. Under the federal law, the direct selling company is a business that sells consumer products using a direct seller who either purchases from the direct selling company and resells the consumer products or sells for or solicits sales of consumer products on behalf of the direct selling company. Retail sales are limited to those occurring in the home or in a temporary retail establishment, such as a vendor booth at a fair.
(3) Washington's direct seller's exemption. The 1983 Washington state legislature used the same criteria to delineate, for state tax purposes, the necessary relationship between a direct seller and a direct seller's representative. In this section "direct seller" refers to the selling company, and the "direct seller's representative" refers to the person who purchases consumer products from the direct seller and resells the products, or sells for or solicits sales on behalf of the direct seller.
The exemption provided by RCW 82.04.423 is limited to the B&O tax on wholesaling or retailing imposed in chapter 82.04 RCW (Business and occupation tax). A direct seller is subject to other Washington state tax obligations, including, but not limited to, the sales tax under chapter 82.08 RCW, the use tax under chapter 82.12 RCW, and the litter tax imposed by chapter 82.19 RCW.
(4) Who may take the exemption. The B&O tax exemption may be taken by a person (the direct seller) selling consumer products using the services of a representative who sells at retail or solicits the sales for retail of only consumer products as outlined in statute. There are ten elements in the statute that must be present in order for a person to qualify for the exemption for Washington sales. The person must satisfy each element to be eligible for the exemption. The taxpayer must retain sufficient records and documentation to substantiate that each of the ten required elements has been satisfied. RCW 82.32.070.
(a) The four statutory elements describing the direct seller. RCW 82.04.423 provides that a direct seller:
(i) Cannot own or lease real property within this state. For example, if the direct seller's representative is selling vitamins door to door for the direct seller, but the direct seller owns or leases a coffee roasting factory in the state, the direct seller is not eligible for this exemption; and
(ii) Cannot regularly maintain a stock of tangible personal property in this state for sale in the ordinary course of business. This provision does not, however, prohibit the direct seller from holding title to the consumer product in the state. For instance, the direct seller owns the consumer products sold by the direct seller's representative when the representative is making retail sales for the direct seller. However, the personal property must not be a stock of goods in the state that is for sale in the ordinary course of business. The phrase "sale in the ordinary course of business" means sales that are arm's length and that are routine and reasonably expected to occur from time to time; and
(iii) Is not a corporation incorporated under the laws of this state; and
(iv) Makes sales in this state exclusively to or through a direct seller's representative. This provision of the statute describes how sales by the direct seller may be made. To be eligible for the exemption, all sales by the direct seller in this state must be made to or through a direct seller's representative. The direct seller may not claim any B&O tax exemption under RCW 82.04.423 if it has made sales in this state using means other than a direct seller's representative. This requirement does not, however, limit the methods the direct seller's representative may use to sell these products. For example, the representative can use the mail or the internet, if all other conditions of the exemption are met. The direct seller's use of mail order or internet, separate from the representative's use, may or may not be found to be "sales in this state" depending on the facts of the situation. If the direct seller's use of methods other than to or through a direct seller's representative constitutes "sales in this state," the exemption is lost. Additionally, a direct seller does not become ineligible for the exemption due to action by the direct seller's representative that is in violation of the statute, such as selling a product to a permanent retail establishment, if the department of revenue (department) finds by a review of the facts that the ineligible sales are irregular, prohibited by the direct seller, and rare.
If a seller uses a direct seller's representative to sell "consumer products" in Washington, and also has a branch office, local outlet, or other local place of business, or is represented by any other type of selling employee, selling agent, or selling representative, no portion of the sales are exempt from B&O tax under RCW 82.04.423. For example, a person who uses representatives to sell consumer products door to door and who also sells consumer products through retail outlets is not eligible for the exemption. The phrase "sales exclusively to … a direct seller's representative" describes wholesale sales made by the direct seller to a representative. The phrase "sales exclusively … through a direct seller's representative" describes retail sales made by the direct seller to the consumer. The B&O tax exemption provided by RCW 82.04.423 is limited to these types of wholesale and retail sales.
(b) The six statutory elements describing the direct seller's representative. RCW 82.04.423 provides the following elements that relate to the direct seller's representative:
(i) How the sale is made. A direct seller's representative is "a person who buys only consumer products on a buy-sell basis or a deposit-commission basis for resale, by the buyer or any other person, in the home or otherwise than in a permanent retail establishment, or who sells at retail, or solicits the sale at retail of, only consumer products in the home or otherwise than in a permanent retail establishment." The direct seller sells the consumer product using the services of a representative in one of two ways, which are described by two clauses in the statute. The first clause ("a person who buys … for resale" from the direct seller) describes a wholesale sale by the direct seller. The second clause (a person who "sells or solicits the sale" for the direct seller) describes a retail sale by the direct seller.
(A) A transaction is on a "buy-sell basis" if the direct seller's representative performing the selling or soliciting services is entitled to retain part or all of the difference between the price at which the direct seller's representative purchases the consumer product and the price at which the direct seller's representative sells the product. The part retained is remuneration from the direct seller for the selling or soliciting services performed by the representative. A transaction is on a "deposit-commission basis" if the direct seller's representative performing the selling or soliciting services is entitled to retain part or all of a purchase deposit paid in connection with the transaction. The part retained is remuneration from the direct seller for the selling or soliciting services performed by the representative.
(B) The location where the retail sale of the consumer product may take place is specifically delineated by the terms of the statute. The direct seller may take the exemption only if the retail sale of the consumer product takes place either in the home or otherwise than in a permanent retail establishment. The resale of the products sold by the direct seller at wholesale is restricted by the statute through the following language: "For resale, by the buyer or any other person, in the home or otherwise than in a permanent retail establishment." This restrictive phrase requires the product be sold at retail either in the home or in a nonpermanent retail establishment. Regardless of to whom the representative sells, the retail sale of the consumer product must take place either in the buyer's home or in a location that is not a permanent retail establishment. Examples of permanent retail establishments are grocery stores, hardware stores, newsstands, restaurants, department stores, and drug stores. Also considered as permanent retail establishments are amusement parks and sports arenas, as well as vendor areas and vendor carts in these facilities if the vendors are operating under an agreement to do business on a regular basis. Persons selling at temporary venues, such as a county fair or a trade show, are not considered to be selling at a permanent retail establishment.
(ii) What product the direct seller must be selling. The direct seller must be selling only a consumer product, the sale of which meets the definition of "sale at retail," used for personal, family, household, or other nonbusiness purposes. "Consumer product" includes, but is not limited to, cosmetics, cleaners and soaps, nutritional supplements and vitamins, food products, clothing, and household goods, purchased for use or consumption. The term does not include commercial equipment, industrial use products, and the like, including component parts. However, if a consumer product also has a business use, it remains a "consumer product," notwithstanding that the same type of product might be distributed by other unrelated persons to be used for commercial, industrial, or manufacturing purposes. For example, desktop computers are used extensively in the home as well as in businesses, yet they are a consumer product when sold for nonbusiness purposes.
(iii) How the person is paid. The statute requires that "substantially all of the remuneration paid to such person, whether or not paid in cash, for the performance of services described in this subsection is directly related to sales or other output, including the performance of services, rather than the number of hours worked." The remuneration must be for the performance of sales and solicitation services and it must be based on measurable output. Remuneration based on hours does not qualify. A fixed salary or fixed compensation, without regard to the amount of services rendered, does not qualify.
Remuneration need not be in cash, and it may be the consumer product itself or other property, such as a car.
(iv) How the contract is memorialized. The services by the person must be performed pursuant to a written contract between the representative and the direct seller. The requirement that the contract be in writing is a specific statutory condition of RCW 82.04.423.
(v) What the contract must contain. The sale and solicitation services must be the subject of the contract. The contract must provide that the representative will not be treated as an employee of the direct seller for federal tax purposes.
(vi) The status of the representative. A person satisfying the requirements of the statute should also be a statutory nonemployee under federal law, since the requirements of RCW 82.04.423 and 26 U.S.C. 3508 are the same. The direct seller must maintain proof the representative is a statutory nonemployee.
(5) Tax liability of the direct seller's representative. The statute provides no tax exemption with regard to the "direct seller's representative." The direct seller's representative is subject to the service and other activities B&O tax on commission compensation earned for services described in RCW 82.04.423. Likewise, a direct seller's representative who buys consumer products for resale and does in fact resell the products is subject to either the wholesaling or retailing B&O tax upon the gross proceeds of these sales. Retail sales tax must be collected and remitted to the department on retail sales unless specifically exempt by law. For example, certain food products are statutorily exempt from retail sales tax (see WAC 458-20-244).
(a) Subject to the agreement of the representatives, the direct seller may elect to remit the B&O taxes of the representatives and collect and remit retail sales tax as agents of the representatives through an agreement with the department. The direct seller's representative should obtain a tax registration endorsement with the department unless otherwise exempt under RCW 82.32.045. (See also WAC 458-20-101 on tax registration.)
(b) Every person who engages in this state in the business of acting as a direct seller's representative for unregistered principals, and who receives compensation by reason of sales of consumer products of such principals for use in this state, is required to collect the use tax from purchasers, and remit the same to the department, in the manner and to the extent set forth in WAC 458-20-221, Collection of use tax by retailers and selling agents.
(6) The retail sales and/or use tax reporting responsibilities of the direct seller. A direct seller is required to collect and remit the tax imposed by chapter 82.08 RCW (Retail sales tax) or 82.12 RCW (Use tax) if the seller regularly solicits or makes retail sales of "consumer products" in this state through a "direct seller's representative" even though the sales are exempt from B&O tax pursuant to RCW 82.04.423.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.04.423. WSR 10-21-011, § 458-20-246, filed 10/7/10, effective 11/7/10. Statutory Authority: RCW 82.32.300. WSR 99-24-007, § 458-20-246, filed 11/19/99, effective 12/31/99; WSR 84-24-028 (Order 84-3), § 458-20-246, filed 11/30/84.]


PDF458-20-247

Trade-ins, selling price, sellers' tax measures.

(1) Introduction. This section explains the measure of tax when a trade-in is included in the sale of tangible personal property. It explains how and when the retail sales or use tax exclusions apply and the recordkeeping requirements needed to document the transactions.
The value of "trade-in property of like kind" is excluded from the definitions of "selling price" in RCW 82.08.010 and the definition of "value of the article used" in RCW 82.12.010.
Unless otherwise stated, "tax," "taxable," and "nontaxable," as used in this section, refer to retail sales or use tax only. The terms "trade-in," "traded in," and "property traded in" have their ordinary and common meaning. The terms refer to property applied, in whole or in part, toward the selling price of property of like kind. Readers are advised that the fact that sales and purchase transactions might be characterized as a "like kind" under Section 1031 of the Internal Revenue Code does not control for the purpose of the trade-in exclusion in RCW 82.08.010 and 82.12.010.
(a) Examples. This section contains examples which identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(b) References to related sections. The department of revenue (department) has adopted other sections that readers may want to refer to.
(i) WAC 458-20-106 Casual or isolated sales—Business reorganizations;
(ii) WAC 458-20-178 Use tax;
(iii) WAC 458-20-208 Exemptions for wholesale sales of new motor vehicles between new car dealers and for accommodation sales;
(iv) WAC 458-20-211 Leases or rentals of tangible personal property, bailments; and
(v) WAC 458-20-272 Tire fee—Core deposits or credits.
(2) General nature of the trade-in exclusion. RCW 82.08.010 and 82.12.010 define the terms "selling price" and "value of the article used," in pertinent part, to mean the total amount of consideration, except separately stated trade-in property of like kind, including cash, credit, or tangible personal property, expressed in terms of money paid or delivered by a buyer to a seller. As a result, the buyer of tangible personal property is entitled to reduce the measure of retail sales or use tax if:
• The buyer delivers the trade-in property to the seller;
• The trade-in property is delivered as consideration for the purchase; and
• The property traded in is "property of a like kind."
(a) The trade-in exclusion applies to all trade-in property of like kind delivered by a buyer to a seller as consideration for a purchase. Thus, if a buyer trades in two motor vehicles when purchasing one motor vehicle, the buyer is entitled to a reduction in the measure of retail sales tax based on the value of both trade-in vehicles.
(b) The trade-in exclusion is limited to retail sales and use taxes. There is no comparable exclusion for business and occupation (B&O) tax. (See definition of "gross proceeds of sales" in RCW 82.04.070 and of "value proceeding or accruing" in RCW 82.04.090.)Sales tax need not have been paid on the item being traded in to be eligible for the trade-in exclusion.
(3) Buyer to deliver trade-in property to seller. The buyer must deliver trade-in property to the "seller."
(a) RCW 82.08.010 defines "seller" as "every person …making sales at retail or retail sales to a buyer, purchaser, or consumer, whether as agent, broker, or principal." There is no requirement that the seller be the owner of the property being sold to the buyer. RCW 82.08.010 anticipates and includes situations where a "seller" is selling property that he or she does not actually own, such as in consignment sales transactions.
For example, Broker enters into a consignment sale contract with Susan Smith to sell her Boat A. John Doe contacts Broker expressing interest in purchasing Boat A, provided his Boat B is accepted as a trade-in on the purchase. John Doe executes a purchase agreement with Broker which specifically identifies both Boat A being purchased and the trade-in. Broker accepts delivery and ownership of Boat B and places Boat B into Broker's own inventory. In turn Broker arranges delivery of the craft purchased to John. The buyer (John) has delivered the trade-in property (Boat B) to the seller (Broker). There is no requirement that Broker purchase Boat A from Susan (thereby becoming the owner) prior to selling Boat A to John and accepting Boat B as trade-in property because, as a broker, Broker is a seller under RCW 82.08.010.
(b) The trade-in exclusion does not apply to transactions where a seller transfers tangible personal property in or out of its own inventory in exchange for other property it also owns.
(4) Trade-in as consideration. Property traded in must be consideration delivered by the buyer to the seller. The sales documents must identify the tangible personal property being purchased and the trade-in property being delivered to the seller. This does not require simultaneous transfers of the property being traded in and the property being purchased, but it does require that the delivery of the trade-in and the purchase be components of a single transaction. Sales documents, executed not later than the date the trade-in property is delivered to the seller, must identify the property purchased and the trade-in property as more fully explained in subsection (8) of this section.
Examples:
(a) Jane Doe offers to purchase Sailboat A from Dealer, if Dealer accepts her Sailboat B as a trade-in on the purchase. Dealer declines to accept ownership of Jane's Sailboat B, but instead offers to sell Sailboat B on a consignment basis with the net proceeds to be applied toward the purchase if Sailboat B is sold within three months. Jane accepts and Sailboat B is sold within the three-month period, and the net proceeds are applied to Jane's purchase of Sailboat A.
Jane is not entitled to the trade-in exclusion. An agreement to sell property on consignment does not constitute consideration "paid or delivered by a buyer to a seller," even if the subsequent proceeds are applied to the purchase price.
(b) Sally Jones decides to upgrade from her existing motor home to a new, larger motor home. The salesperson at a local RV dealership explains that while the dealership does not currently have on hand a motor home meeting Sally's needs, it can order one for her from the manufacturer. The salesperson also explains that if Sally trades in her motor home at the time she enters into the purchase contract, the dealership will accept the motor home as a down payment toward the purchase of the new motor home. Sally signsthe purchase contract, the dealership orders the new motor home, and Sally delivers her motor home to the RV dealership (who accepts ownership of the motor home). Sally's new motor home is delivered to her eight months later.
Sally is entitled to the trade-in exclusion because the motor home was delivered to the RV dealership as consideration paid toward her purchase of the new motor home.
(c) Mr. B and Coastal Brokers enter into a consignment sales agreement. Under the terms of this agreement, Coastal Brokers will sell Mr. B's sailboat on a consignment basis and at the time of sale place the proceeds due Mr. B into a trust account for use toward a possible purchase of a yacht by Mr. B. Mr. B's sailboat is sold and the proceeds due to Mr. B placed in the trust account. Mr. B subsequently purchases a yacht from Coastal Brokers, and the trust account proceeds are applied to the purchase price of the yacht.
Mr. B is not entitled to the trade-in exclusion. The delivery of Mr. B's sailboat to Coastal Brokers and Mr. B's purchase of the yacht are not components of a single transaction. In addition, Mr. B's delivery of his sailboat for consignment sale by Coastal Brokers does not constitute consideration "paid or delivered by a buyer to a seller," even if proceeds from the sale are applied to the purchase of the yacht.
(d) John Smith agrees to purchase Travel Trailer A from Dealer if Dealer accepts John's Travel Trailer B as a trade-in on the purchase. Dealer accepts ownership of Travel Trailer B at an agreed-upon value, on the condition that John pay Dealer a monthly fee to reimburse Dealer for financing costs associated with Travel Trailer B. This fee is to be paid for a period of four months or until Dealer sells Travel Trailer B, whichever is shorter. John has no further responsibility with respect to Travel Trailer B after this period.
John is entitled to the trade-in exclusion because he delivered Travel Trailer B to Dealer as consideration paid toward Travel Trailer A. The fees John paid to reimburse Dealer for financing costs associated with the trade-in property do not change the nature of the transaction, though for the purposes of the trade-in exclusion they do reduce the originally agreed-upon value of the trade-in property.
(5) Property of like kind. The term "property of like kind" means articles of tangible personal property of the same generic classification. It refers to the class and kind of property, not to its grade or quality. The term includes all property within a general classification rather than within a specific category in the classification. Thus, as examples, it means furniture for furniture, motor vehicles for motor vehicles, licensed recreational land vehicles for licensed recreational land vehicles, appliances for appliances, auto parts for auto parts, and audio/video equipment for audio/video equipment. These general classifications are determined by the nature of the property and its function or use. It may be that some kinds of property fit within more than one general classification. For example, a motor home is both a motor vehicle and a licensed recreational land vehicle. Thus, for purposes of the trade-in exclusion, a motor home may be taken as a trade-in on a travel trailer, truck, camper, or a truck with camper attached, and vice versa. Similarly, a travel trailer may be taken as trade-in on a motor home even though a travel trailer is not a motor vehicle; both are licensed recreational land vehicles. Conversely, a utility trailer may not be taken as trade-in on a travel trailer because a utility trailer is neither a motor vehicle nor a licensed recreational land vehicle. Likewise a car may not be taken as trade-in on a camper and vice versa.
It is not required that a car be traded in exclusively on another car in order to get the trade-in reduction of the tax measure. It could, as well, be traded in as part payment for a truck, motorcycle, motor home, or any other qualifying motor vehicle. Similarly, a sofa for a recliner chair, a pistol for a rifle, a sailboat for a motorboat, or a gold chain for a wrist watch are the kinds of generic trade-in transfers which would qualify. The exclusion of the value of property traded in, however, does not include such things as a motorcycle for a boat, a diamond ring for a television set, a battery for lumber, computer hardware for computer software, or farm machinery (including tractors and self-propelled combines) for a car.
(6) Value of property traded in. The seller and buyer establish the value of property traded in. The parties may not overstate the value of the trade-in property in order to artificially lower the amount of retail sales or use tax due. Absent proof of a higher value, the property traded in must be determined by the fair market value of similar property of like quality, quantity, and age, sold or traded under comparable conditions.
(7) Trade-in value exceeds selling price. If the trade-in value exceeds the selling price of the item sold, the selling price of the item being purchased should be used as the trade-in value. For example, a Washington resident purchases a car with a value of $15,000 and trades in a car with a fair market value of $17,000. The net due to the purchaser is $2,000. When the seller completes the excise tax return, he or she should report a trade-in value of $15,000 and not $17,000 because the trade-in value is capped at selling price of the item being purchased.
(8) Recordkeeping. RCW 82.32.070 requires every person liable for any tax to keep and preserve records from which tax liability can be determined. To substantiate a claim for the trade-in exclusion, the sales agreement and/or invoice must identify both the property being purchased and the trade-in property. Such identification includes the model number, serial number, year of manufacture, and other information as appropriate. The sales agreement and/or invoice must also specify the selling price and the value of the trade-in property.
A copy of the sales agreement or invoice must be retained as a part of the seller's sales records. The following is an example of an invoice providing the necessary information regarding a sales transaction with trade-in:
Sold: 2009 Mountain Home 8.5 ft. Camper
 
Model MH-20DT, Serial No. 200010
$19,075
Less "trade-in" - 1983 Meadowlark 8 ft. Camper
 
Model No. ML883, Serial No. 0001
$2,000
Subtotal
$17,075
Retail Sales Tax
 
Total
 
(9) Encumbered property traded in. A buyer is entitled to full value for trade-in property, which is otherwise encumbered by a security interest or the subject of a conditional sale, or retail installment sales contract.
(10) Casual or isolated sales. The retail sales tax applies to all casual or isolated retail sales made by any person who is required to be registered and reporting tax to the state. The trade-in exclusion applies in the case of a casual or isolated sale, provided the statutory requirements are satisfied. The recordkeeping requirements explained in subsection (8) of this section apply to casual or isolated sales.
Persons who are not engaged in business activity, e.g., private persons, are not required to be registered and are not required to collect sales tax on their casual or isolated sales. See RCW 82.08.0251 and WAC 458-20-106. The use of property acquired through casual sales is subject to use tax. See RCW 82.12.020 and WAC 458-20-178.
(11) Trade-ins as sales. RCW 82.04.040 defines the term "sale" in pertinent part to mean "any transfer of the ownership of, title to, or possession of property for a valuable consideration." When property is traded in, ownership in that property is transferred. As a result, under the law a buyer delivering trade-in property to a seller is making a sale of the trade-in property.
(a) If the buyer is not in the business of selling the type of property being traded in the buyer incurs no B&O tax liability. See WAC 458-20-106.
(b) On occasions where the buyer is in the business of selling the type of property being traded in, the buyer incurs a B&O tax liability.
For example, Don's Leasing purchases a new car from Tom the Dealer. This car will be part of Don's inventory of cars that it rents to customers. Don delivers a used car out of its inventory to Tom the Dealer as a part of the consideration paid for the new car. The trade-in of the used car by Don is considered a wholesale sale to Tom. This is not a casual or isolated sale because Don is in the business of selling cars in the form of rentals.
(c) In most cases, a buyer delivers trade-in property to a seller who is in the business of reselling trade-in property (e.g., a buyer trading in an automobile to a new car dealer). The buyer in these cases has no responsibility to collect retail sales tax.
(12) Retail services. The exclusion of the value of property traded in from the selling price tax measure applies only to sales involving tangible personal property traded in for tangible personal property sold. It does not apply to any transactions involving services that have been statutorily included as "sales at retail." See RCW 82.04.050. For example, a construction contractor may not accept part payment in tangible personal property to thereby reduce the sales tax measure of the construction contract selling price. Similarly, a seller of tangible personal property may not accept retail services as part payment to thereby reduce the selling price tax measure. Such transfers neither qualify as trade-in transfers of tangible property nor "in-kind" transfers.
(13) Trade-in for rental property. Under RCW 82.04.050, rentals or leases of tangible personal property are "retail sales." The "selling price" is also the measure of tax for such rentals and leases. Where tangible personal property is traded in as part payment for the rental or lease of property of like kind (e.g., a used computer against the rental of a new one), the sales tax will apply to all payments after the value of the property traded in has been depleted or consumed and the lessor of the property actually begins making charges for the lease or rental of tangible personal property. Refer to WAC 458-20-211 for more information regarding the tax-reporting responsibilities with respect to lease or rental transactions.
A lessee must first purchase leased property before trading it in toward the purchase/lease of other property to be entitled to the trade-in exclusion. A buyer cannot satisfy the statutory requirement that the trade-in property be delivered to the seller as a part of the consideration for the purchased property if the buyer does not have ownership of and the right to sell the property being traded in. For example, Jane Doe leases Auto A from Leasing Company. Jane decides to lease a newer Auto B from Leasing Company. Jane exercises her option to purchase Auto A, and then delivers Auto A as a trade-in towards the lease of Auto B. Jane is entitled to the trade-in exclusion. By delivering her ownership of Auto A to Leasing Company, Jane has satisfied the statutory requirement that she as the buyer deliver trade-in property to the seller as a part of the consideration paid for Auto B.
(14) Real property transfers. Because the trade-in exclusion is limited to tangible personal property, the trade-in exclusion does not apply to sales of real property or transactions where real property is traded in for tangible personal property.
(15) Use tax. RCW 82.12.010 defines the measure of the use tax as the "value of the article used." As explained in subsection (2) of this section, the statutory definition excludes "trade-in property of like kind." Therefore, the measure of the use tax for tangible personal property upon which no retail sales tax has been paid (e.g., if it were purchased in another state) is the same as the measure of the retail sales tax. In such cases the value of the property traded in should be excluded from the use tax measure.
The consumer-user, or any seller who has a duty to collect this state's use tax, must retain the sales records reflecting property "traded in," as explained in subsection (8) of this section.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.020, and 82.12.010. WSR 10-02-009, § 458-20-247, filed 12/24/09, effective 1/24/10. Statutory Authority: RCW 82.32.300. WSR 01-08-003, § 458-20-247, filed 3/21/01, effective 4/21/01; WSR 86-04-024 (Order 86-2), § 458-20-247, filed 1/28/86; WSR 85-02-006 (Order ET 84-6), § 458-20-247, filed 12/21/84.]


PDF458-20-248

Sales of precious metal bullion and monetized bullion.

Effective July 1, 1985, amounts derived from sales of precious metal bullion and monetized bullion as defined herein, are not subject to business and occupation tax under either the wholesaling or retailing classification or to retail sales tax. Statutory law expressly excludes such sales from the definitions of the terms, "wholesale sale," "sale at wholesale," "retail sale," and "sale at retail."
The term, "precious metal bullion" is statutorily defined to mean any precious metal which has been put through a process of smelting or refining, including, but not limited to, gold, silver, platinum, rhodium, and palladium, and which is in such state or condition that its value depends upon its contents and not upon its form.
The term, "monetized bullion" means coin or other forms of money manufactured from gold, silver, or other metals and heretofore, now, or hereafter used as a medium of exchange under the laws of this state, the United States, or any foreign nation, but does not include coins or money sold to be manufactured into jewelry or works of art.
Thus, sales of processed or refined precious metal valued solely upon the content thereof, whatever its form, are not subject to tax in this state. This includes processed nuggets, bars, sticks, dust, and other processed forms of precious metal. For example, sales of gold or silver in raw, refined forms to dentists, laboratories, jewelers, and other persons, for their own consumption or for resale are not taxable. However, sales of precious metal which has been manufactured or further processed into any form which determines or adds to the value thereof are fully taxable. For example, sales of jewelry items, medallions, artworks, and other items, the value of which is dependent upon more than the mere content of precious metal therein, are subject to wholesaling or retailing business and occupation tax, whichever is applicable, and retail sales tax as appropriate.
Sales of metal money, in coined or other form, which is recognized as a medium of exchange in the financial marketplace, are not taxable. However, sales of coin or money, whether or not recognized as a medium of exchange, to jewelers or other persons for the purpose of manufacturing jewelry or artworks therefrom are fully taxable. For example, sales of coins for necklaces or to be used as buttons or in paintings or painting frames, etc., are taxable.
It is presumed that all sales of coin and metal money are entitled to tax exemption: Provided, That in order to be exempt of tax persons who knowingly sell such things to buyers who are regularly engaged in the business of manufacturing jewelry or works of art must take a written, signed, and dated statement from such buyers that the coins or metal money are not being purchased for use in manufacturing jewelry or works of art. Artistic or cultural organizations which purchase such things are exempt of retail sales tax as provided in WAC 458-20-249.
The tax exclusions explained herein apply equally to sales of precious metal bullion or monetized bullion transferred through documents of ownership, certificates, confirmation slips, or other indicia of ownership.
Taxable Commissions
Amounts received as commissions upon sales of precious metals by dealers, brokers, and other selling and/or buying agents who sell or buy precious metal bullion or monetized bullion for the accounts of customers are subject to the service and other activities classification of business and occupation tax. The amount of any shared commission or fee paid to other dealers or commissioned agents associated in such transactions are deductible from the measure of this tax. However, no deduction is allowed for any of the dealer's or commissioned agent's own costs of doing business, including salaries or commissions paid to their own salespersons or other employees. Similarly, persons who receive any part of shared commissions derived from having been associated in transactions for the purchase or sale of precious metal or monetized bullion for the account of others, are themselves subject to service business tax measured by such amounts received.
Use Tax
The use tax does not apply upon the use of precious metal bullion or monetized bullion in this state under such circumstances that the sale of such bullion to the user would not be taxable if made in this state as explained earlier herein. In all other cases the use tax applies upon the first use by a consumer of precious metals in this state if retail sales tax has not been paid. See WAC 458-20-178.
[Statutory Authority: RCW 82.32.300. WSR 86-09-016 (Order ET 86-6), § 458-20-248, filed 4/9/86.]


PDF458-20-249

Artistic or cultural organizations.

(1) Introduction. This rule explains deductions and exemptions from Washington business and occupation tax, retail sales tax and use tax as applied to artistic and cultural organizations. Readers may refer to the following for additional information.
(a) Statutes that may apply:
(i) RCW 82.04.4327 Deductions—Artistic and cultural organizations.
(ii) RCW 82.04.4328 "Artistic or cultural organization" defined.
(iii) RCW 82.08.031 Exemptions—Sales to artistic or cultural organizations of certain objects acquired for exhibition or presentation.
(iv) RCW 82.12.031 Exemptions—Use by artistic or cultural organizations of certain objects.
(b) Other rules that may apply:
(i) WAC 458-20-169 Nonprofit organizations.
(ii) WAC 458-20-178 Use tax and the use of tangible personal property.
(2) Definitions.
(a) "Artistic or cultural organization" means an organization that is organized and operated exclusively for the purpose of providing artistic or cultural exhibitions, presentations, or performances or cultural or art education programs for viewing or attendance by the general public and meets all of the following requirements:
(i) The organization is a nonprofit corporation under chapter 24.03A RCW;
(ii) The organization is managed by a governing board of not less than eight individuals none of whom is a paid employee of the organization;
(iii) No part of the organization's income may be paid directly or indirectly to its members, stockholders, officers, directors, or trustees except in the form of services rendered by the corporation in accordance with its purposes and bylaws;
(iv) Salary or compensation paid to the organization's officers and executives must be only for actual services rendered, and at levels comparable to the salary or compensation of like positions within the state;
(v) Assets of the corporation must be irrevocably dedicated to the activities for which the exemption is granted;
(vi) On the liquidation, dissolution, or abandonment by the corporation, assets of the corporation may not inure directly or indirectly to the benefit of any member or individual except a nonprofit organization, association, or corporation that also would be entitled to the exemption;
(vii) The corporation must be duly licensed or certified when licensing or certification is required by law or regulation;
(viii) The amounts received that qualify for exemption must be used for the activities for which the exemption is granted;
(ix) Services must be available regardless of race, color, national origin, or ancestry; and
(x) The director of revenue must have access to its books in order to determine whether the corporation is exempt from taxes.
(b) The term "artistic or cultural exhibitions, presentations, or performances or cultural or art education programs" includes and is limited to:
(i) An exhibition or presentation of works of art or objects of cultural or historical significance, such as those commonly displayed in art or history museums;
(ii) A musical or dramatic performance or series of performances; or
(iii) An educational seminar or program, or series of such programs, offered by the organization to the general public on an artistic, cultural, or historical subject.
(3) Business and occupation tax deduction. In computing tax under RCW 82.04.4327, an artistic or cultural organization may deduct the following from the measure of tax:
(a) All amounts received by the artistic or cultural organization; and
(b) The value of articles manufactured by the artistic or cultural organization solely for use by the organization in displaying art objects or presenting artistic or cultural exhibitions, performances, or programs for attendance or viewing by the general public.
(4) Retail sales tax.
(a) Artistic or cultural organizations that charge for goods or services included in the definition of "retail sale" under RCW 82.04.050 must collect and report the retail sales tax. No retail sales tax exemption is available for sales by such organizations.
(b) Such organizations are exempt from paying retail sales tax on their purchases of certain "objects" for the purpose of exhibition or presentation to the general public if the objects are:
(i) Objects of art;
(ii) Objects of cultural value;
(iii) Objects to be used in the creation of a work of art, other than tools; or
(iv) Objects to be used in displaying art objects or presenting artistic or cultural exhibitions or performances. (RCW 82.08.031)
(c) The term "objects" means items of tangible personal property. It does not include professional or commercial services rendered by third parties. Where certain services performed are merely incidental to sales of tangible personal property, e.g., designing playbills or altering stage curtains that are then sold to qualifying organizations, the total charge will be exempt.
(d) Charges for materials, equipment, and services related to repair, maintenance, or replacement of buildings or structures are not exempt. Thus, e.g., theater seats, aisle carpeting, air conditioning systems, painting of interior or exterior of buildings, and the like are not tax exempt "objects."
(e) Exempt sales include rentals of exempt objects. Examples of objects that qualifying artistic or cultural organizations may purchase without payment of retail sales tax are:
(i) Tickets, programs, signs, posters, fliers, and playbills printed for particular displays or performances; scenery, costumes, stage props, scrims, and materials for their construction;
(ii) Stage lights, filters, control panels, color medium, stage drapes, sets, set paint, gallery exhibition materials, risers, display platforms, and materials for their construction;
(iii) Sheet music, recordings, musical instruments and musical supplies for the staging of displays and performances;
(iv) Movie projectors, films, sound systems, video and sound equipment and supplies, computer hardware and standard, prewritten software directly used exclusively in the staging of performances or actual display of art objects.
(f) Examples of objects that qualifying artistic or cultural organizations may purchase, on which the retail sales tax must be paid are:
(i) Supplies and equipment for clerical support, including bulk tickets for general use, stationery, computers, copy machines, and general office supplies;
(ii) Theater seats, lobby furniture, carpeting, vending machines, and general supplies for audience or patron convenience and use;
(iii) Shipping and packing materials, crates, boxes, dunnage, labels, tags, and container-related items for transfer or storage of exempt objects;
(iv) Sewing machines and other durable equipment used to prepare, repair, and maintain exempt objects (such items are deemed to be "tools," rather than exempt objects);
(v) Theater or building lighting and utility fixtures and systems, and computer hardware and software not directly and exclusively used in staging performances or actually displaying art objects.
(g) Qualified artistic and cultural organizations may obtain the tax exemptions by providing their suppliers with a written statement in essentially the following form:
I, (buyer's name) , hereby confirm that the items purchased on (date of purchase) , without payment of retail sales tax, from (seller's name) are all objects of art or cultural value or to be used in the creation of such objects or in displaying art objects or presenting artistic or cultural exhibitions or performances.
 
(signature of authorized purchaser)
 
 
for: (name of organization)
 
 
(registration no. of organization)
 
(h) Vendors who accept such certifications in good faith are not required to collect and remit retail sales tax on such sales.
(6) Use tax. Under RCW 82.12.031, the use tax does not apply to the use of any objects that would be exempt from retail sales tax had the objects been purchased in this state. The use tax applies to all other items of tangible personal property that artistic or cultural organizations use upon which retail sales tax has not been paid.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-14-014, § 458-20-249, filed 6/23/22, effective 7/24/22; WSR 21-01-064, § 458-20-249, filed 12/9/20, effective 1/9/21. Statutory Authority: RCW 82.32.300. WSR 86-07-006 (Order ET 86-4), § 458-20-249, filed 3/6/86.]


PDF458-20-250

Solid waste collection tax.

(1) Introduction. This section explains how the solid waste collection tax imposed under chapter 82.18 RCW applies; who is required to collect the tax; and the B&O, sales, and use tax obligations of persons providing solid waste collection services. The tax imposed under chapter 82.18 RCW was previously known as the "refuse collection tax." For the purposes of this section, the tax is referred to by its statutory name, the "solid waste collection tax."
(2)(a) What is "solid waste"? "Solid waste" or "waste" means garbage, trash, rubbish, or other material discarded as worthless or not economically viable for further use. The term does not include hazardous or toxic waste nor does it include material collected primarily for recycling or salvage.
(b) Who is the taxpayer for purposes of the solid waste collection tax? "Taxpayer" means that person upon whom the solid waste collection tax is imposed, that is, the private or commercial consumer.
(c) Who is required to collect the solid waste collection tax? Every person who receives waste for transfer, storage, or disposal including, but not limited to, all collection services, public or private dumps, transfer stations, and similar operations, must collect the solid waste collection tax from the private or commercial consumer.
(d) What is the measure of the tax? The solid waste collection tax applies to the consideration charged for solid waste collection services.
"Consideration charged for the services" is the total amount billed as compensation for solid waste collection services, without any deduction for any costs of doing business or any other expense whatsoever, paid or accrued. The term does not include:
(i) Any amount included in the charges for materials collected primarily for recycling;
(ii) The solid waste collection tax itself, whether separately itemized or not:
(iii) Any utility taxes or consumer taxes, imposed by the state or any political subdivision thereof or any municipal corporation, directly upon the consumer and separately itemized on the taxpayer's billing; or
(iv) Late charges or penalties which may be imposed for nontimely payment.
(3) Reporting and collection obligations. The person who collects the charges for solid waste collection services from the taxpayer is responsible for collecting the solid waste collection tax and remitting it to the state.
(a) Failure to collect tax. If any person charged with collecting the tax fails to bill the taxpayer for it, or to notify the taxpayer in writing that the tax is due, then that person shall be personally liable for the tax. Thus, unlike the retail sales tax, the solid waste collection tax may be included within the gross fee or charge billed to taxpayers and need not be separately itemized on such billings, but only if such taxpayers are notified in writing that the tax has been imposed and is being collected. Nothing prevents any solid waste collection business from separately itemizing the tax on customer billings, at its option.
(b) Failure to remit collected tax. If any person collects the tax and fails to pay it to the department in the manner provided in this section, for any reason whatsoever, the person shall be personally liable for the tax.
(4) Due date. The solid waste collection tax is due from the taxpayer within twenty-five days from the date the taxpayer is billed for the solid waste collection services. The solid waste collection tax must be separately reported upon lines provided on the excise tax return.
The tax is due to be remitted to the department by the person collecting it at the end of the tax reporting period in which the tax is received by that person.
(5) Partial payments. If a taxpayer makes only a partial payment of the amount billed for the services and tax, the amount paid must first be used to remit the solid waste collection tax to the department. The tax has first priority over all other claims against the amount paid by the taxpayer.
(6) Sales to the federal government, Indians and Indian tribes. The federal government, its agencies and instrumentalities, and all solid waste collection service contracts with such federal entities are not subject to the solid waste collection tax. Similarly, Indians and Indian tribes may be exempt from the tax. Refer to WAC 458-20-190 and 458-20-192 for more information about tax reporting and recordkeeping obligations relating to sales to the federal government and Indians or Indian tribes.
(7) Transactions with multiple collection businesses. To prevent pyramiding or multiple taxation of single transactions, the solid waste collection tax does not apply to any person other than the ultimate consumer of the solid waste service.
(a) Exemption certificate. Persons engaged in the solid waste collection business by operating facilities for the transfer, storage, or disposal of waste, including public and private dumps, and who provide such services directly to taxpayers for a charge, are liable for the collection of the solid waste collection tax on such charges. However, persons who collect the solid waste collection tax and who, themselves, utilize the further services of others for the transfer, storage, or disposal of the waste collected are not required to again pay the tax to such other service providers. In order to be exempt from such tax payment a solid waste collection business must provide other solid waste service providers with a solid waste collector's exemption certificate in the following form:
We hereby certify that we are engaged in the solid waste collection business and are registered with the state department of revenue to collect and report the solid waste collection tax imposed under chapter 82.18 RCW. We certify further that the solid waste collection tax due with respect to the solid waste collection business being performed under this certificate has been or will be collected and paid and that we are exempt from further payment of such tax on charges for any solid waste collection services being procured by us.
Business Name . . . . . . . . . . . . Authorized Signature . . . .
Business Address . . . . . . . . . . Date . . . .
Revenue Registration No. . . . .
U.T.C. Certificate of Public Necessity No. . . . .
If not regulated by U.T.C., please check here . . . .
(b) Blanket exemption certificates. Blanket certificates may be provided in advance by solid waste collectors or other persons who collect the customer charges for solid waste collection and who are liable for collecting and remitting the solid waste collection tax. Blanket certificates are valid for as long as the buyer and seller have a recurring business relationship. A "recurring business relationship" means at least one sale transaction within a period of twelve consecutive months. RCW 82.08.050 (7)(c).
(c) Examples. Examples of taxable and tax exempt transactions are:
(i) A private person or commercial customer hauls its own waste to a dump site for disposal and pays a fee - the fee is subject to the solid waste collection tax.
(ii) A solid waste collection company picks up and hauls residential or commercial waste to a dump for disposal - this company bills the customer for the tax and need not pay the tax upon any further charge made by the dump site operator, by providing an exemption certificate.
(iii) A city provides solid waste collection services to its residents through an independent hauler under a negotiated contract, and uses a county operated land fill. The city bills the residents on their utility bills. The tax applies to the solid waste portion of the utility bill adjusted as provided in this section. These taxes do not apply to any charge paid by the city to the hauling company, nor to any charge made by the county to the city for dumping services. The city must provide the hauler and the county with an exemption certificate.
(8) Business and occupation tax. A solid waste collection business is subject to service and other activities B&O tax on the gross income from solid waste collection activities. There is no deduction for any cost of doing business or any amounts paid over to other solid waste collection businesses. Late charges or penalties are subject to the service and other activities B&O tax.
Solid waste collection is an "enterprise activity," when funded over fifty percent by user fees. Amounts derived from this activity by a local governmental entity are subject to service and other activities B&O tax. See RCW 82.04.419, 82.04.4291, and WAC 458-20-189.
(9) Sales of containers. Solid waste collection businesses which provide waste receptacles, containers, dumpsters, and the like to their customers for a charge, separate from any charge for collection of the waste, are engaged in the business of renting tangible personal property taxable separate and apart from the solid waste collection business. Charges for such rentals, however designated, are subject to retailing B&O and retail sales taxes when they are billed separately or are line itemized on customer billings.
(10) Sales and use tax obligations for the use of property. Solid waste collection businesses are themselves the consumers of all tangible personal property purchased for their own use in conducting such business, other than items for resale or renting to customers, e.g., rented receptacles. Retail sales tax must be paid to materials suppliers and providers of such tangible consumables. (See RCW 82.04.050.) If the seller does not collect retail sales tax, the solid waste collection business must remit the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless specifically exempt by law. Deferred sales or use tax should be reported on the buyer's excise tax return. However, the excise tax return does not have a separate line for reporting deferred sales tax. Consequently, deferred sales tax liability should be reported on the use tax line of the buyer's excise tax return. For detailed information regarding the use tax, refer to WAC 458-20-178 (Use tax).
[Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.18 RCW. WSR 08-14-025, § 458-20-250, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.330, 82.01.060(2), and 34.05.230. WSR 06-12-017, § 458-20-250, filed 5/26/06, effective 6/26/06. Statutory Authority: RCW 82.32.300. WSR 89-16-090 (Order 89-11), § 458-20-250, filed 8/2/89, effective 9/2/89; WSR 86-15-064 (Order ET 86-14), § 458-20-250, filed 7/22/86.]


PDF458-20-251

Sewerage collection and other related activities.

(1) Introduction. RCW 82.16.020 levies a public utility tax upon persons engaging in the business of sewerage collection. This rule provides guidance on the assessment of the public utility tax upon sewerage collection businesses, including the distinction between sewerage collection and other related business activities. It also describes how to determine the taxable gross receipts of a sewerage collection business that also engages in other related business activities. Additionally, the rule addresses a sewerage collection business's business and occupation (B&O), retail sales, and use tax reporting responsibilities. Municipalities and other governmental entities engaging in sewerage collection business activities should also refer to WAC 458-20-189 for guidance on the taxation of public service businesses and enterprise activities.
(2) What is a sewerage collection business? A sewerage collection business is the activity of accepting sewage to be deposited into and carried off by a system of lateral sewers, drains, and pipes to a common point, or points, for transfer to treatment or disposal, but does not include the actual transfer, treatment, or disposal of sewage. A sewerage collection business includes only that portion of a sewer system where "collection" occurs. Sewerage collection ends when the sewage exits the lateral sewers in a sewer system. Collection does not include the further transfer of sewage through a system of intercepting sewers or the final treatment or disposal of sewage.
(a) What is the difference between sewage and sewerage? Sewage is the waste matter carried off by sewer drains and pipes. Sewerage refers to the physical facilities (e.g., pipes, lift stations, and treatment and disposal facilities) through which sewage flows.
(b) What is the difference between lateral and intercepting sewers?
(i) A lateral sewer is a branch sewer running laterally down a street, alley, or easement that collects sewage directly from abutting properties and delivers it into an intercepting sewer.
(A) The sewage from abutting properties is collected through sewer pipes running from the abutting properties to the lateral sewer in the street, alley, or easement. If a sewerage collection business is responsible for maintaining any portion of such a sewer pipe, that portion is considered to be part of the lateral sewer.
(B) A lateral sewer may include force mains or lift stations if such equipment is installed as part of a lateral sewer line.
(ii) An intercepting sewer is a main sewer that receives flow from laterals and delivers the sewage to another main sewer or to a point for treatment or disposal.
The following diagram illustrates how sewer pipes in a sewerage system are categorized as lateral or intercepting sewers. The diagram does not attempt to represent any publicly maintained portions of sewer pipes that run from abutting properties to the lateral sewer in the street, alley, or easement.
(c) How are drainage utility charges accounted for? Certain real estate development projects (due to paving and other factors) may adversely affect rainwater runoff within areas served by a stormwater sewer system. Often, the stormwater system is administered by the same entity that operates a sewerage collection business. In this circumstance, some sewerage utilities impose a drainage utility charge on the development to reflect the impact on the utility's stormwater sewer system caused by the increased runoff. Other sewerage utilities charge all sewerage customers an additional drainage utility charge to reflect stormwater runoff. Although the same entity may be providing both stormwater and sanitary sewer collection services to the customer and many of the same facilities may be used, a drainage utility charge is not related to the collection of sewage for treatment and disposal. Therefore, a sewerage collection business does not include this activity. Utility drainage charges are, however, subject to B&O taxation under the service and other activities classification, as discussed in subsection (4) below.
(3) How is the public utility tax determined? Persons engaged in the sewerage collection business are subject to the public utility tax under the sewer collection classification measured by the gross receipts of the collection business. (See RCW 82.16.020.) Gross receipts of the sewerage collection business include only that portion of income from customer billings that is allocable to the collection of sewage by a sewerage collection business. Gross receipts do not include any charges of any kind attributable to sewerage services other than collection.
There are two methods to determine the gross receipts of the collection business.
(a) Itemization of customer billings. If customer billings are itemized to show the actual charge for sewage collection, income realized from those billings is the gross receipts tax measure. If the itemized charges for sewage collection are less than the actual cost of providing the collection service, however, the sewerage collection business must use the cost-of-doing-business formula in subsection (3)(b) below.
(b) Cost-of-doing-business formula. If collection services are provided jointly with other related sewer services provided by the sewerage collection business or any other person, and the actual charge for sewerage collection is not itemized separately on customer billings or is less than the actual cost of providing the collection service, a simple cost-of-doing-business formula is used to derive the gross receipts public utility tax measure.
(i) Formula. The costs of providing sewerage collection services are divided by all business costs incurred in rendering all sewer services, including sewerage collection. The resulting percentage is multiplied by gross income from customer billings (all sewerage related charges). The result is the gross receipts public utility tax measure from engaging in the sewerage collection business. The standard cost accounting records of the sewerage collection business must be used for this purpose.
The formula is:
Sewerage collection costs
(Annualized)
  =  
 
% x gross billing income
=
Public
Utility
Tax
Measure
Total sewer service costs
(Annualized)
 
In determining sewage collection costs for a sewerage collection business that also engages in related business activities involving the interception, transfer, storage, treatment, and/or disposal of sewage, only lateral sewers are considered collection sewers. Intercepting sewers are not collection sewers and may not be allocated to collection activities. All costs of operation of the sewer services business must be included in the denominator, including, but not limited to, direct operating costs and direct and indirect overhead costs. When circumstances warrant, the department may allow certain equipment—such as force mains or pump stations—to be converted into an equivalent length of pipe for purposes of allocating costs accurately.
(ii) Annual year-end adjustment. For the purpose of annualizing its costs, the sewerage collection business may use the previous calendar year costs or its budget allocations for the current tax year. In either case, however, it must make an end-of-year adjustment to its reporting based upon actual costs incurred during the current year.
(c) Late charges/penalties excluded. Revenue from late charges or other penalties for untimely payment by sewerage collection customers must be excluded when calculating gross receipts under subsection (3)(a) and (b) above. Receipts from these sources are subject to B&O taxation under the service and other activities classification as provided in subsection (4) below. (See WAC 458-20-179, Public utility tax, for further explanation of the taxation of late charge penalties.)
(d) Preutility service activities excluded. Services provided to a customer prior to receipt of sewerage collection services are subject to B&O taxation under the service and other activities classification as provided in subsection (4) below. For example, many sewerage collection businesses assess connection charges to a new customer before providing sewerage collection services to that customer. Such a connection charge may be variable (calculated as a charge per linear foot of road frontage for example) or a flat fee. A sewerage collection business may assess other charges for specific services provided to new customers, such as installing or inspecting the installation of service connections. In each case, the revenue from such fees is taxable under the service and other activities classification as long as the service for which the fee is assessed is performed before the sewerage collection business provides collection services to that customer. (See WAC 458-20-179, Public utility tax, for further explanation of the taxation of preutility service activities.)
(e) Treatment or disposal costs deduction. RCW 82.16.050(11) provides that in computing the public utility tax, a sewerage collection business may deduct from its reported gross income amounts paid by the business to a person taxable under chapter 82.04 RCW for the treatment or disposal of sewage. The deduction provided by RCW 82.16.050(11) may be taken on the combined excise tax return only when the receipts related to treatment or disposal are included in the gross amounts reported under the sewer collection classification.
(4) How are related business activities taxed? Persons engaged in the sewerage collection business may also be engaged in related business activities involving the interception, transfer, storage, treatment, and/or disposal of sewage. These activities are generally subject to the service and other activities B&O tax. The measure of tax is the gross income or gross proceeds derived from those other services. The measure of tax does not include any amount subject to the sewerage collection public utility tax classification. The amount of gross income or gross proceeds subject to the service and other activities B&O tax must be determined consistent with the method used to determine the gross receipts subject to the sewage collection public utility tax (see subsection (3) above).
(5) What if a governmental sewerage collection business pays a separate governmental entity for sewage interception, treatment or disposal? RCW 82.04.432 provides a deduction from the B&O tax measure for amounts paid by municipal sewerage utilities and other public corporations to any other municipal corporation or governmental agency for sewage interception, treatment, or disposal. Thus, in such cases the service and other activities B&O tax on sewer services does not have a pyramiding effect. In addition, RCW 82.04.4291 provides a B&O tax deduction for amounts derived by a political subdivision of the state of Washington from another political subdivision of the state of Washington as compensation for services subject to the service and other activities B&O tax. Income received from the state of Washington or its agencies and departments, however, is not deductible under RCW 82.04.4291. Thus, the local government entity that receives compensation from another local government entity for providing sewage interception, treatment, or disposal for that other government entity may also deduct the income from its own measure of service and other activities B&O tax, provided this amount has been included in the gross amount reported on the combined excise tax return. In such a case, neither entity pays tax on the amounts represented by the payments made for sewage interception, treatment, or disposal.
For example, Washington Municipality A operates a sewerage collection business. Rather than invest in its own treatment facilities, it contracts with Washington Municipality B to provide sewage transfer, treatment, and disposal services to Municipality A. When determining its tax liability, Municipality A must break down its sewage service charges (as provided in subsection (3) above) into a sewerage collection portion and that portion representing other sewage services (interception, transfer, treatment, and disposal). Municipality A pays public utility tax on its gross receipts from the sewerage collection business. Municipality A also pays service and other activities B&O tax on income derived from that portion of sewage transfer that it undertakes to move the waste to Municipality B for further transfer, treatment, and disposal by Municipality B. However, Municipality A may deduct from its gross income subject to service and other activities B&O tax the amount of any payments made to Municipality B for sewage transfer, treatment, or disposal services provided by Municipality B. In addition, pursuant to RCW 82.04.4291, Municipality B may deduct from its gross income subject to service and other activities B&O tax the amount of the payments received from Municipality A.
(6) Local improvement district assessments. Local improvement district (LID) and utility local improvement district (ULID) assessments, including interest and penalties on assessments, are not considered part of taxable income for either public utility tax or B&O tax purposes because they are exercises of the jurisdiction's taxing authority. These assessments may be composed of a share of the costs of capital facilities, installation labor, connection fees, and other expenses. A deduction may be taken for these amounts if they are included in the LID or ULID assessments.
(7) Property purchased and used by a sewerage collection business. Persons engaged in the sewerage collection business and/or engaged in providing other related sewer services are themselves the consumers of all tangible personal property purchased for their own use in conducting those activities. Retail sales tax (commonly referred to as "deferred sales tax") or use tax must be remitted directly to the department upon all tangible personal property used by a sewerage collection business or sewer service provider as a consumer, if the retail sales tax has not been collected by the seller. (See RCW 82.12.020.)
(8) Sale of sludge. With proper treatment, it is possible for the sludge remaining after the initial treatment of raw sewage to be used as fertilizer. If a sewerage collection business sells sludge, manufacturing B&O tax is due on the value of the products and retailing or wholesaling B&O tax is due on the gross proceeds of the sale. A multiple activities tax credit (MATC) applies as provided in RCW 82.04.440 and WAC 458-20-19301. If the sludge is sold to a consumer, retail sales tax is due on the proceeds of that sale, unless otherwise exempt by law.
If the necessary requirements are met, the business may claim a manufacturing machinery and equipment (M&E) exemption for machinery and equipment used directly in manufacturing the sludge (rendering it suitable for use as a fertilizer). This exemption is not available for machinery or equipment used merely to treat sewage for disposal.
For more information on the M&E exemption, see RCW 82.08.02565, 82.12.02565, and WAC 458-20-13601.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 03-19-059, § 458-20-251, filed 9/11/03, effective 10/12/03. Statutory Authority: RCW 82.32.300. WSR 86-18-069 (Order 86-16), § 458-20-251, filed 9/3/86.]


PDF458-20-252

Hazardous substance tax.

(1) Introduction. Under chapter 82.21 RCW (referred to in this rule as the "law"), a hazardous substance tax is imposed upon the wholesale value of certain substances and products, with specific credits and exemptions provided. The tax is an excise tax upon the privilege of possessing hazardous substances in this state.
Before July 1, 2019, the tax was imposed upon the wholesale value of the hazardous substance. Starting July 1, 2019, the tax is imposed in one of two ways:
Upon the wholesale value of certain hazardous substances ("value-based tax"); or
Upon the volume of certain hazardous substances ("volumetric tax").
The volumetric tax applies to petroleum products that are easily measured on a per barrel basis. The value-based tax applies to all other hazardous substances, including petroleum products that are not easily measured on a per barrel basis.
(a) Chapter 82.21 RCW defines certain specific substances as being hazardous and includes other substances by reference to federal legislation governing such things. It also provides authority to the director of the state department of ecology to designate by rule any other substance or product as hazardous that could present a threat to human health or the environment. (Chapter 173-342 WAC.)
(b) Chapter 82.21 RCW is administered exclusively under this rule. The law relates exclusively to the possession of hazardous substances and products. The law does not relate to waste, releases or spills of any materials, cleanup, compensation, or liability for such things, nor does tax liability under the law depend upon such factors. The incidence or privilege that incurs tax liability is simply the possession of the hazardous substance or product, whether or not such possession actually causes any hazardous or dangerous circumstance.
(c) The hazardous substance tax is imposed upon any possession of a hazardous substance or product in this state by any person who is not expressly exempt of the tax. However, it is the intent of the law that the economic burden of the tax should fall upon the first such possession in this state. Therefore, the law provides that if the tax has not been paid upon any hazardous substance or product the department of revenue may collect the tax from any person who has had possession. The amount of tax paid then constitutes a debt owed by the first person having had taxable possession to the person who pays the tax.
(2) Definitions. For purposes of this rule the following definitions apply.
(a) "Barrel" means a container that holds 42 billed gallons of a petroleum product, as defined in this rule. Starting July 1, 2019, it is the tax measure or base for petroleum products that are easily measured on a per barrel basis.
(b) "Billed gallon" means a U.S. gallon of petroleum product, whether net or gross as billed to the purchaser.
(c) "Gross gallon" means a U.S. gallon of petroleum product of 231 cubic inches as measured at the terminal rack.
(d) "Hazardous substance" means:
(i) Any substance that, on March 1, 2002, is a hazardous substance under section 101(14) of the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), 42 U.S.C. Sec. 9601(14), as amended by Public Law 99-499 on October 17, 1986, except that hazardous substance does not include the following noncompound metals when in solid form in a particle larger than 100 micrometers (0.004 inches) in diameter: Antimony, arsenic, beryllium, cadmium, chromium, copper, lead, nickel, selenium, silver, thallium, or zinc. These substances consist of chemicals and elements in their purest form. A CERCLA substance that contains water is still considered pure. Combinations of CERCLA substances as ingredients together with nonhazardous substances will not be taxable unless the end product is specifically designated as a hazardous substance by the department of ecology;
(ii) Petroleum products (further defined below);
(iii) Pesticide products required to be registered under section 136a of the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), 7 U.S.C. Sec. 136 et seq., as amended by Public Law 104-170 on August 3, 1996; and
(iv) Anything else enumerated as a hazardous substance in chapter 173-342 WAC by the department of ecology.
(e) "Net gallon" means a U.S. gallon of petroleum product of 231 cubic inches at 60 degrees Fahrenheit and a pressure of 14.7 pounds per square inch (1 atmosphere).
(f) "Person" means any natural or artificial person, including a business organization of any kind, and has the further meaning defined in RCW 82.04.030.
The term "natural person," for purposes of the tax exemption in subsection (4)(b) of this rule regarding substances used for personal or domestic purposes, means human beings in a private, as opposed to a business sense.
(g) "Petroleum product" means any plant condensate, lubricating oil, crankcase motor oil, gasoline, aviation fuel, kerosene, diesel motor fuel, benzol, fuel oil, residual fuel, asphalt base, liquefied or liquefiable gases, such as butane, ethane and propane, and every other product derived from the refining of crude oil, but the term does not include crude oil.
The term "derived from the refining of crude oil" as used herein, means produced because of and during petroleum processing. "Petroleum processing" includes all activities of a commercial or industrial nature wherein labor or skill is applied, by hand or machinery, to crude oil or any byproduct of crude oil so that as a result thereof a fuel or lubricant is produced for sale or commercial or industrial use. "Fuel" includes all combustible gases and liquids suitable for the generation of energy. The term "derived from the refining of crude oil" does not mean petroleum products that are manufactured from refined oil derivatives, such as petroleum jellies, cleaning solvents, asphalt paving, etc. Such further manufactured products become hazardous substances only when expressly so designated by the director of the department of ecology in chapter 173-342 WAC.
(h) "Possession" means control of a hazardous substance located within this state and includes both actual and constructive possession.
(i) "Control" means the power to sell or use a hazardous substance or to authorize the sale or use by another.
(ii) "Actual possession" occurs when the person with control has physical possession.
(iii) "Constructive possession" occurs when the person with control does not have physical possession.
(i) "Previously taxed hazardous substance" means a hazardous substance upon which the tax has been paid and which has not been remanufactured or reprocessed in any manner.
(i) Remanufacturing or reprocessing does not include the mere repackaging or recycling for beneficial reuse. Rather, these terms embrace activities of a commercial or industrial nature involving the application of skill or labor by hand or machinery so that as a result, a new or different substance or product is produced.
(ii) "Recycling for beneficial reuse" means the recapturing of any used substance or product, for the sole purpose of extending the useful life of the original substance or product in its previously taxed form, without adding any new, different, or additional ingredient or component.
(iii) Example: Used motor oil drained from a crankcase, filtered, and containerized for reuse is not remanufactured or reprocessed. If the tax was paid on possession of the oil before use, the used oil is a previously taxed substance.
(iv) Possessions of used hazardous substances by persons who merely operate recycling centers or collection stations and who do not reprocess or remanufacture the used substances are not taxable possessions.
(j) "Product" means any item containing a combination of ingredients, some of which are hazardous substances and some of which are not hazardous substances.
(k) "Selling price" means consideration of any kind expressed in terms of money paid or delivered by a buyer to a seller, without any deductions for any costs whatsoever. Bona fide discounts actually granted to a buyer result in reductions in the selling price rather than deductions.
(l) "State," for purposes of the credit provisions of the hazardous substance tax, means:
(i) The state of Washington.
(ii) States of the United States or any political subdivisions of such other states.
(iii) The District of Columbia.
(iv) Territories and possessions of the United States.
(v) Any foreign country or political subdivision thereof.
(m) Except as otherwise expressly defined in this rule, the definitions of terms provided in chapters 82.04, 82.08, and 82.12 RCW apply equally for this rule. Other terms not expressly defined in these chapters or this rule are to be given their common and ordinary meanings.
(n) "Tax" means the hazardous substance tax imposed under chapter 82.21 RCW.
(o) "Wholesale value" means the fair market value determined by the wholesale selling price.
In cases where no sale has occurred, wholesale value means the fair market wholesale value, determined as nearly as possible according to the wholesale selling price at the place of use of similar substances of like quality and character. In such cases the wholesale value shall be the "value of the products" as determined under the alternate methods set forth in WAC 458-20-112.
Before July 1, 2019, the wholesale value was the tax measure or base for all hazardous substances. Starting July 1, 2019, the wholesale value is the tax measure or base for all hazardous substances other than petroleum products that are easily measured on a per barrel basis.
(3) Tax rate and measure. The tax is imposed upon the privilege of possessing a hazardous substance in this state.
(a) For value-based tax. The value-based tax rate is seven tenths of one percent (.007). The value-based tax measure or base is the wholesale value of the substance, as defined in this rule. Before July 1, 2019, the value-based tax applied to all hazardous substances. Starting July 1, 2019, the value-based tax rate applies to all hazardous substances other than petroleum products that are easily measured on a per barrel basis.
(b) For volumetric tax. Starting July 1, 2019, the volumetric tax rate is $1.09 per barrel and applies to petroleum products that are easily measured on a per barrel basis. Starting July 1, 2020, the volumetric tax rate on petroleum products will be adjusted to reflect the percentage change in the implicit price deflator for nonresidential structures as published by the United States Department of Commerce, Bureau of Economic Analysis for the most recent 12-month period ending December 31st of the prior year.
(i) Density adjustments. For petroleum products that are easily measured on a per barrel basis, taxpayers will determine the amount of tax due based on billed gallons. Billed gallons may be calculated by using either gross gallons or net gallons. However, for contracts that adjust the formula for calculating billed gallons throughout the year to reduce the quantity of reported barrels, the department may employ the net gallons standard.
(ii) Example. Barrels are measured and reported to the department as billed gallons. However, to calculate billed gallons, Company A has negotiated a contract to employ the gross gallons standard during the winter in a location where average temperatures are 40 degrees Fahrenheit, while adjusting to the net gallons standard at the same location during the summer where average temperatures are 70 degrees Fahrenheit. Company A's seasonal formula for calculating billed gallons would ordinarily result in reducing the measured quantity of barrels throughout the year versus choosing a single formula to measure billed gallons. Therefore, the department may employ the net gallons standard for the entirety of the contract to measure the quantity of barrels.
(c) The department of revenue maintains lists of petroleum products that are easily measured, and petroleum products that are not easily measured, on a per barrel basis, on its website at dor.wa.gov. Petroleum products that remain in a liquid state at 77 degrees Fahrenheit and a pressure of 14.7 pounds per square inch (1 atmosphere) are subject to hazardous substance tax on a per barrel basis. These lists are not exclusive. If additional petroleum products are identified in the future, the department will add them to the applicable list. Products added to the lists will be subject to hazardous substance tax for all periods that the tax applies, even if the product was not on a list at the time.
(4) Exemptions. The following are expressly exempt from the tax:
(a) Any successive possessions of any previously taxed hazardous substances are tax exempt.
(i) Any person who possesses a hazardous substance that has been acquired from any other person who is registered with the department of revenue and doing business in this state may take a written statement certifying that the tax has been previously paid. Such certifications must be taken in good faith and must be in the form provided in subsection (14) of this rule. Blanket certifications may be taken, as appropriate, which must be renewed at intervals not to exceed four years. These certifications may be used for any single hazardous substance or any broad classification of hazardous substances, e.g., "all chemicals."
(ii) In the absence of taking such certifications, the person who possesses any hazardous substance must retain proofs that it purchased or otherwise acquired the substance from a previous possessor in this state. It is not necessary for subsequent possessors to obtain certificates of previously taxed hazardous substances in order to perfect their tax exemption. Documentation that establishes any evidence of previous tax payment by another person will suffice. This includes invoices or billings from in-state suppliers that reflect their payment of the tax or simple bills of lading or delivery documents revealing an in-state source of the hazardous substances.
(iii) This exemption for taxes previously paid is available for any person in successive possession of a taxed hazardous substance even though the previous payment may have been satisfied by the use of credits or offsets available to the previous person in possession.
(iv) Example. Company A brings a substance into this state upon which it has paid a similar hazardous substance tax in another state. Company A takes a credit against its Washington tax liability in the amount of the other state's tax paid. It then sells the substance to Company B, and provides Company B with a certificate of previously taxed substance. Company B's possession is tax exempt even though Company A has not directly paid Washington's tax but has used a credit against its Washington liability.
(b) Any possession of a hazardous substance by a natural person for use of a personal or domestic nature, rather than a business nature, is tax exempt.
(i) This exemption extends to relatives, as well as other natural persons who reside with the person possessing the substance, and also to regular employees of that person who use the substance for the benefit of that person.
(ii) This exemption does not extend to possessions by any independent contractors hired by natural persons, which contractors themselves provide the hazardous substance.
(iii) Examples: Possessions of spray materials by an employee-gardener or soaps and cleaning solvents by an employee-domestic servant, when such substances are provided by the natural person for whose domestic benefit such things are used, are tax exempt. Also, possessions of fuel by private persons for use in privately owned vehicles are tax exempt.
(c) Any possession of any hazardous substance, other than pesticides or petroleum products, possessed by a retailer for making sales to consumers, in an amount that is determined to be "minimal" by the department of ecology. That department has determined that the term "minimal" means less than $1,000.00 worth of such hazardous substances measured by their wholesale value, possessed during any calendar month.
(d) Possessions of alumina or natural gas are tax exempt.
(e) Persons or activities that the state is prohibited from taxing under the United States Constitution are tax exempt.
(i) This exemption extends to the U.S. government, its agencies and instrumentalities, and to any possession the taxation of which has been expressly reserved or preempted under the laws of the United States.
(ii) The tax will not apply with respect to any possession of any hazardous substance purchased, extracted, produced or manufactured outside this state that is shipped or delivered into this state until the interstate transportation of such substance has finally ended in this state. Thus, out-of-state sellers or producers need not pay the tax on substances shipped directly to customers in this state. The customers must pay the tax upon their first possession unless otherwise expressly exempt.
(iii) Out-of-state sellers or producers will be subject to tax upon substances shipped or delivered to warehouses or other in-state facilities owned, leased, or otherwise controlled by them.
(iv) However, the tax will not apply with respect to possessions of substances that are only temporarily stored or possessed in this state in connection with through, interstate movement of the substances from points of origin to points of destination both of which are outside of this state.
(f) The former exemption for petroleum products for export sale or use outside this state as fuel was effectively repealed by I-97 (1988). There are no exemptions under the law for any possessions of hazardous substances in this state simply because such substances may later be sold or used outside this state.
(g) Any possession of an agricultural crop protection product that is solely for use by a farmer or certified applicator as an agricultural crop protection product and is warehoused in this state or transported to or from this state is tax exempt, provided that the person possessing the product does not use, manufacture, package for sale, or sell the product in this state. The following definitions apply throughout this subsection unless the context clearly requires otherwise.
(i) "Agricultural crop protection product" means a chemical regulated under the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Sec. 136 as amended as of September 1, 2015, when used to prevent, destroy, repel, mitigate, or control predators, diseases, weeds, or other pests.
(ii) "Certified applicator" has the same meaning as provided in RCW 17.21.020.
(iii) "Farmer" has the same meaning as in RCW 82.04.213.
(iv) "Manufacturing" includes mixing or combining agricultural crop protection products with other chemicals or other agricultural crop protection products.
(v) "Package for sale" includes transferring agricultural crop protection products from one container to another, including the transfer of fumigants and other liquid or gaseous chemicals from one tank to another.
(vi) "Use" has the same meaning as in RCW 82.12.010.
(5) Credits. There are three distinct kinds of tax credits against liability that are available under the law.
(a) A credit may be taken by any manufacturer or processor of a hazardous substance produced from ingredients or components that are themselves hazardous substances, and upon which the hazardous substance tax has been paid by the same person or is due for payment by the same person.
(i) Example. A manufacturer possesses hazardous chemicals that it combines to produce an acid, which is also designated as a hazardous substance or product. When it reports the tax upon the wholesale value of the acid it may use a credit to offset the tax by the amount of tax it has already paid or reported upon the hazardous chemical ingredients or components. In this manner the intent of the law to tax hazardous substances only once is fulfilled.
(ii) Under circumstances where the hazardous ingredient and the hazardous end product are both possessed by the same person during the same tax reporting period, the tax on the respective substances must be computed and the former must be offset against the latter so that the tax return reflects the tax liability after the credit adjustment.
(iii) This credit may be taken only by manufacturers who have the first possession in this state of both the hazardous ingredients and the hazardous end product.
(b) A credit may be taken in the amount of the hazardous substance tax upon the value of fuel that is carried from this state in the fuel tank of any airplane, ship, truck, or other vehicle.
(i) The credit may be claimed only for the amount of tax reported or actually due to be paid on the fuel, not the amount representing the value of the fuel.
(ii) The purpose of this credit is to exclude from taxation any possessions of fuel that remains in the fuel tanks of any carrier vehicles powered by such fuel when they leave this state, regardless of where or from whom such fuel-in-tanks was acquired.
(iii) The nature of this credit is such that it generally has application only for interstate and foreign private or common carriers that carry fuel into this state or purchase fuel in this state. The intent is that the tax will apply only to so much of such fuel as is actually consumed by such carriers within this state.
(iv) In order to equitably and efficiently administer this tax credit, any fuel that is brought into this state in carrier vehicle fuel tanks must be accounted for separately from fuel that is purchased in this state for use in such fuel tanks. Formulas approved by the department of revenue for reporting the amount of fuel consumed in this state for purposes of this tax or other excise tax purposes will satisfy the separate accounting required under this subsection.
(v) Fuel-in-tanks brought into this state must be fully reported for tax and then the credit must be taken in the amount of such fuel that is taken back out of this state. This is to be done on the same periodic excise tax return so that the net effect is that the tax is actually paid only upon the portion of fuel consumed here.
(vi) The credit for fuel-in-tanks purchased in this state must be accounted for by using a fuel-in-tanks credit certificate in substantially the following form:
Certificate of Credit for Fuel Carried
from this State in Fuel Tanks
I hereby certify that the petroleum products specified herein, purchased by or transferred to the undersigned, from (name of seller or transferor), are entitled to the credit for fuel that is carried from this state in the fuel tank of any airplane, ship, truck, or other vehicle operated by a private or common carrier in interstate or foreign commerce. I will become liable for and pay the taxes due upon all or any part of such fuel that is not so carried from this state. This certification is given with full knowledge of, and subject to the legally prescribed penalties for fraud and tax evasion.
Registration No.
. . . .
(if applicable)
Type of Business
. . . .
Firm Name
. . . .
Business Address
. . . .
Registered Name
. . . .
(if different)
Tax Reporting Agent
. . . .
(if applicable)
Authorized Signature
. . . .
Title
. . . .
Identity of Fuel
. . . .
(kind and amount by volume)
 
Date: . . . .
(vii) This certificate may be executed and provided to any possessor of fuel in this state, throughout the chain of distribution, with respect to fuel that ultimately will be sold and delivered into any carrier's fuel tanks in this state. Thus, refiners or manufacturers will take such certificates directly from carriers or from their wholesale purchasers who will sell to such carriers. Similarly, fuel dealers and distributors will take such certificates from carriers to whom they sell such fuel. These certificates must be retained as a permanent part of such seller's business records.
(viii) Persons who execute and provide these credit certificates to their fuel suppliers must retain suitable purchase and sales records as may be necessary to determine the amount of tax for which such persons may be liable.
(ix) Blanket certificates may be used to cover recurrent purchases of fuel by the same purchaser. Such blanket certificates must be renewed every two years.
(c) A credit may be taken against the tax owed in this state in the amount of any other state's hazardous substance tax that has been paid by the same person measured by the wholesale value of the same hazardous substance.
(i) In order for this credit to apply, the other state's tax must be significantly similar to Washington's tax in all its various respects. The taxable incident must be possessing the substance; the tax purpose must be that the substance is hazardous; and the tax measure must be stated in terms of the wholesale value, or volume, of the substance, without deductions for costs of doing business, such that the other state's tax does not constitute an income tax or added value tax.
(ii) This credit may be taken for the amount of any other state's qualifying tax that has actually been paid before Washington state's tax is incurred because the substance was previously possessed by the same person in another taxing jurisdiction.
(iii) The amount of credit is limited to the amount of tax paid in this state upon possession of the same hazardous substance in this state. Also, the credit may not be applied against any tax paid or owed in this state other than the hazardous substance tax imposed under chapter 82.21 RCW.
(iv) Exchange agreements under which hazardous substances or products possessed in this state are exchanged through any accounts crediting system with like substances possessed in other states do not qualify for this credit. The substance taxed in another state, and for which this credit is sought, must be actually, physically possessed in this state.
(v) Persons claiming this credit must maintain records necessary to verify that the credit taking qualifications have been met. Additional information regarding recordkeeping requirements is provided in WAC 458-20-19301.
(6) Newly defined hazardous substances. Under chapter 82.21 RCW the director of the department of ecology may identify and designate other substances or products as being hazardous substances for purposes of the tax. The director of the department of ecology may also delete substances or products previously designated as hazardous substances. Such actions are done by amending chapter 173-342 WAC.
(a) The law allows the addition or deletion of substances or products as hazardous substances by rule amendments, no more often than twice in any calendar year.
(b) When such additions or deletions are made, they do not take effect for tax purposes until the first day of the following month that is at least 30 days after the effective date of rule amendment by the department of ecology.
(i) Example. The department of ecology amends chapter 173-342 WAC by adding a new substance and the effective date of the amendment is June 15th. Possession of the substance does not become taxable until August 1st.
(ii) The tax is owed by any person who has possession of the newly designated hazardous substance upon the tax effective date as explained herein. It is immaterial that the person in possession on that date was not the first person in possession of the substance in this state before it was designated as hazardous.
(7) Recurrent tax liability. It is the intent of the law that all hazardous substances possessed in this state should incur this tax liability only once unless they are expressly exempt. This is true of hazardous ingredients of products as well as the manufactured end product itself, if designated as a hazardous substance. The exemption for previously taxed hazardous substances does not apply to "products" that have been manufactured or remanufactured simply because an ingredient or ingredients of that product may have already been taxed when possessed by the manufacturer. Instead of an exemption, manufacturers in possession of both the hazardous ingredient and end product should use the credit provision explained at subsection (5)(a) of this rule.
(a) However, the term "product" is defined to mean only an item or items that contain a combination of both hazardous substances and nonhazardous substances. The term does not include combinations of only hazardous substances. Thus, possessions of substances produced by combining other hazardous substances upon all of which the tax has previously been paid will not again be taxable.
(b) When any hazardous substance is first produced during and because of any physical combination or chemical reaction that occurs in a manufacturing or processing activity, the intermediate possession of such substance within the manufacturing or processing plant is not considered a taxable possession if the substance becomes a component or ingredient of the product being manufactured or processed or is otherwise consumed during the manufacturing or processing activity.
However, when any intermediate hazardous substance is first produced during a manufacturing or processing activity and is withdrawn for sale or transfer outside of the manufacturing or processing plant, a taxable first possession occurs.
(c) Concentrations or dilutions for shipment or storage. The mere addition or withdrawal of water or other nonhazardous substances to or from hazardous substances designated under CERCLA or FIFRA for the sole purpose of transportation, storage, or the later manufacturing use of such substances does not result in any new hazardous product.
(8) How and when to pay tax. The tax must be reported on a special line of the combined excise tax return designated "hazardous substances." It is due for payment together with the timely filing of the return upon which it is reported, covering the tax reporting period during which the hazardous substance is first possessed within this state. Any person who is not expressly exempt of the tax and who possesses any hazardous substance in this state, without having proof that the tax has previously been paid on that substance, must report and pay the tax.
(a) It may be that the person who purchases a hazardous substance will not have billing information from which to determine the wholesale value of the substance when the tax return for the period of possession is due. In such cases the tax is due for payment no later than the next regular reporting due date following the reporting period in which the substance is first possessed.
(b) The taxable incident or event is the possession of the substance. Tax is due for payment by the purchaser of any hazardous substance whether or not the purchase price has been paid in part or in full.
(c) Special provision for manufacturers, refiners, and processors. Manufacturers, refiners, and processors who possess hazardous substances are required to report the tax and take any available exemptions and credits only at the time that such hazardous substances are withdrawn from storage for purposes of their sale, transfer, remanufacture, or consumption.
(9) How and when to claim credits. Credits should be claimed and offset against tax liability reported on the same excise tax return when possible. The tax return form provides a line for reporting tax on hazardous substances and a line for taking credits as an offset against the tax reported. It is not required that any documents or other evidence of entitlement to credits be submitted with the report. Such proofs must be retained in permanent records for the purpose of verification of credits taken.
(10) Special provision for consumer as first possessor. Under circumstances where the consumer is the first person in possession of any nonexempt hazardous substance (e.g., substances imported by the consumer), or where the consumer is the person who must pay the tax upon substances previously possessed in this state (fuel purchased for export in fuel tanks) the consumer's tax measure will be the wholesale value determined as nearly as possible according to the wholesale selling price at the place of use of similar substances of like quality and character.
(11) Hazardous substances or products on consignment. Consignees who possess hazardous substances or products in this state with the power to sell such things, in their own name or on behalf of a disclosed or undisclosed consignor are liable for payment of the tax. The exemption for previously taxed substances is available for such consignees only if the consignors have paid the tax and the consignee has retained the certification or other proof of previous tax payment referred to in subsection (4)(a)(i) and (ii) of this rule. Possession of consigned hazardous substances by a consignee does not constitute constructive possession by the consignor.
(12) Hazardous substances untraceable to source. Various circumstances may arise whereby a person will possess hazardous substances in this state, some of which have been previously taxed in this or other states and some of which may not. In such cases formulary tax reporting may be used upon a special ruling by the department of revenue.
Example. Fungible petroleum products from sources both within and outside this state are commingled in common storage facilities. Formulary reporting is appropriate based upon volume percentages reflecting the ratio of in-state production to out-of-state production or other form of acquisition.
(13) Administrative provisions. The provisions of chapter 82.32 RCW regarding due dates, reporting periods, tax return requirements, interest and penalties, tax audits and limitations, disputes and appeals, and all such general administrative provisions apply equally to the hazardous substance tax. Taxpayers may request, from the department, tax rulings covering unique circumstances not addressed in this rule.
(14) Certification of previously taxed hazardous substance. Certification that the hazardous substance tax has already been paid by a person previously in possession of the substance may be taken in substantially the following form:
I hereby certify that this purchase -
all purchases of
(omit one)
. . . .
. . . .
(identify substances purchased)
by
. . . .,
(name of purchaser)
who possesses registration no.
. . . .,
(buyer's number, if registered)
consists of the purchase of a hazardous substance or product upon which the hazardous substance tax has been paid in full by a person previously in possession of the substance or product in this state. This certificate is given with full knowledge of, and subject to the legally prescribed penalties for fraud and tax evasion, and with the full knowledge and agreement that the undersigned hereby assumes any liability for hazardous substance tax which has not been previously paid because of possession of the hazardous substance or product identified herein.
. . . .
 
The registered seller named below personally paid the tax upon possession of the hazardous substances.
. . . .
 
A person in possession of the hazardous substances prior to the possession of the registered seller named below paid the tax.
(Check the appropriate line.)
Name of registered seller . . . .
Registration No. . . . .
Firm name . . . .
Address . . . .
Type of business . . . .
Authorized signature . . . .
Title . . . .
 
Date . . . .
[Statutory Authority: RCW 82.01.060(2), 82.32.300, and 82.21.030. WSR 24-12-037, § 458-20-252, filed 5/30/24, effective 6/30/24. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 20-02-055, § 458-20-252, filed 12/24/19, effective 1/24/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapter 82.21 RCW. WSR 18-22-012, § 458-20-252, filed 10/25/18, effective 11/25/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-01-155, § 458-20-252, filed 12/21/16, effective 1/21/17. Statutory Authority: RCW 82.32.300. WSR 89-16-091 (Order 89-12), § 458-20-252, filed 8/2/89, effective 9/2/89; WSR 89-10-051 (Order 89-1), § 458-20-252, filed 5/2/89; WSR 88-06-028 (Order 88-2), § 458-20-252, filed 2/26/88.]


PDF458-20-254

Recordkeeping.

(1) Introduction. This rule defines the requirements for the maintenance and retention of books, records, and other sources of information. It also addresses these requirements where all or a part of the taxpayer's books and records are received, created, maintained, or generated through various computer, electronic, and/or imaging processes and systems.
The general requirements imposed on taxpayers under RCW 82.32.070 are to retain and make available those records necessary to verify that the correct tax liability has been reported and paid by the taxpayer with respect to the taxes administered by the department of revenue (department). The records provided to the department are confidential and privileged and may not be disclosed by the department, except as provided by RCW 82.32.330.
(2) Definitions. For purposes of this rule, the following definitions apply:
(a) "Database management system" means a software system that controls, relates, retrieves, and provides accessibility to data stored in a database.
(b) "Electronic data interchange" or "EDI technology" means the computer-to-computer exchange of business transactions in a standardized structured electronic format.
(c) "Hard copy" means any documents, records, reports or other data printed on paper.
(d) "Machine-sensible record" means a collection of related information in any electronic format (e.g., database management systems, EDI technology, automated data process systems, etc.). Machine-sensible records do not include hard-copy records that are created or recorded on paper or stored in or by an imaging system such as microfilm, microfiche, or storage-only imaging systems.
(e) "Records" means all books, data, documents, reports, or other information, including those received, created, maintained, or generated through various computer, electronic, and/or imaging processes and systems.
(f) "Storage-only imaging system" means a system of computer hardware and software that provides for the storage, retention and retrieval of documents originally created on paper. It does not include any system, or part of a system, that manipulates or processes any information or data contained on the document in any manner other than to reproduce the document in hard copy or as an optical image.
(3) Recordkeeping requirements—General.
(a) Duty of taxpayer to keep records. Every taxpayer liable for a tax or fee imposed by the laws of the state of Washington for which the department has primary or secondary administrative responsibility, e.g., Title 82 RCW, chapters 67.28 (hotel/motel tax), 70A.205 (fee on tires), and 84.33 RCW (forest excise tax), must keep complete and adequate records from which the department can determine the tax liability of the taxpayer.
It is the duty of each taxpayer to prepare and preserve all records in a systematic manner conforming to accepted accounting methods and procedures. Records are to be kept and preserved and must be presented upon request by the department or its authorized representatives. The records should demonstrate:
(i) The amounts of gross receipts and sales from all sources, however derived, including barter or exchange transactions, whether or not such receipts or sales are taxable. These amounts must be supported by original source documents or records including but not limited to all purchase invoices, sales invoices, contracts, and such other records as may be necessary to substantiate gross receipts and sales.
(ii) The amounts of all deductions, exemptions, or credits claimed through supporting records or documentation required by statute or administrative rule, or other supporting records or documentation necessary to substantiate the deduction, exemption, or credit.
(iii) The payment of retail sales tax or use tax on capital assets, supplies, articles manufactured for your own use, and other items used by the taxpayer as a consumer.
(iv) The amounts of any refunds claimed. These amounts must be supported by records as may be necessary to substantiate the refunds claimed. Refer to WAC 458-20-229 Refunds, for information on the refund process.
(b) Types of records. The records kept, preserved, and presented must include the normal records maintained by an ordinary prudent business person. These records may include general ledgers, sales journals, cash receipts journals, bank statements, check registers, and purchase journals, together with all bills, invoices, cash register tapes, and other records or documents of original entry supporting the books of account entries. The records must include all federal and state tax returns and reports and all schedules, work papers, instructions, and other data used in the preparation of the tax reports or returns.
(c) Format of records. If a taxpayer retains records in both machine-sensible and hard-copy formats, they must make the records available to the department in machine-sensible format upon request of the department. However, the taxpayer is not prohibited from demonstrating tax compliance with traditional hard-copy documents or reproductions, although this does not eliminate the requirement that they provide access to machine-sensible records, if requested.
Machine-sensible records used to establish tax compliance must contain sufficient transaction-level detail information so that the details underlying the machine-sensible records can be identified and made available to the department upon request.
At the time of an examination, the retained records must be capable of being retrieved and converted to a readable record format, as required in subsection (6) of this rule.
Taxpayers are not required to construct machine-sensible records other than those created in the ordinary course of business. A taxpayer who does not create the electronic equivalent of a traditional paper document in the ordinary course of business is not required to construct such a record for tax purposes.
(4) Record retention period. All records must be open for inspection and examination at any time by the department, upon reasonable notice, and must be kept and preserved for a period of five years. RCW 82.32.070.
(5) Failure to maintain or disclose records. Any taxpayer who fails to comply with the requirements of RCW 82.32.070 or this rule is forever barred from questioning, in any court action or proceedings, the correctness of any assessment of taxes made by the department based upon any period for which such books, records, and invoices have not been so kept, preserved, or disclosed. RCW 82.32.070.
(6) Electronic records.
(a) Electronic data interchange requirements.
(i) Where a taxpayer uses electronic data interchange (EDI) processes and technology, the level of record detail, in combination with other records related to the transactions, must be equivalent to that contained in an acceptable paper record. For example, the retained records should contain such information as vendor name, invoice date, product description, quantity purchased, price, amount of tax, indication of tax status, shipping detail, etc. Codes may be used to identify some or all of the data elements, provided that the taxpayer provides a method which allows the department to interpret the coded information.
(ii) The taxpayer may capture the information at any level within the accounting system and need not retain the original EDI transaction records provided the audit trail, authenticity, and integrity of the retained records can be established. For example, a taxpayer using electronic data interchange technology receives electronic invoices from its suppliers. The taxpayer decides to retain the invoice data from completed and verified EDI transactions in its accounts payable system rather than to retain the EDI transactions themselves. Since neither the EDI transaction nor the accounts payable system captures information from the invoice pertaining to product description and vendor name (i.e., they contain only codes for that information), the taxpayer must also retain other records, such as its vendor master file and product code description lists and make them available to the department. In this example, the taxpayer need not retain its EDI transaction for tax purposes if the vendor master file contains the required information.
(b) Electronic data processing systems requirements. The requirements for an electronic data processing accounting system should be similar to that of a manual accounting system, in that an adequately designed accounting system should incorporate methods and records that will satisfy the requirements of this rule.
(c) Internal controls.
(i) Upon the request of the department, the taxpayer must provide a description of the business process that created the retained records. Such description must include the relationship between the records and the tax documents prepared by the taxpayer and the measures employed to ensure the integrity of the records.
(ii) The taxpayer must be capable of demonstrating:
(A) The functions being performed as they relate to the flow of data through the system;
(B) The internal controls used to ensure accurate and reliable processing; and
(C) The internal controls used to prevent unauthorized addition, alteration, or deletion of retained records.
(iii) The following specific documentation is required for machine-sensible records retained pursuant to this rule:
(A) Record formats or layouts;
(B) Field definitions (including the meaning of all codes used to represent information);
(C) File descriptions (e.g., data set name); and
(D) Detailed charts of accounts and account descriptions.
(7) Access to machine-sensible records.
(a) The manner in which the department is provided access to machine-sensible records may be satisfied through a variety of means that take into account a taxpayer's facts and circumstances through consultation with the taxpayer.
(b) Access will be provided in one or more of the following manners:
(i) The taxpayer may arrange to provide the department with the hardware, software and personnel resources to access the machine-sensible records.
(ii) The taxpayer may arrange for a third party to provide the hardware, software and personnel resources necessary to access the machine-sensible records.
(iii) The taxpayer may convert the machine-sensible records to a standard record format specified by the department, including copies of files, on a magnetic medium that is agreed to by the department.
(iv) The taxpayer and the department may agree on other means of providing access to the machine-sensible records.
(8) Storage-only imaging systems.
(a) Converting documents. For purposes of storage and retention, taxpayers may convert hard-copy documents received or produced in the normal course of business and required to be retained under this rule to microfilm, microfiche or other storage-only imaging systems and may discard the original hard-copy documents, provided the conditions of this rule are met. Documents which may be stored on these media include general books of account, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, credit memoranda, etc.
(b) System requirements. Microfilm, microfiche and other storage-only imaging systems must meet the following requirements:
(i) Documentation establishing the procedures for converting the hard-copy documents to microfilm, microfiche or other storage-only imaging system must be maintained and made available upon request. Such documentation must, at a minimum, contain a sufficient description to allow an original document to be followed through the conversion system as well as internal procedures established for inspection and quality assurance.
(ii) Procedures must be established for the effective identification, processing, storage, and preservation of the stored documents and for making them available for a period of five years.
(iii) Upon request by the department, a taxpayer must provide facilities and equipment for reading, locating, and reproducing any documents maintained on microfilm, microfiche or other storage-only imaging system.
(iv) When displayed on such equipment or reproduced on paper, the documents must exhibit a high degree of legibility and readability. For this purpose, legibility is defined as the quality of a letter or numeral that enables the observer to identify it positively and quickly to the exclusion of all other letters or numerals. Readability is defined as the quality of a group of letters or numerals being recognizable as words or complete numbers.
(v) All data stored on microfilm, microfiche or other storage-only imaging systems must be maintained and arranged in a manner that permits the location of any particular record.
(vi) There must be no substantial evidence that the microfilm, microfiche, or other storage-only imaging system lacks authenticity or integrity.
(9) Hard-copy records.
(a) Recordkeeping requirements. The provisions of this rule do not relieve taxpayers of the responsibility to retain hard-copy records that are created or received in the ordinary course of business as required by existing law and regulations, except as otherwise provided in this rule. Hard-copy records may be retained on a recordkeeping medium as provided in subsection (8) of this rule. The department may request hard-copy printouts in lieu of retained machine-sensible records at the time of examination.
Hard-copy records not produced or received in the ordinary course of transacting business (e.g., when the taxpayer uses electronic data interchange technology), do not need to be created. Computer printouts that are created for validation, control, or other temporary purposes do not need to be retained.
(b) Debit and credit card transactions. Hard-copy records generated at the time of a transaction using a credit or debit card must be retained unless all the details necessary to determine correct tax liability relating to the transaction are subsequently received and retained by the taxpayer in accordance with this rule.
(10) Out-of-state businesses. An out-of-state business which does not keep its necessary records within this state may either produce these records within this state as required for examination by the department or permit the examination of all of its records by the department or its authorized representatives at the place where the records are kept. RCW 82.32.070.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-23-124, § 458-20-254, filed 11/16/23, effective 12/17/23; WSR 20-22-093, § 458-20-254, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-040, § 458-20-254, filed 2/24/16, effective 3/26/16; WSR 07-04-100, § 458-20-254, filed 2/6/07, effective 3/9/07. Statutory Authority: RCW 82.32.300. WSR 89-11-040 (Order 89-6), § 458-20-254, filed 5/16/89.]


PDF458-20-255

Carbonated beverage syrup tax.

(1) Introduction. This rule explains the carbonated beverage syrup tax (syrup tax) as imposed by chapter 82.64 RCW. The syrup tax is an excise tax on the number of gallons of carbonated beverage syrup sold in this state at wholesale or retail. The syrup tax is in addition to all other taxes.
Except as otherwise provided in this rule, the provisions of chapters 82.04, 82.08, 82.12 and 82.32 RCW regarding definitions, due dates, reporting periods, tax return requirements, interest and penalties, tax audits and limitations, disputes and reviews, and all general administrative provisions apply to the syrup tax.
This rule provides examples that identify a number of facts and then state a conclusion regarding the applicability of the syrup tax. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) What is carbonated beverage syrup? Carbonated beverage syrup (syrup) is a concentrated liquid that is added to carbonated water to produce a carbonated beverage. "Carbonated beverage" includes any nonalcoholic liquid intended for human consumption that contains any amount of carbon dioxide. Examples include soft drinks, mineral waters, seltzers, and fruit juices, if carbonated, and frozen carbonated beverages known as FCBs. "Carbonated beverage" does not include products such as bromides or carbonated liquids commonly sold as pharmaceuticals.
(3) When is syrup tax imposed and how is it determined? Syrup tax is imposed on the wholesale or retail sales of syrup within this state. The syrup tax is determined by the number of gallons of syrup sold. Fractional amounts are taxed proportionally.
(a) When should syrup tax be reported and paid? The frequency of reporting and paying the syrup tax coincides with the reporting periods of taxpayers for their business and occupation (B&O) tax. For example, a wholesaler who reports B&O tax monthly would also report any syrup tax liability on the monthly excise tax return.
(b) What if I sell both previously taxed and nontaxed syrups? Persons selling syrups in this state, some of which have been previously taxed in this or other states and some of which have not, may contact the department of revenue (department) for authorization to use formulary tax reporting. Prior to reporting in this manner, the person must receive a special ruling from the department that allows formulary reporting. A ruling may be obtained by writing the department at dor.wa.gov/content/ContactUs/Default.aspx; or
Taxpayer Information and Education
Washington State Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
Persons selling previously taxed syrups should refer to subsections (5)(a) and (6) of this rule for information about an exemption or credit that may be applicable to such sales.
(4) Who is responsible for paying the syrup tax? This subsection explains who is responsible for payment of the syrup tax for both wholesale and retail sales of syrup in this state.
(a) Wholesale sales. A wholesaler making a wholesale sale of syrup in this state must collect the tax from the buyer and report and pay the tax to the department. If, however, the wholesaler is prohibited from collecting the tax under the Constitution of this state or the Constitution or laws of the United States, the wholesaler is liable for the tax. A wholesaler who fails or refuses to collect the syrup tax with intent to violate the provisions of chapter 82.64 RCW, or to gain some advantage directly or indirectly is guilty of a misdemeanor. The buyer is responsible for paying the syrup tax to the wholesaler. The syrup tax required to be collected by the wholesaler is a debt from the buyer to the wholesaler, until the tax is paid by the buyer to the wholesaler. Except as provided in subsection (5)(b)(ii) of this rule, the buyer is not obligated to pay or report the syrup tax to the department.
(b) Retail sales. A retailer making a retail sale in this state of syrup purchased from a wholesaler who has not collected the tax must report and pay the tax to the department. Except as provided in subsection (5)(b)(ii) of this rule, the buyer is not obligated to pay or report the syrup tax to the department.
(5) Exemptions: This subsection provides information on exemptions from the syrup tax.
(a) Previously taxed syrup. Any successive sale of previously taxed syrup is exempt. See RCW 82.64.030(1). "Previously taxed syrup" is syrup on which tax has been paid under chapter 82.64 RCW.
(i) All persons selling or otherwise transferring possession of taxed syrup, except retailers, must separately itemize the amount of the syrup tax on the invoice, bill of lading, or other instrument of sale. Beer and wine wholesalers selling syrup on which the syrup tax has been paid and who are prohibited under RCW 66.28.010 from having a direct or indirect financial interest in any retail business may, instead of a separate itemization of the amount of the syrup tax, provide a statement on the instrument of sale that the syrup tax has been paid. For purposes of the payment and the itemization of the syrup tax, the tax computed on standard units of a product (e.g., cases, liters, gallons) may be stated in an amount rounded to the nearest cent. In competitive bid documents, unless the syrup tax is separately itemized in the bid documents, the syrup tax will not be considered as included in the bid price. In either case, the syrup tax must be separately itemized on the instrument of sale except when the separate itemization is prohibited by law.
(ii) Any person prohibited by federal or state law, ruling, or requirement from itemizing the syrup tax on an invoice, bill of lading, or other document of delivery must retain the documentation necessary for verification of the payment of the syrup tax.
(iii) A subsequent sale of syrup sold or delivered upon an invoice, bill of lading, or other document of sale that contains a separate itemization of the syrup tax is exempt from the tax. However, a subsequent sale of syrup sold or delivered to the subsequent seller upon an invoice, bill of lading, or other document of sale that does not contain a separate itemization of the syrup tax is conclusively presumed to be previously untaxed syrup, and the seller must report and pay the syrup tax unless the sale is otherwise exempt.
(iv) The exemption for syrup tax previously paid is available for any person selling previously taxed syrup even though the previous payment may have been satisfied by the use of credits or offsets available to the prior seller.
(v) Example. Company A sells to Company B a syrup on which Company A paid a similar syrup tax in another state. Company A takes a credit against its Washington tax liability in the amount of the other state's tax paid (see subsection (6) of this rule). It provides Company B with an invoice containing a separate itemization of the syrup tax. Company B's subsequent sale is tax exempt even though Company A has not directly paid Washington's tax but has used a credit against its Washington liability.
(b) Syrup transferred out-of-state. Any syrup that is transferred to a point outside the state for use outside the state is exempt. See RCW 82.64.030(2). The exemption for the sale of exported syrup may be taken by any seller within the chain of distribution.
(i) Required documentation. The prior approval of the department is not required to claim an exemption from the syrup tax for exported syrup. The seller, at the time of sale, must retain in its records an exemption certificate completed by the buyer to document the exempt nature of the sale. This requirement may be satisfied by using the department's "Certificate of Tax Exempt Export Carbonated Beverage Syrup," or another certificate with substantially the same information. A blank exemption certificate can be obtained through the following means:
(A) From the department's internet website at dor.wa.gov; or
(B) By writing to: Taxpayer Services, Washington State Department of Revenue, P.O. Box 47478, Olympia, Washington 98504-7478.
(ii) The exemption certificate may be used so long as some portion of the syrup is exported. Sellers are under no obligation to verify the amount of syrup to be exported by their buyers providing such certificates. The buyer is liable for tax on syrup that is not exported.
(iii) Example. Company A sells a previously untaxed syrup to Company C. Company C provides the seller with a completed exemption certificate as explained in (b)(i) of this subsection. Company C sells the syrup to Company D, who provides Company C with an exemption certificate. Company D decides to not export a portion of the purchased syrup. Companies A and C can both accept exemption certificates. Company D is responsible for paying syrup tax on the syrup not exported.
(iv) Persons who make sales of syrup to persons outside this state must keep the proofs required by WAC 458-20-193 (Inbound and outbound interstate sales of tangible personal property) to substantiate the out-of-state sales.
(c) Taxation prohibited under the United States Constitution. Persons or activities that the state is prohibited from taxing under the United States Constitution are exempt. See RCW 82.64.050(1).
For instance, consider the sales of syrup to Indian tribes when the syrup is delivered in Indian country. In the following examples, the assumption is that the sale to the tribal business qualifies under the subsection on preemption of state tax for "sales of tangible personal property or provisions of service by nonmembers in Indian country" in WAC 458-20-192, Indians—Indian country.
(i) Example 1. Big Cola (an instate manufacturer) sells syrup wholesale to Little Cola Distribution (a nonbottler). Big Cola collects and pays the syrup tax and shows it on the invoice of Little Cola Distribution. Little Cola Distribution then sells and delivers the syrup to a tribal business in Indian country. In this situation the tax is due because the legal incidence of the tax is on Little Cola Distribution, a non-Indian outside of Indian country, as the first purchaser in a wholesale sale. Thus, the syrup tax is not preempted by the second wholesale sale to Indians in Indian country of syrup. In this circumstance, the legal incidence of the tax is not on the sale to the tribal business in Indian country. The syrup tax was previously owed and paid by Little Cola Distribution in its purchase from Big Cola. This tax is only collected once, notwithstanding that Little Cola Distribution separately itemized its syrup tax obligation as provided for in subsection (5)(a)(i) of this rule.
(ii) Example 2. Big Cola sells syrup wholesale to Little Cola Bottling (a trademarked bottler). Big Cola does not collect or pay the syrup tax from the sale to Little Cola Bottling due to the trademarked bottler exemption under subsection (5)(d) of this rule. Little Cola Bottling then sells and delivers the bottled syrup to a tribal business in Indian country. The syrup tax is not due.
(iii) Example 3. Big Cola sells and delivers syrup directly to a tribal business in Indian country. The syrup tax is not due.
(d) Wholesale sales of trademarked syrup to bottlers. Any wholesale sale of a trademarked syrup by any person to a person commonly known as a bottler who is appointed by the owner of the trademark to manufacture, distribute, and sell the trademarked syrup within a specific geographic territory is exempt. See RCW 82.64.030(3).
(6) Syrup tax credits.
(a) B&O tax credit for syrup tax paid. RCW 82.04.4486 provides a B&O tax credit that was effective July 1, 2006. The credit is available to any buyer of syrup using the syrup in making carbonated beverages that are then sold, provided that the syrup tax, imposed by RCW 82.64.020, has been paid. The tax credit is a percentage of the syrup tax paid.
(i) How much is the credit? For syrup purchased July 1, 2006, through June 30, 2007, the B&O tax credit for the buyer was equivalent to twenty-five percent of the syrup tax paid. From July 1, 2007, through June 30, 2008, the allowable credit was fifty percent. From July 1, 2008, through June 30, 2009, the credit was seventy-five percent. As of July 1, 2009, the buyer is entitled to a B&O tax credit of one hundred percent of the syrup tax paid.
(ii) When can the credit be taken? The B&O tax credit can be claimed against taxes due for the tax reporting period in which the taxpayer purchased the syrup. The credit cannot exceed the amount of B&O tax due, nor can credit be refunded. Unused credit may be carried over and used for future reporting periods for a maximum of one year. The year starts at the end of the reporting period in which the syrup was purchased and credit was earned. See (b)(ii)(B)(iii) of this subsection for record documentation and retention.
(b) Credit for syrup tax paid to another state. Credit is allowed against the taxes imposed by chapter 82.64 RCW for any syrup tax paid to another state with respect to the same syrup. The amount of the credit cannot exceed the tax liability arising under chapter 82.64 RCW. The amount of credit is limited to the amount of tax paid in this state upon the wholesale sale of the same syrup in this state. In addition, the credit may not be applied against any tax paid or owed in this state other than the syrup tax imposed by chapter 82.64 RCW.
(i) What is a state? For purposes of the syrup tax credit, "state" is any state of the United States other than Washington, or any political subdivision of another state; the District of Columbia; and any foreign country or political subdivision of a foreign country.
(ii) What is a syrup tax? For purposes of the syrup tax credit, "syrup tax" means a tax that is:
(A) Imposed on the sale at wholesale of syrup and is not generally imposed on other activities or privileges; and
(B) Measured by the volume of the syrup.
(iii) How and when to claim the credit. Any tax credit available to the taxpayer should be claimed and offset against tax liability reported on the same excise tax return when possible. The excise tax return provides a line for reporting syrup tax, and the credit must be taken in the credit section under the credit classification "other credits." A statement showing the computation of the credit must be provided. It is not required that any other documents or other evidence of entitlement to credits be submitted with the return. Such proofs must be retained in permanent records for the purpose of verification of credits taken.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-12-075, § 458-20-255, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2) and chapter 82.64 RCW. WSR 14-14-085, § 458-20-255, filed 6/30/14, effective 7/31/14; WSR 08-14-019, § 458-20-255, filed 6/20/08, effective 7/21/08; WSR 06-23-067, § 458-20-255, filed 11/9/06, effective 12/10/06; WSR 05-02-009, § 458-20-255, filed 12/27/04, effective 1/27/05. Statutory Authority: RCW 82.32.300. WSR 98-20-085, § 458-20-255, filed 10/6/98, effective 11/6/98; WSR 91-20-058, § 458-20-255, filed 9/24/91, effective 10/25/91; WSR 89-17-001 (Order 89-13), § 458-20-255, filed 8/3/89, effective 9/3/89.]


PDF458-20-256

Trade shows, conventions and seminars.

(1) When a trade show, convention or educational seminar is sponsored and held by a nonprofit trade or nonprofit professional organization for a group other than the general public, the sponsoring organization may deduct from its business and occupation tax measure all "attendance" or "space" charges it collects for such an event, per RCW 82.04.4282. Nonqualifying organizations, and qualifying organizations sponsoring nonqualifying events, must include "attendance" and "space" charges in their tax measure for purposes of computing service and other activity business and occupation tax thereon.
(2) Nonprofit organizations are taxed in the same fashion as profit-making individuals or groups, with but few tax exemptions. This section implements one of those exemptions. See also WAC 458-20-114 and 458-20-169.
(3) For purposes of this section, the following definitions shall apply:
(a) The term "nonprofit" means exempt from tax under Section 501 of the Internal Revenue Code. The tax exempt status must be in effect when the trade show, convention, or seminar is conducted.
(b) A "trade organization" is an entity whose members are engaged "in trade", i.e., in one or more lawful commercial trades, businesses, crafts, industries, or distinct productive enterprises.
(c) A "professional organization" is an entity whose members are engaged in a particular lawful vocation, occupation or field of activity of a specialized nature.
(d) A "trade show" is a gathering of persons in trade for the purpose of exhibiting, demonstrating, and explaining services, products and/or equipment.
(e) A "convention" is a gathering of persons in trade or a profession for the purposes of providing, publishing and exchanging information, ideas and attitudes and conducting the business of the organization.
(f) A "seminar" is a gathering of persons in trade or a profession for the purpose of research, study, and/or exchange of specialized information, ideas and attitudes in regard to that trade or profession.
(g) "Not open to the general public" means that attendance is limited to members of the sponsoring organization and to specific invited guests of the sponsoring organization.
(4) As of July 23, 1989, for purposes of computing taxable receipts subject to business and occupation tax, a qualifying "nonprofit" organization may deduct all amounts the organization collects as charges for
(a) Admissions, and
(b) Licenses to occupy space in order to display exhibits, equipment and/or goods, at an organization-sponsored trade show, convention or seminar not open to the general public.
(5) No statutory deduction is available for the following:
(a) Outright sales of tangible personal property or services for which a specific charge separate from the charge for attending or occupying space is made. It is only those charges which are paid for the express privilege of attending or exhibiting at such an event which are deductible; and
(b) Admission or space charges for purely social, recreational, entertainment or other nontrade or nonprofessional gatherings regardless of the nonprofit tax status of the sponsoring organization.
(6) Examples:
(a) The local building trade council (council) organizes and sponsors a trade show held for specialty and general housing contractors. Council has on file a letter of tax exemption under Section 501 of the Internal Revenue Code. Council collects $100.00, prepaid, from each exhibitor for licenses to display and exhibit construction equipment, tools and related wares at preassigned booths, and $5.00, paid at the door, from each contractor who attends the event. Because the sponsoring organization qualifies as a nonprofit trade organization, the event qualifies as a trade show sponsored by the organization, and it is not open to the general public, all of the amounts collected constitute deductible receipts of admission and/or space charges.
(b) The metropolitan business group (metro), a recognized tax-exempt organization under IRC Section 501, organizes and sponsors a convention for all of its businesses members. Following completion of regular metro business matters (election of officers, etc.), there are speeches by accountants, attorneys, bankers, financial consultants, city planners, and other persons able to give legal and business advice and information to those attending. Metro charges a $25.00 per person entry fee. Included with the program is a hosted luncheon at which the mayor gives an explanation of local governmental regulations. The entry charges are fully deductible by Metro from its business and occupation tax measure. The sponsoring organization is "nonprofit" and a "trade organization" because its members are generically "in trade" even though not all are members of just one trade. The event constitutes a convention for persons "in trade" (generic, not specific) and the event is not open to the public. Finally, the moneys collected all constitute admission charges, no special charge for the meal having been made.
(c) The eastside whiffle ball association (association), a corporation recognized in writing to be tax exempt under Section 501 of the Internal Revenue Code, holds a "skills" clinic for all interested persons. The association charges $3.00 to all attending, which is just sufficient to cover the cost of materials and the use of a facility. Following the event, a special barbecue is held for $4.00 extra per participant. Souvenirs imprinted with the association name are also available for extra charge. The $3.00 admission charges, the $4.00 dinner charges, and the souvenir charges must all be included in the association's B&O tax measure for the following reasons, each one of which disallows the deduction:
(i) The association is not a trade or professional organization,
(ii) The event is not a trade show, convention or seminar, and
(iii) The event is open to the public. Separate dinner and souvenir charges are nondeductible in any event because they constitute itemized charges for goods and services.
(d) A local concerned citizen group (group), which has never applied for federal tax exempt status, organizes and sponsors a health care seminar held in the local school auditorium for district health care professionals, nurses, sport trainers, parents, and concerned students. To cover the cost of hiring competent medical experts to speak at the seminar, the group charges $5.00 per person. The event is sponsored by the group for a worthwhile public purpose and the entry fees are in fact admission charges. For the following reasons, each one of which disallows the deduction, the group will have to include all door charges in its tax measure: (i) The sponsoring organization is not properly recognized to be nonprofit (no federal tax recognition) or to be a trade or professional organization, and (ii) the event is open to the public at large.
[Statutory Authority: RCW 82.32.300. WSR 90-04-058, § 458-20-256, filed 2/2/90, effective 3/5/90.]


PDF458-20-257

Tangible personal property warranties and service contracts.

(1) Introduction. This rule explains the business and occupation (B&O) tax, retail sales tax, and use tax reporting responsibilities of persons selling or performing services covered by warranties, service contracts, and mixed agreements for tangible personal property. For additional information on computer software maintenance agreements see WAC 458-20-15502, Taxation of computer software.
(2) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(3) Definitions. For the purpose of this rule, the following terms will apply:
(a) Agreement. Unless otherwise stated, "agreement" means "service contract," "warranty," or "mixed agreement" as those terms are defined.
(b) Insurance rider. An insurance rider is an attachment to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or excluding certain conditions from the coverage.
(c) Mixed agreement. A mixed agreement is an agreement that contains provisions of both warranty and service contracts.
(d) Seller. "Seller" means every person making sales to a buyer, purchaser, or consumer, whether as agent, broker, or principal.
(e) Service contract. A service contract, sometimes referred to as a maintenance agreement or even an extended warranty, provides for the repairing, cleaning, altering, or improving of tangible personal property, generally for the purpose of continued satisfactory operation. These services may be performed on a regular or irregular basis. Even though a service contract may be referred to by some other name, it is the coverage that determines whether the contract is a service contract or extended warranty.
(f) Warranty. A warranty, sometimes referred to as a guarantee, is an agreement which provides for the replacement or repair of tangible personal property at no additional charge or at a reduced charge for tangible personal property, labor, or both, or to compensate for the replacement or repair of tangible personal property, based upon the happening of some unforeseen occurrence, e.g., a component part fails and the property needs repair. Unless otherwise stated, the term warranty includes both a warranty and an extended warranty.
(4) Sales of agreements for tangible personal property.
(a) Retail sales. Income from agreements sold with or without tangible personal property to consumers is subject to the retailing B&O tax and retail sales tax, unless a specific exemption applies. Income from the sales of insurance riders to consumers is also subject to retailing B&O tax and retail sales tax. See RCW 82.04.050. Sellers of agreements and insurance riders to consumers are responsible for collecting the retail sales tax from the consumers, and remitting it and retailing B&O tax to the department of revenue (department).
If a seller is acting as agent or broker for another party, such as the actual warrantor, the seller is still liable for collecting the retail sales tax from the buyer and remitting it to the department. In this case, the seller as an agent or broker of the warrantor normally receives a commission. Commission income is taxable under the service and other business activities B&O tax classification. See subsection (5) of this rule for "Sales by third parties." The warrantor's gross income on the sale is taxable under the retailing B&O tax classification. There is no deduction allowed for the commission paid to the agent or broker.
(b) Wholesale sales. Sales of agreements can be made at wholesale when the buyer will be reselling the agreement without intervening use, or including the agreement in the sale of tangible personal property, and the seller takes from the buyer a copy of the buyer's reseller permit. The reseller permit documents the wholesale nature of any sale as provided in WAC 458-20-102, Reseller permits. (Reseller permits replaced resale certificates effective January 1, 2010.)
Example 1. An automobile dealer sells a vehicle to a customer for a selling price of $20,000 that includes a manufacturer's limited five years or 50,000 miles warranty. The automobile dealer extends coverage for an additional two years, as a bonus to the customer. When the automobile dealer purchases the two-year agreement from a warranty provider, with the intent to sell the agreement along with the sale of the vehicle to the customer, the purchase of the extended warranty by the automobile dealer is for resale.
(i) Example 2. A home improvement store (store) sells a lawnmower to a customer. The store also makes available for purchase a manufacturer's agreement for extended coverage. The customer decides to purchase an agreement from the store for the lawnmower. As the store is reselling the agreement, the store may purchase it at wholesale from the manufacturer with the use of a reseller permit. Both the sales of the lawnmower and agreement to the customer are taxable retail sales. The store will collect the retail sales tax from the customer, and remit it along with retailing B&O tax to the department.
(ii) Example 3. For a special holiday sale, the home improvement store in Example 2 purchases the manufacturer's extended warranties to provide with the sales of lawnmowers. The store makes no intervening use of the extended warranties, and does not charge customers for the warranties. The warranty purchases by the store are wholesale purchases as long as the store provides a copy of its reseller permit to the manufacturer. The store is not the consumer of the warranties as the warranties are provided to customers as a condition of purchase of the lawnmowers. The store will collect retail sales tax, from the customers on the sales of the lawnmowers, and remit it along with retailing B&O tax to the department.
(c) Agreement purchases from a third party. When an agreement is purchased by a manufacturer, wholesaler, or retailer to be included in the sale of tangible personal property, the purchase of the agreement can be made at wholesale with the use of a reseller permit. In this instance, the manufacturer, wholesaler, or retailer is not the consumer of the warranty. When the retailer sells the tangible personal property including the agreement, it will collect the retail sales tax from the customer and remit it and the retailing B&O tax to the department.
Example 4. If a vehicle wholesaler sells a vehicle to a retailer and includes an agreement with the sale, the sale of the vehicle with agreement is a wholesale sale. RCW 82.04.050. The retailer must provide the wholesaler with a reseller permit.
(d) Deferred sales or use tax due. If a manufacturer, wholesaler, or retailer purchases an agreement, without knowing whether it will be sold or given as an incentive with the sale of tangible personal property, the agreement can be purchased at wholesale with the use of a reseller permit. If there is intervening use of the agreement by the manufacturer, wholesaler, or retailer, deferred sales or use tax will be due.
(e) Additional charges for parts or repair services covered under an agreement. In some cases, a customer is required to pay an amount for services or parts not fully covered under an agreement. This additional amount is subject to both the retailing B&O tax and retail sales tax, unless an exemption applies.
Example 5. The automobile dealer in Example 1 sells a vehicle to a customer for a selling price of $20,000 that includes a manufacturer's limited five-year or 50,000 miles warranty. The dealer also sells its own extended warranty to the customer for $200. The dealer insures itself with an insurance carrier, and under the policy claims are paid on the retail value of the repairs. The customer has the dealer complete $500 of repairs under the warranty. The customer pays the dealer a reduced charge of $100 for the warranty services and the dealer receives $400 from its insurance carrier. In completing the repair, the dealer installed parts from its inventory which had a cost to the dealer of $150 and subcontracted part of the repair to an electrical shop which charged the dealer $200. The tax liability to the dealer and subcontractor is as follows:
(i) In addition to retail sales tax collected from the customer on the $20,000 selling price, retail sales tax must be collected on the $200 selling price for the dealer's own extended warranty.
(ii) The $20,200 selling price for both the automobile and warranty is reported under the retailing B&O tax and retail sales tax classifications on the excise tax return. The $20,000 paid for the automobile (but not the cost of the warranty) is also subject to the motor vehicle sales excise tax.
(iii) The $100 charge paid by the customer for the warranty services performed is subject to the retailing B&O tax, and the dealer must collect retail sales tax from the customer.
(iv) The $400 received by the dealer from the insurance company is a nontaxable insurance claim reimbursement.
(v) The $150 cost of the parts taken from inventory is not subject to use tax.
(vi) The subcontractor is making a $200 wholesale sale to the dealer, if the dealer provides the subcontractor with a copy of its reseller permit.
(f) Exemptions. The sale of an agreement by a retailer is not exempt simply because the sale of the tangible personal property to which it applies is exempt. Generally, for the sale of the agreement to be exempt, there must be a provision in statute exempting all services or products covered by the agreement. If all such obligations are not exempt, the sale of the agreement to the consumer is subject to retail sales tax. See RCW 82.08.190 and 82.08.195 for additional information regarding the taxation of bundled transactions.
(i) Service contracts. Since a service contract is a contract for the repairing, cleaning, altering, or improving of the tangible personal property covered by the contract, the sale of a service contract by the retailer may be exempt from retail sales tax if there is a statutory exemption for all activities covered by the contract.
(A) Example 6. RCW 82.08.955 provides a retail sales tax exemption for both the sales and repair of machinery and equipment used directly for retail sales of a biodiesel blend or E85 motor fuel. Company A sells machinery that qualifies for exemption under RCW 82.08.955 to Dealer BF. The purchase price of the machinery is $10,000 and includes a ninety-day warranty against defects in material and workmanship. Dealer BF also purchases a service contract for an additional $300 that covers the repairing and cleaning of qualified parts. If Dealer BF provides Company A with an exemption certificate, the $10,000 selling price and $300 service contract price are exempt from retail sales tax. Company A reports the total $10,300 under the retailing B&O tax and retail sales tax classifications, taking a deduction under retail sales tax for the exemption.
(B) Example 7. RCW 82.08.809 provides an exemption for the purchase of vehicles using clean alternative fuels provided the provisions of the exemption are followed. A dealer sells a new vehicle powered by natural gas for $30,000 and a $500 two-year service contract to a customer. The sale of the vehicle is exempt from retail sales tax, but the sale of the service contract is subject to retail sales tax as there is no statutory exemption for the repair activities covered by the service contract.
(ii) Warranties. The sale of a warranty by a retailer is exempt only if a specific statutory exemption is available. The place of sale for a warranty is the seller's business location if the buyer receives the warranty at that location. See RCW 82.32.730 and WAC 458-20-145, Local sales and use tax for additional sourcing information. See WAC 458-20-15502 for computer software warranties.
Warranties purchased and received outside of Washington are subject to use tax when put to use in Washington. See RCW 82.12.020.
Example 8. Assume that Dealer BF in Example 6 also purchases an extended warranty for an additional $200. If Dealer BF provides Company A with a valid exemption certificate, the $10,000 selling price and $300 service contract are exempt from retail sales tax, but the $200 for the extended warranty is subject to retail sales tax. RCW 82.08.955 does not provide for an exemption for a warranty for eligible equipment. As there is no corresponding tax exemption for B&O tax, Company A will pay retailing B&O tax to the department on the total amount of $10,500 along with remitting the retail sales tax collected from Dealer BF.
(iii) Mixed agreements. The sale to a consumer of a mixed agreement for tangible personal property, which by definition contains provisions of both a warranty and a service contract, is a "bundled transaction." Retail sales tax must generally be collected from the consumer on the selling price of a mixed agreement, unless both the warranty provisions and service contract provisions each separately qualify for a retail sales tax exemption. Refer to RCW 82.08.190 and 82.08.195 for additional guidance on how retail sales tax applies to bundled transactions.
(5) Sales by third parties. Consideration received by a third party as a commission, for selling an agreement for the actual warrantor, is generally subject to tax under the service and other activities tax classification. In this situation, the third-party seller never takes possession of the agreement, and the warrantor maintains liability for the provisions of the agreement.
(a) Responsibility for payment of retailing B&O tax. The warrantor is subject to retailing B&O tax on the gross sales price received from the sales of agreements by third parties. No deduction is allowed for commissions paid to third parties.
(b) Responsibility for collection of retail sales tax. The third party is responsible for collecting the retail sales tax from the buyer and remitting it, along with service and other activities B&O tax on its commission income, to the department. If the seller of the agreement is licensed under chapter 48.17 RCW with respect to this selling activity, the seller owes tax on commissions under the insurance producers B&O tax classification.
(6) Sales of repair services or parts to obligor. A person obligated under an agreement, including any third-party obligor under an agreement sold to a retailer and provided at no additional charge to the end consumer, may purchase the following from a supplier or service provider at wholesale without incurring retail sales tax, provided the obligor provides the supplier or service provider with a reseller permit:
• Parts purchased to replace or become an ingredient or component of tangible personal property covered by the agreement, as long as there is no intervening use of the parts as a consumer; and
• Repair services purchased to satisfy the obligor's obligations under an agreement.
The supplier or service provider is taxable under the wholesaling B&O tax classification on the value of the parts and labor provided.
(7) Warranties with insurance elements. There are tangible personal property agreements that include elements of insurance (i.e., theft, loss) and elements of warranty (operational failure, damage). Income from sales to consumers of agreements defined as a warranty, service contract or maintenance agreement, that are not otherwise insurance contracts where tax has been paid under Title 48 RCW insurance premiums tax, is subject to retailing B&O tax and retail sales tax. See RCW 48.14.080. If a bundled transaction includes both taxable and nontaxable plans, retailing B&O and retail sales taxes are due on the income. For more information on bundled transactions see RCW 82.08.190 and 82.08.195.
(8) Commonly asked questions.
(a) Is it a warranty or service contract when a credit card company replaces lost or damaged items purchased by one of their credit card holders? The credit card company (company) covering the purchased items would be providing an insurance product, but the company may not be charging the card holders for the benefit of having lost or damaged items replaced at no charge and if not, the company would not owe premiums tax, but owe B&O tax on income. When the company replaces items, the company is responsible for paying sales tax on the items purchased and provided as replacements.
(b) Is identity theft protection considered a warranty? Identity theft protection is not tangible personal property. The protection plan may be a combination of products including monitoring a person's accounts. It depends on the coverage as to whether the protection plan is an insurance product that is subject to the premiums tax.
(c) Are agreements that cover accidentally dropping a phone in water an insurance product? Most agreements are service contracts and not insurance products, and are covered under chapter 48.110 RCW, Service contracts and protection product guarantees.
(d) If a loaner piece of equipment is included in the cost of a warranty, does the customer using the loaner owe use tax on the loaned piece of equipment? If the loan of the equipment is included in the warranty, the customer does not owe use tax on the use of the loaned equipment.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), and chapters 82.08 and 82.12 RCW. WSR 15-09-005, § 458-20-257, filed 4/2/15, effective 5/3/15. Statutory Authority: RCW 82.32.300. WSR 90-10-081, § 458-20-257, filed 5/2/90, effective 6/2/90.]


PDF458-20-258

Travel agents and tour operators.

(1) Introduction. This rule describes the business and occupation (B&O), and retail sales and use tax reporting responsibilities of persons providing travel agent or tour operator services. A travel business may include both travel agent and tour operator activities.
(a) References to related rules. The department of revenue (department) has adopted other rules that readers may want to refer to:
(i) WAC 458-20-111 (Advances and reimbursements);
(ii) WAC 458-20-183 (Amusement, recreation, and physical fitness services);
(iii) WAC 458-20-19401 (Minimum nexus thresholds for apportionable activities); and
(iv) WAC 458-20-19402 (Single factor receipts apportionment—Generally).
(b) Rule examples. This rule includes a number of examples that identify a set of facts and then state a conclusion. These examples are only a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority.
(2) Travel agents.
(a) Definitions. For purposes of this rule:
(i) A "travel agent" is a person engaging in the business activity of arranging travel including, but not limited to, transportation, lodging, meals, or other similar service that is purchased by the customer from the service provider and where the travel agent merely receives a commission for arranging the customer's service.
(ii) A "commission" is the fee or percentage of the price charged by a service provider to a customer that the travel agent receives from the service provider as compensation for arranging the purchase of the service by the customer. Commission also includes any additional fee charged by the travel agent to the customer that the travel agent receives as compensation for arranging the purchase of the service by the customer.
(b) Taxability of income.
Travel agent services. The gross income for engaging in business as a travel agent is the commissions received, which is subject to the travel agent/tour operator B&O tax classification. The gross amount of the commissions is taxable, without any deduction for the cost of materials used, labor costs, interest, discount, delivery cost, taxes, losses, or any other expense.
Example 1: Travel Agent books an airplane ticket for Jane in Jane's name. The cost of the ticket is $250, which is paid by Jane. Travel Agent receives $25 from the airline for providing the service. Travel Agent is at no time personally liable for the ticket price. The $25 commission received by Travel Agent is subject to the travel agent/tour operator B&O tax classification.
(c) Other income. Income from other business activities is subject to tax under the appropriate B&O tax classification, such as service and other business activities B&O tax classification or retailing B&O tax classification, as the case may be. If the sale is a retail sale, retail sales tax must be collected unless the sale is specifically exempt by law. See subsection (3) of this rule for an explanation of the taxability of tour operator activities and subsection (4) of this rule for an explanation of the taxability of other potential income generating activities.
(d) Taxability of purchases. A travel agent is the consumer of tangible personal property or retail services the travel agent purchases or uses in providing travel agent services. If the travel agent does not pay retail sales tax to the seller of the property or services, the travel agent must remit retail sales (commonly referred to as "deferred sales tax") or use tax directly to the department.
Example 2: TTT Travel Services has a booking arrangement with its charter air and bus transportation service providers, under which TTT receives from the providers 10% of the selling price of each ticket sold. TTT charges its customers the face value of each ticket sold.
(i) If TTT, in its capacity as agent for Susan Smith, arranges the purchase of Susan's air transportation from XY Airlines for $500, the $50 TTT receives from XY Airlines is considered commission income subject to the travel agent/tour operator B&O tax classification.
(ii) TTT has a policy requiring customers to pay a 10% nonrefundable down payment for a tour, with the remaining balance due 15 days before departure. If a customer fails to pay the remaining balance or cancels the tour, TTT retains the 10% down payment. Any down payment retained by TTT is included in the gross income of the business and subject to the travel agent/tour operator B&O tax classification.
Example 3: SSS Travel Services offers a Washington state tour. The tour package consists of lodging and bus transportation services, which are reserved by SSS, but SSS has no liability for any lodging or bus tickets not sold by SSS to customers.
SSS sells a tour package to Jane and also arranges air transportation to the site where the tour begins. Jane pays $300 for the airline ticket and SSS receives a $30 fee (10% of the airfare) from the airline for booking the flight. Further, SSS collects $600 from Jane for the lodging, only paying $500 over to the lodging providers and collects $400 for the bus transportation but only pays over to the transportation providers $360.
SSS's gross income from travel agent/tour operator activities is $170, which is subject to the travel agent/tour operator B&O tax classification. This total of $170 income consists of the $30 commission from the airline, $100 retained from the sale of the lodging, and $40 retained from the sale of the bus transportation.
(3) Tour operators.
(a) Definitions.
(i) A "tour operator" is a person engaging in the business activity of providing tours directly or through third-party providers including, but not limited to, transportation, lodging, meals and other associated services that are purchased by the customer. The tour operator generally either purchases or provides some or all of the services offered, and is itself liable for paying for any services it purchases.
(ii) "Day trips for sightseeing purposes" is a business activity of providing directly or through third-party providers, sight-seeing tours lasting less than twenty-four hours to consumers. Day trips for sightseeing purposes are taxable as "amusement and recreation services" subject to the retailing B&O tax classification and retail sales tax as provided in RCW 82.04.050 (15)(a) and 82.08.020, respectively. Information regarding amusement and recreation services is provided in WAC 458-20-183.
(iii) A "pass-through expense" is an amount received by a tour operator from a customer where the tour operator is acting solely as agent of the customer in purchasing services from a service provider. The customer, not the tour operator is liable for payment of the service provider's charge. The tour operator cannot be primarily or secondarily liable for the charge, other than as agent for the customer. Information regarding advances and reimbursements is provided in WAC 458-20-111.
(b) Taxability of income.
Tour operator services. The gross income received for engaging in business as a tour operator is subject to the travel agent/tour operator B&O tax classification. There is no deduction allowed for the cost of materials used, labor costs, discounts, taxes, losses, or any other expense to the tour operator. Amounts received from the customer for pass-through expenses are not included as a part of gross income.
Example 4: TTT Travel Services offers a Washington state tour priced at $1,500. The tour package consists of air transportation, lodging, and bus transportation. TTT is liable for paying the service providers, even if a customer fails to pay TTT for a reserved tour. The gross income of the business is the total tour sales price received, $1,500, and is subject to the travel agent/tour operator B&O tax classification.
(c) Other income. Income from other business activities is subject to tax under the appropriate B&O classification, such as service and other business activities classification or retailing classification, as the case may be. If the sale is a retail sale, retail sales tax must be collected unless specifically exempt by law. See subsection (2) of this rule for an explanation of the taxability of travel agent activities and subsection (4) of this rule for an explanation of the taxability of other potential income-generating activities.
(d) Taxability of purchases. A tour operator is the consumer of tangible personal property or retail services the tour operator purchases or uses in a tour operator's business. If the tour operator does not pay retail sales tax to the seller of the property or services, the tour operator must remit retail sales (commonly referred to as "deferred sales tax") or use tax directly to the department.
(4) Taxability of other income. A travel agent or tour operator may derive income from business activities other than as a travel agent or tour operator. The gross income from these other business activities is subject to other B&O tax classifications and retail sales tax, as provided by law.
Examples of other income that a travel agent or tour operator may receive include:
(a) Sales of tangible personal property, such as a gift or merchandise to customers. Gross proceeds from these sales are subject to retailing B&O tax classification and the travel agent/tour operator must collect and remit retail sales tax, unless specifically exempt by law.
(b) Management, financial, and administrative services provided to an affiliated company. Gross income from these activities is subject to the service and other business activities B&O tax classification, even if the affiliated company is engaged in business as a travel agent or tour operator.
(c) Incentive payments or other referral fees. Gross income from the activities of making referrals for other providers or of using products or services of other providers is subject to the service and other business activities B&O tax classification. This includes payments to travel agents from businesses providing global distribution systems used to store and retrieve information and conduct transactions related to travel services provided by hotels, airlines, rental car companies, and other travel-service providers.
Example 5: TTT Travel Services (TTT) is hired to purchase an airline ticket for a customer. TTT uses Global Distribution Systems Company (GDS) to purchase the airline ticket from Airways Company. Airways Company pays GDS a commission for booking the airline ticket. GDS then pays TTT a fee for TTT using its global distribution systems. The fee to TTT is based on a percentage of the commission GDS received from Airways Company. The fee received by TTT from GDS is subject to the service and other business activities B&O tax classification.
Example 6: TTT Travel Services (TTT) is hired to book an airline ticket for a customer. After locating an XY Airlines flight the customer wants, TTT purchases the ticket in the name of the customer. XY Airlines agrees that TTT has no liability to pay for the flight and that the customer alone is liable to pay for the flight. The customer agrees that TTT has no liability for providing the purchased service and the customer will not be entitled to a refund from TTT if the flight is canceled. In these circumstances, TTT may exclude the amount of the ticket for its customer from its taxable gross income. However, if TTT Travel provided XY Airlines with a guarantee of payment, then TTT would have a secondary liability to pay for the ticket and would not be entitled to exclude the amount from gross income.
TTT must include as gross income all commission income received from XY Airlines, the service provider, for booking the air transportation, whether paid by the customer or the service provider. Any additional fees for other activities are subject to the service and other business activities B&O tax classification.
Example 7: TTT Travel Services (TTT) offers a Washington state tour priced at $1,500. The tour package consists of air transportation, lodging, and bus transportation. TTT is liable for paying the service providers, even if a customer fails to pay TTT for a reserved tour. The gross income of the business is the total tour sales price received, $1,500, and is subject to the travel agent/tour operator B&O tax classification.
Example 8: TTT has a policy requiring customers to pay a 10% nonrefundable down payment for a tour, with the remaining balance due 15 days before the departure. If a customer fails to pay the remaining balance or cancels the tour, TTT retains the 10% down payment. Any down payment retained by TTT is included in the gross income of the business and subject to the travel agent/tour operator B&O tax classification.
Example 9: SSS Travel Services (SSS) offers a tour package and also arranges transportation to the site where the tour begins. The tour package includes a $300 airline ticket, $600 in lodging and $400 for bus transportation. SSS secondarily guarantees only the airline payment. SSS's gross income from the air fare is $300. If SSS purchases the lodging from Great Hotels to sell in its tour packages, it will include in gross income the price of the lodging purchased from Great Hotels that it resells to its tour package customers.
(5) Apportionment. Persons engaged in business as a travel agent or tour operator both inside and outside the state may be eligible to apportion gross income reportable under the travel agent/tour operator B&O tax classification. WAC 458-20-19401 and 458-20-19402 provide guidance on apportionment methods that may be appropriate for a travel agent or tour operator that has substantial nexus with other states.
[Statutory Authority: RCW 82.01.060(2) and 82.32.300. WSR 15-22-065, § 458-20-258, filed 11/2/15, effective 12/3/15. Statutory Authority: RCW 82.32.300. WSR 90-17-003, § 458-20-258, filed 8/2/90, effective 9/2/90.]


PDF458-20-260

Oil spill response and administration tax.

(1) Introduction. This rule explains the provisions of chapter 82.23B RCW, which imposes an oil spill response tax and an oil spill administration tax. Both of these taxes are imposed on the privilege of receiving crude oil or petroleum products through any of the following three ways at:
• A marine terminal in this state from a waterborne vessel or barge operating on the navigable waters of this state;
• A bulk oil terminal within this state from a tank car, as of July 1, 2015;
• A bulk oil terminal within this state from a tank car or a pipeline, as of April 1, 2018. RCW 82.23B.020.
Examples found in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Definitions. For purposes of this rule, the following terms as found in RCW 82.23B.010 will apply.
(a) Barrel. "Barrel" means a unit of measurement of volume equal to forty-two United States gallons of crude oil or petroleum product.
(b) Bulk oil terminal. "Bulk oil terminal" means a facility of any kind, other than a waterborne vessel, that is used for transferring crude oil or petroleum products from a tank car or pipeline into the terminal's storage tanks.
(c) Crude oil. "Crude oil" means any naturally occurring hydrocarbons coming from the earth that are liquid at twenty-five degrees Celsius and one atmosphere of pressure including, but not limited to, crude oil, bitumen and diluted bitumen, synthetic crude oil, and natural gas well condensate.
(d) Department. "Department" means the department of revenue.
(e) Marine terminal. "Marine terminal" means a facility of any kind, other than a waterborne vessel, that is used for transferring crude oil or petroleum products to or from a waterborne vessel or barge.
(f) Navigable waters. "Navigable waters" means those waters of the state and their adjoining shorelines that are subject to the ebb and flow of the tide, including the Columbia and Snake rivers.
(g) Person. "Person" or "company," herein used interchangeably, means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, political subdivision of the state of Washington, corporation, limited liability company, association, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise and the United States or any instrumentality thereof. RCW 82.04.030.
(h) Petroleum product. "Petroleum product" means any liquid hydrocarbons at atmospheric temperature and pressure that are the product of the fractionation, distillation, or other refining or processing of crude oil, and that are used as, useable as, or may be refined as fuel or fuel blendstock including, but not limited to, gasoline, diesel fuel, aviation fuel, bunker fuel, and fuels containing a blend of alcohol and petroleum.
(i) Pipeline. "Pipeline" means an interstate or intrastate pipeline subject to regulation by the United States Department of Transportation under 49 C.F.R. Part 195 in effect as of April 1, 2018, through which oil moves in transportation, including line pipes, valves, and other appurtenances connected to line pipes, pumping units, and fabricated assemblies associated with pumping units.
(j) Previously taxed product. "Previously taxed product" means any crude oil or petroleum product which has been received in this state in a manner subject to the tax imposed by chapter 82.23B RCW and upon which such tax has been paid.
(k) Tax. "Tax" means the oil spill response and oil spill administration taxes imposed by chapter 82.23B RCW.
(l) Taxpayer. "Taxpayer" means the person owning crude oil or petroleum products immediately after receipt of the same into the storage tanks of a marine or bulk oil terminal in this state and who is liable for the tax.
(m) Tank car. "Tank car" means a rail car, the body of which consists of a tank for transporting liquids.
(n) Waterborne vessel or barge. "Waterborne vessel or barge" means any ship, barge, or other watercraft capable of traveling on the navigable waters of this state and capable of transporting any crude oil or petroleum product in quantities of ten thousand gallons or more for purposes other than providing fuel for its motor or engine.
(3) Imposition, base, and reporting of tax. The taxes are imposed on the privilege of receiving crude oil or petroleum products at:
• A marine terminal within this state from a waterborne vessel or barge operating on the navigable waters of this state;
• A bulk oil terminal within this state from a tank car, beginning July 1, 2015; or
• A bulk oil terminal within this state from a pipeline, beginning April 1, 2018.
The tax is levied upon the owner of the crude oil or petroleum products immediately after receipt of the same into the storage tanks of a marine or bulk oil terminal from a tank car, pipeline or waterborne vessel or barge. RCW 82.23B.020.
(a) Tax is due. The tax is due for payment together with the timely filing of the tax return on which it is reported, on or before the twenty-fifth day of the month following the month in which the taxable receipt of crude oil or petroleum products occurs. If receipt commences on the last day of any month and extends past midnight, the receipt at the election of the marine or bulk oil terminal may be deemed to have occurred during the following month or may be deemed to have been completed at midnight on the last day of the month on which it was commenced.
(b) Compute the number of net barrels. The number of barrels received must be computed as the net barrels received by the marine or bulk oil terminal operator. Net barrels must be computed by using an industry standard adjustment to gross barrels received to account for variations in temperature and content of water or other nonpetroleum substances.
(4) Tax collection by the marine or bulk oil terminal operator. Unless the taxpayer has been issued a direct payment certificate as provided in subsection (5) of this rule, the operator of any marine or bulk oil terminal located in this state where crude oil or petroleum products are received and placed into storage tanks is responsible for the collection of the tax from the taxpayer.
(a) Personally liable for the tax. Failure to collect the tax from the taxpayer and remit it to the department will cause the marine or bulk oil terminal operator to become personally liable for the tax, unless the terminal operator has billed the taxpayer for the tax or notified the taxpayer in writing of the imposition of the tax.
(i) The tax has been billed to a taxpayer when an invoice, statement of account, or notice of imposition of the tax is mailed or delivered to the taxpayer by the marine or bulk oil terminal operator within the operator's normal billing cycle, and separately states the dates of receipt, rate of tax, number of barrels received and placed into storage tanks, and the amount of the tax required to be collected by the operator.
(ii) A taxpayer has been notified of the imposition of the tax when, within twenty days from the date of receipt, a notice is mailed or delivered to the taxpayer, or to an agent of the taxpayer authorized to accept notices of this type other than the marine or bulk oil terminal operator. This notice must separately state the dates of receipt, rate of tax, number of barrels received into storage tanks, and the amount of the tax required to be collected by the operator.
(iii) Marine and bulk oil terminal operators must maintain a record of the names and addresses of taxpayers billed for the tax, or in cases where taxpayers are sent written notification of the imposition of the tax, the names and addresses of the persons to whom notice is sent. Such records must indicate those persons billed or notified from whom the tax has been collected. On request, the records must be made available for inspection by the department.
(b) Tax must be held in trust. The tax collected must be held in trust by the marine or bulk oil terminal operator until paid to the department. The tax is due from the operator, along with reports and returns on forms prescribed by the department, within twenty-five days after the end of the month in which the tax is collected.
(c) Use of direct payment certificate. A marine or bulk oil terminal operator who relies in good faith on a direct payment certificate (see subsection (5) of this rule) issued to a taxpayer is relieved from any liability for the collection of the tax from the taxpayer. A marine or bulk oil terminal operator is likewise relieved from liability for collection of the tax from a taxpayer if the terminal operator relies in good faith on a current roster of certificate holders that bears the name of a taxpayer and is published by the department.
(5) Direct payment to the department. Any taxpayer may apply to the department in writing for permission to pay the tax directly to the department. On approval of the department, any taxpayer making application for direct payment will be issued a direct payment certificate entitling the taxpayer to pay the tax directly to the department.
(a) Qualifications for direct payments. To qualify for direct payment, the taxpayer must meet the following requirements:
(i) The taxpayer must be registered with the department.
(ii) The taxpayer must file a bond with the department in an amount equal to two months' estimated liability for the tax, but in no event less than ten thousand dollars. The bond must be executed by the taxpayer as principal, and by a corporation approved by the department and authorized to engage in business as a surety company in this state, as surety. Two months' estimated tax liability shall be the total number of barrels received and placed into the storage tanks of a marine or bulk oil terminal in this state by the taxpayer during the two months in the immediately preceding twelve-month period, with the highest number of barrels received multiplied by the total tax rate. If the department determines that the result of the foregoing calculation does not represent a fair estimate of the actual tax liability that the taxpayer is expected to incur, it may set the bond requirement at such higher amount as the department determines in its judgment will secure the payment of the tax. The bond requirement may be waived with proof satisfactory to the department that the taxpayer has sufficient assets located in this state to ensure payment of the tax.
(iii) The taxpayer must be current in all of its tax obligations to the state having filed all returns as required by Title 82 RCW.
(b) Review of bond amount. The department may, from time to time, review the amount of any bond filed by a taxpayer possessing a direct payment certificate and may, with twenty days' written notice to the taxpayer, require such higher bond as the department determines to be necessary to ensure payment of the tax. The filing of a substitute bond in such higher amount is a condition to the continuation of the right to make direct payment under this rule.
(c) A direct payment certificate can be revoked. The department may revoke a direct payment certificate issued under this rule if the taxpayer fails to maintain a current registration, fails to file a substitute bond within twenty days of a written request by the department, or becomes delinquent in the payment of the tax.
(d) Taxpayers holding a direct payment certificate. The department maintains a current roster of all taxpayers who have a direct payment certificate. Copies of the roster are made available on a monthly basis to any interested person requesting to be placed on the roster subscription list. Requests to be placed on the roster subscription list should be mailed to Taxpayer Services, Department of Revenue, P.O. Box 47478, Olympia, WA 98504-7478.
(e) Application for a direct payment certificate. Applications for a direct payment certificate must be in writing and must include the name and address of the applicant, the applicant's registration number if currently registered, and the name and phone number of a contact person. The application must also contain a statement that if the application is approved, the taxpayer consents to public disclosure of the taxpayer's direct payment certificate status, including any subsequent revocation of any issued certificates. Certificate applications should be mailed to Taxpayer Account Administration, Attn: Oil Spill Tax Unit, Department of Revenue, P.O. Box 47476, Olympia, WA 98504-7476.
(6) Exemption - Previously taxed crude oil or petroleum products. The oil spill response and administration taxes apply only to the first receipt of crude oil or petroleum products at a marine or bulk oil terminal in this state. RCW 82.23B.030 provides an exemption for the subsequent receipt at a marine or bulk oil terminal in this state of previously taxed crude oil or petroleum products. This exemption applies even though the previously taxed crude oil or petroleum products are refined or processed prior to subsequent transportation and receipt.
(7) Presumption. Any receipt of crude oil or petroleum products at a marine terminal within this state from a waterborne vessel or barge operating on the navigable waters of this state, at a bulk oil terminal within this state from a tank car or pipeline, is presumed to be subject to the tax.
(a) Certification of previous payment of the oil spill tax. A person may rebut this presumption of taxability by documenting that the crude oil or petroleum products received were previously subject to the tax. The proof may be in the form of information on the invoice or a written certification from the seller at the time of shipment or exchange. The written certification must be in substantially the form below, stating that all or a specific, stated portion of the crude oil or petroleum products were previously subject to the tax or, in the alternative, stating the amount of tax remitted or to be remitted to the state respective to the crude oil or petroleum products being sold.
 
Certification of Previous Payment of the Oil Spill Tax
 
 
I hereby certify that all or a portion of the crude oil or petroleum products specified herein were previously subject to the oil spill tax and that such tax was paid by the undersigned.
 
 
Identify product: _____
 
 
Amount of product in this shipment: _____
 
 
Percentage of product on which the tax has been paid: _____
 
 
or
 
 
Amount of tax remitted or to be remitted to the state on product: _____
 
 
Name of recipient: _____
 
 
_____
Authorized Signature of Seller
_____
Date
 
 
_____
Firm Name
_____
UBI Number
 
(b) Example 1. Crude oil is received at a marine terminal in this state and the tax is remitted. The crude oil is then commingled with previously untaxed crude oil from a source not involving a receipt at a marine terminal, such as a receipt from a tank car. The commingled crude oil is refined into two petroleum products such as jet kerosene and unleaded gasoline. The petroleum products are then placed on separate waterborne vessels or barges and are shipped to a second marine terminal in this state. The receipt of petroleum products at the second marine terminal is presumed to be subject to the tax. The presumption may be rebutted by proof of what portion of each product of the shipment was previously subject to tax. Proof may be made by means of information on the invoice or a written certification that substantially conforms with the requirements set forth in subsection (7)(a) of this rule.
(c) Example 2. Petroleum product is received at a marine terminal in this state and the tax is remitted. Substances that were not previously subject to the tax are added to the petroleum product resulting in an increase of the volume of the petroleum product. The petroleum product is then placed on a waterborne vessel or barge and received at a second marine terminal in this state. At time of receipt at the second marine terminal, the tax is due on the incremental increase in volume of the petroleum product caused by the addition of the substances.
(8) Export credit. A credit is allowed against the tax for any crude oil or petroleum products exported from or sold for export from the state. RCW 82.23B.040.
(a) Credit for previously taxed product. Any person who exports or sells for export any previously taxed product may take an export credit. When the person taking the export credit is not the person who remitted the tax, the proof of payment of tax may be made by information on an invoice or written certification that substantially conforms to the requirements set forth in subsection (7)(a) of this rule.
(b) When product is exported. A person exports product when the person actually transports the product beyond the borders of this state for purposes of sale, or delivers the product to a common carrier for delivery and subsequent sale or use at a point outside this state. Documentation of export is described in (d) of this subsection.
(c) Sales of previously taxed product for export. A person sells product for export when, as a necessary incident to a contract of sale, the seller agrees to, and does deliver previously taxed product:
(i) To the buyer at a destination outside this state;
(ii) To a carrier consigned to and for transportation to a destination outside this state;
(iii) To the buyer alongside or aboard a vessel or other vehicle of transportation under circumstances where it is clear that the process of exporting the product has begun; or
(iv) Into a pipeline for transportation to a destination outside this state.
In all circumstances, there must be a certainty of export evidenced by some overt step taken in the export process. A sale for export will not necessarily be deemed to have occurred if the product is merely in storage awaiting shipment, even though there is reasonable certainty that the product will be exported. The intention to export, as evidenced for example, by financial and contractual relationships, does not indicate certainty of export if the product has not commenced its journey outside this state. The product must actually enter the export stream. Sales of petroleum products by delivery into the fuel tank of a vessel or other vehicle in quantities greater than one hundred gallons will be considered placed into the export stream, provided the vessel or vehicle is immediately destined for a point outside this state and the seller obtains and keeps the documentary evidence discussed in (d) of this subsection.
(d) Certificate of export. A person who takes the credit for export must show that the previously taxed product was exported or sold for export. An export or a sale for export may be shown by obtaining and keeping any of the following documentary evidence:
(i) A bona fide bill of lading in which the seller is the shipper/consignor and by which the carrier agrees to transport the product to the buyer at a destination outside this state; or
(ii) A written certification in substantially the following form:
Certificate of Export
I hereby certify that the crude oil or petroleum products specified herein, purchased by or transferred to the undersigned from (seller or transferor), have been received into the export stream and are for export for sale or use outside Washington state. I will become liable for any tax credit granted (seller or transferor) pertaining to any crude oil or petroleum products that are not so exported outside Washington state. This certificate is given with full knowledge of, and subject to the legally prescribed penalties for fraud.
Registration No. . . . .
(If applicable)
Type of Business . . . .
Firm Name . . . .
Registered Name . . . .
(If different)
Authorized Signature . . . .
Title . . . .
Identity of Product . . . .
(Kind and amount by volume)
Date . . . .; or
 
(iii) Documents consisting of:
(A) Purchase orders or contracts of sale which show that the seller is required to place the product into the export stream, e.g., "f.a.s. vessel"; and
(B) Local delivery receipts, tripsheets, waybills, warehouse releases, etc., reflecting how and when the product was delivered into the export stream; and
(C) When available, records showing that the products were packaged, numbered, or otherwise handled in a way that is exclusively attributable to products sold for export.
(e) Circumstances when credit is not available. Only the export or sale for export of crude oil or petroleum products will qualify for the export credit. Crude oil or petroleum products are not eligible for the export credit if, prior to export, they are subject to further processing or used as ingredients in other compounds unless the resulting products are themselves crude oil or petroleum products.
(f) Location exchange agreement. Crude oil or petroleum products delivered to purchasers in other states pursuant to location exchange agreements do not qualify for the export credit unless the crude oil or petroleum products were previously subject to the tax, and credit has not yet been taken. A location exchange agreement is any arrangement where crude oil or petroleum products located in this state are exchanged through an accounts crediting system, or any other method, for like substances located in other states. Any person acquiring previously taxed product in this state for which no credit has been taken may claim a credit on any such product subsequently exported or sold for export, provided all of the requirements set forth in subsections (8) and (9) of this rule have been met.
(g) Maintenance of records. Persons claiming the export credit must maintain records necessary to verify that the qualifications for taking the credit have been met. For this purpose any person claiming a credit who maintains those records required by WAC 458-20-19301 (Multiple activities tax credit), subsection (9), will be considered to have satisfied the requirements of this subsection.
(9) Amount of credit. The amount of the credit is equal to the tax previously paid on the crude oil or petroleum product exported or sold for export and for which credit has not already been taken. In no event will a credit be allowed in excess of the tax paid on the product exported or sold for export.
(a) Credit for amount billed or written on certification. If the person claiming the credit is not the taxpayer, the credit will be equal to that portion of the tax billed on an invoice or shown on a written certification that substantially conforms with the requirements set forth in subsection (7)(a) of this rule which relates to the particular product exported or sold for export.
To determine the amount of tax reflected on an invoice that relates to a particular product exported or sold for export, it may be necessary to convert the tax paid from a rate per barrel to a rate per gallon or some other unit of measurement. This conversion is computed by taking the total amount of tax paid on an invoice for a particular product and dividing that figure by the total quantity of the product expressed in terms of the unit of measurement used for export. The credit is then computed by multiplying the converted rate times the quantity of product exported or sold for export.
(b) Accounting methods for determining credit for commingled products. When the product exported is previously taxed product commingled with untaxed product a person claiming the export credit may compute the amount of previously taxed product using one of the following methods:
(i) First-in, first-out method. Under this method the export credit is computed by treating existing inventory as sold before later acquired inventory.
(ii) Average of tax paid method. Under this method, the export credit is determined by calculating the average rate of tax paid on all inventory. This method requires computing the tax by making adjustments in the rate of tax paid on all products on hand as they are removed from or added to storage.
(iii) Any other method approved by the department.
(c) Use of selected method. The use of one of the methods set forth in this subsection (9) to account for tax paid on commingled crude oil or petroleum products constitutes an election to continue using the method selected. Once selected, no change in accounting method is permitted without the prior consent of the department.
(d) Examples. The following examples show how to compute the credit.
(i) Example 3. A petroleum products distributor purchases 100 barrels each of premium unleaded gasoline and regular unleaded gasoline. The invoice from the refiner separately states that the invoice includes $5.00 of tax for each of the two types of products. The distributor pays the invoiced amount and later sells 2,000 gallons of the premium unleaded and 4,000 gallons of the regular unleaded to a retailer located outside Washington. To compute the amount of credit on the export sales, the distributor must convert the tax paid from barrels to gallons. Since there are 42 US gallons in a barrel and 200 barrels purchased, the number of gallons equals 8400 (42 × 200). The per gallon tax paid on both products is equal to .119 cents per gallon ($10.00 ÷ 8400). The distributor would be eligible for credit equal to $2.38 for the premium unleaded (2,000 × $.00119) and $4.76 for the regular unleaded (4,000 × $.00119).
(ii) Example 4. A petroleum products distributor purchases 100 barrels of unleaded gasoline on which the tax has been remitted for a portion. The invoice for the unleaded separately states that the total price includes $4.00 of tax. This previously taxed product is commingled with 30 barrels of other previously untaxed gasoline. The distributor sells 2,940 gallons of commingled product to a retailer for sale outside Washington. The tax paid on the previously taxed product is equal to .095 cents per gallon ($4.00 ÷ 4200). Since the exported product has been blended with product that has not been taxed, only 76.9% of the exported product is eligible for credit (100 ÷ 130). The credit is $2.15 (2,940 × .769 × $.00095).
(iii) Example 5. A petroleum distributor purchases 100 barrels of gasoline and receives from the seller an invoice that states that the tax has been paid on 90% of the shipped product. The distributor exports the 100 barrels. The petroleum distributor may claim an export credit of $4.50. (90% of 100 barrels equals 90 barrels times the tax rate of $.05 equals $4.50.)
(iv) Example 6. A petroleum distributor purchases 100 barrels of unleaded gasoline from refinery A and later purchases 100 barrels from refinery B. The distributor stores all of its unleaded gasoline in a single storage tank. The invoice from refinery A separately states the amount of tax on the gasoline as $5.00 and the refinery B invoice states the tax as $4.00. The distributor pays the two invoiced amounts and sells 2,100 gallons of the commingled unleaded to a retailer located outside Washington. The distributor then purchases 100 more barrels of unleaded gasoline from distributor C. Distributor C's invoice separately states the tax as $3.00. Following payment of the invoice, the distributor exports an additional 2,100 gallons of unleaded. The distributor could choose to calculate the tax using one of the methods of accounting described in (b) of this subsection.
(A) Under the first-in, first-out method, the distributor would treat all 4,200 gallons sold as if it was the unleaded gasoline purchased from refinery A. Under this method, the credit would be equal to .119 cents per gallon ($5.00 ÷ 4,200) or $5.00 total ($.00119 × 4,200).
(B) Under the average of tax paid method the distributor would recompute the tax paid on average for the entire commingled amount, making adjustments as gasoline is sold or gasoline is added. Prior to the addition of the purchases from refinery B or distributor C, the rate would be .119 cents per gallon ($5.00 ÷ 4,200). Following the addition of the 100 barrels from refinery B, the tank contains 8,400 gallons. The rate of tax would now be .107 cents per gallon (($5.00 + $4.00) ÷ 8,400). Out of this amount 2,100 gallons is exported in the first sale. The credit for this sale would be equal to $2.25 ($.00107 × 2,100).
(10) Credit for use of petroleum products. A person having paid the tax imposed by chapter 82.23B RCW may claim a refund or credit for the following:
(a) The use of petroleum products as a consumer for a purpose other than as a fuel. For this purpose, the term consumer shall be defined as provided in RCW 82.04.190; or
(b) The use of petroleum products as a component or ingredient in the manufacture of an item which is not a fuel.
(c) The amount of refund or credit claimed may not exceed the amount of tax paid by the person making such claim on the petroleum products so consumed or used.
[Statutory Authority: RCW 82.23B.050, 82.32.300, and 82.01.060(2). WSR 18-19-076, § 458-20-260, filed 9/18/18, effective 10/19/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-07-149, § 458-20-260, filed 3/23/16, effective 4/23/16. Statutory Authority: RCW 82.23B.050 and 82.32.300. WSR 02-16-016, § 458-20-260, filed 7/26/02, effective 8/26/02; WSR 92-24-049, § 458-20-260, filed 11/30/92, effective 12/31/92. Statutory Authority: RCW 82.23B.050. WSR 92-10-006, § 458-20-260, filed 4/24/92, effective 5/25/92.]


PDF458-20-261

Commute trip reduction incentives.

(1) Introduction. This rule explains the various commute trip reduction incentives. RCW 82.04.355 and 82.16.047 exempt amounts received from providing ride sharing, or ride sharing for persons with special transportation needs, from business and occupation (B&O) tax and public utility tax (PUT). RCW 82.08.0287 and 82.12.0282 provide sales and use tax exemptions for sales or use of passenger motor vehicles as ride sharing vehicles. Finally, chapter 82.70 RCW provides commute trip reduction incentives in the form of B&O tax or PUT credits in connection with ride sharing, public transportation, car sharing, and nonmotorized commuting.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Car sharing" means a membership program intended to offer an alternative to car ownership under which persons or entities that become members are permitted to use vehicles from a fleet on an hourly basis. RCW 82.70.010.
(b) "Nonmotorized commuting" means commuting to and from the workplace by an employee, by walking or running, or by riding a bicycle or other device not powered by a motor. "Nonmotorized commuting" does not include teleworking, which is a program where work functions normally performed at a traditional workplace are instead performed by an employee at their home, at least one day a week for the purpose of reducing the number of trips to the employee's workplace. RCW 82.70.010.
(c) "Public transportation" means the transportation of packages, passengers, and their incidental baggage, by means other than by charter bus or sight-seeing bus, together with the necessary passenger terminals and parking facilities or other properties necessary for passenger and vehicular access to and from such people moving systems. "Public transportation" includes passenger services of the Washington state ferries and passenger-only ferry services for those public transportation benefit areas eligible to provide passenger-only ferry service under RCW 36.57A.200. RCW 82.70.010.
(d)(i) "Ride sharing" means a carpool or vanpool arrangement whereby one or more groups not exceeding 15 persons each, including the drivers, and not fewer than three persons, including the drivers, are transported in a passenger motor vehicle with a gross vehicle weight not exceeding 10,000 pounds. RCW 46.74.010. See subsection (4)(b) of this rule for increased minimum group size requirements in some circumstances. "Ride sharing" includes ride sharing on Washington state ferries. RCW 82.70.010.
(ii) Ride sharing does not include transportation provided in the normal course of business by entities subject to chapters 46.72A (limousines), 48.177 (commercial transportation services), 81.66 (private, nonprofit transportation providers that receive compensation for transporting persons with special transportation needs), 81.68 (auto transportation companies), 81.70 (passenger charter and excursion carriers), and 81.72 (taxicabs) RCW, or offer peer-to-peer car sharing. "Peer-to-peer car sharing" means motor vehicle owners making their motor vehicles available for persons to rent for short periods of time.
(e) "Ride sharing for persons with special transportation needs" means an arrangement, whereby a group of persons with special transportation needs, and their attendants, is transported by a public social service agency or a private, nonprofit transportation provider, as defined in (e)(i) of this subsection, serving persons with special needs, in a passenger motor vehicle as defined by the department of licensing to include small buses, cutaways, and modified vans not more than 28 feet long. The driver need not be a person with special transportation needs. RCW 46.74.010.
(i) "Private, nonprofit transportation provider" means any private, nonprofit corporation providing transportation services for compensation solely to persons with special transportation needs, or pursuant to a contract with a state agency or funded by a grant issued by the department of transportation. RCW 81.66.010.
(ii) "Persons with special transportation needs" means those persons, including their personal attendants, who because of physical or mental disability, income status, or age, are unable to transport themselves or to purchase appropriate transportation. RCW 81.66.010.
(3) B&O tax and PUT exemptions for providing ride sharing or ride sharing for persons with special transportation needs. RCW 82.04.355 and 82.16.047 provide B&O tax and PUT exemptions for amounts received in the course of ride sharing or ride sharing for persons with special transportation needs.
(4) Retail sales tax and use tax exemptions on sales or use of passenger motor vehicles as ride sharing vehicles. RCW 82.08.0287 and 82.12.0282 provide retail sales tax and use tax exemptions for sales and use of passenger motor vehicles as ride-sharing vehicles. The following conditions apply to qualify for these exemptions:
(a) Minimum duration of usage. The passenger motor vehicles must be used primarily for ride sharing or ride sharing for persons with special transportation needs for 36 consecutive months beginning from the date of purchase (retail sales tax exemption) and the date of first use (use tax exemption). If the vehicle is used as a ride sharing vehicle for less than 36 consecutive months, the registered owner must pay the retail sales tax or use tax.
(b) Increased passenger requirements for vehicles not operated by a public transportation agency. If a vehicle is not operated by a public transportation agency, the minimum group size is increased from three persons each to five persons each including the driver.
(c) Qualifying jurisdictions. Vehicles must be operated within:
(i) A county, or a city or town within that county, which has a commute trip reduction plan under chapter 70A.15 RCW; or
(ii) In other counties, where the vehicle is registered with, or operated by, a public transportation agency.
(d) Ownership and operation. The vehicle must be:
(i) Operated by a public transportation agency for the benefit of the general public;
(ii) Used by a major employer, as defined in RCW 70A.15.4010, as an element of its commute trip reduction program for their employees; or
(iii) Owned and operated by individual employees and registered either with the employer as part of its commute trip reduction program or with a public transportation agency.
(e) Certification.
(i) Individual employee owned and operated motor vehicles require certification that the vehicle is registered with a major employer or a public transportation agency; and
(ii) Major employers who own and operate motor vehicles for their employees must certify that the commute ride sharing arrangement conforms to a carpool or vanpool element contained within their commute trip reduction program.
(5) B&O tax or PUT credit for ride sharing, public transportation, car sharing, or nonmotorized commuting. RCW 82.70.020 provides a credit against B&O tax or PUT liability for amounts paid to or on behalf of employees for ride sharing, for using public transportation, for using car sharing, or for using nonmotorized commuting. The credit is equal to the amount paid to or on behalf of each employee multiplied by 50 percent, but may not exceed $60 per employee per fiscal year. No refunds will be granted for unused credits.
(a) Who is eligible for this credit?
(i) Employers in Washington are eligible for this credit, for amounts paid to or on behalf of their own or other employees, as financial incentives to such employees for ride sharing, for using public transportation, for using car sharing, or for using nonmotorized commuting.
(ii) Property managers who manage worksites in Washington are eligible for this credit, for amounts paid to or on behalf of persons employed at those worksites, as financial incentives to such persons for ride sharing, for using public transportation, for using car sharing, or for using nonmotorized commuting.
(b) What is the credit amount? The amount of the credit is equal to the amount paid to or on behalf of each employee multiplied by 50 percent, but may not exceed $60 per employee per fiscal year.
(c) What is a "fiscal year"? A "fiscal year" begins on July 1st of one year and ends on June 30th of the following year.
(d) When will the credit expire?
(i) For those who meet the eligibility requirements described in subsection (5)(a)(i) of this rule, credits may be earned through December 31, 2024. Credits must be used for tax reporting periods within the calendar year for which they are approved and must be claimed before July 1, 2025.
(ii) For those who meet the eligibility requirements described in subsection (5)(a)(ii) of this rule, credits may be earned through December 31, 2023. Credits must be used for tax reporting periods within the calendar year for which they are approved and must be claimed before July 1, 2025.
(e) What are the limitations of the credit?
(i) The credit may not exceed the amount of B&O tax or PUT that would otherwise be due for the same fiscal year.
(ii) A person may not receive credit for amounts paid to or on behalf of the same employee under both B&O tax and PUT.
(iii) A person may not take a credit for amounts claimed for credit by other persons.
(iv) The total credit granted to a person under both B&O tax and PUT may not exceed $100,000 for a fiscal year.
(v) The total credit granted to all persons under both B&O tax and PUT may not exceed $2,750,000 in any fiscal year.
(vi) No credit or portion of a credit denied, because of exceeding the limitations in (e)(i), (iv), or (v) of this subsection, may be used against tax liability for other fiscal years.
(vii) No person is eligible for tax credits under RCW 82.70.020 if the additional revenues for the multimodal transportation account under RCW 47.66.070 are terminated.
(f) What are the credit procedures?
(i) Persons applying for the credit must complete the commute trip reduction credit annual application. The application must be electronically filed and received by the department between January 1st and January 31st, following the calendar year in which the applicant made incentive payments. The commute trip reduction credit annual application is available through the business's "My DOR" account on the department's website at dor.wa.gov.
(ii) The department must approve or deny a completed application within 60 days of the January 31st deadline. The department must deny an application not received by the January 31st deadline, except the department may accept applications received up to 15 calendar days after the deadline if the application was not received because of circumstances beyond the control of the taxpayer. For what is considered circumstances beyond the control of a taxpayer, see WAC 458-20-228 Returns, payments, penalties, extensions, interest, stays of collection. Once the application is approved and the tax credit is granted, the department is not allowed to increase the credit.
(iii) If the total amount of credit applied for by all approved applicants in a fiscal year exceeds the limitation as provided in subsection (5)(e) of this rule, the amount of credit allowed for all applicants must be proportionally reduced so as not to exceed the limit. The amount reduced may not be carried forward and claimed in subsequent fiscal years.
(iv) To claim a commute trip reduction tax credit, a person must file all returns, forms, and other information the department requires in an electronic format as provided or approved by the department. Any return, form, or information required to be filed in an electronic format is not filed until received by the department in an electronic format. "Returns" has the same meaning as "return" in RCW 82.32.050.
(g) Examples. The following examples identify facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(i) Example 1. An employer pays $180 for a yearly bus pass for one employee. For another employee, the employer buys a bicycle helmet and bicycle lock for a total of $50. The sum of these two amounts, $230, is the total expenditure during a fiscal year of amounts paid to, or on behalf of, employees in support of ride sharing, using public transportation, using car sharing, and using nonmotorized commuting. The employer may claim a credit of $60 for the amount spent for the employee using the bus pass. 50 percent of $180 is $90, but the credit is limited to $60 per employee. The employer may claim a credit of $25 (50 percent of $50) for the amount spent for the employee who bicycles to work. Even though 50 percent of $230 (the total amount spent on both employees), works out to be less than $60 per employee, the credit is computed by looking at actual spending for each employee and not by averaging the spending for both employees.
(ii) Example 2. An employer provides parking spaces for the exclusive use of ride sharing vehicles. Amounts spent for signs, painting, or other costs related to the parking spaces do not qualify for the credit. This is because the credit is for financial incentives paid to or on behalf of employees. While the parking spaces support the use of ride sharing vehicles, they are not financial incentives and do not involve amounts paid to or on behalf of employees.
(iii) Example 3. An employer pays the property manager for a yearly bus pass for one employee who works at the worksite managed by the property manager. The property manager in turn pays the amount received from the employer to a public transportation agency to purchase the bus pass. Either the employer or the property manager, but not both, may take the credit for this expenditure.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.70.020, and 82.70.040. WSR 24-20-054, s 458-20-261, filed 9/25/24, effective 10/26/24. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-23-124, § 458-20-261, filed 11/16/23, effective 12/17/23. Statutory Authority: RCW 82.01.060, 46.74.010, 82.04.355, 82.08.0287, 82.12.0282, 82.16.047, 82.44.015, and 82.70.010. WSR 22-06-050, § 458-20-261, filed 2/24/22, effective 3/27/22. Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 20-22-093, § 458-20-261, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.70.020, 82.70.025, 82.70.040, and 82.70.900. WSR 16-04-035, § 458-20-261, filed 1/26/16, effective 2/26/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.70.020, 82.70.040, 82.70.900, 82.44.015, 82.08.0287, and 82.12.0282. WSR 15-03-019, § 458-20-261, filed 1/8/15, effective 2/8/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.70.020 and 82.70.040. WSR 14-13-096, § 458-20-261, filed 6/17/14, effective 7/18/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 06-01-026, § 458-20-261, filed 12/13/05, effective 1/13/06. Statutory Authority: RCW 82.32.300, 82.04.4453 and 82.16.048. WSR 00-11-097, § 458-20-261, filed 5/17/00, effective 6/17/00; WSR 99-08-035, § 458-20-261, filed 3/31/99, effective 5/1/99.]


PDF458-20-262

Retail sales and use tax exemptions for farmworker housing.

(1) Introduction. RCW 82.08.02745 and 82.12.02685 provide a retail sales and use tax exemption for farmworker housing. This section also explains the exemptions, who is entitled to the exemptions and how to obtain an exemption certificate.
(2) Definitions. The following definitions apply throughout this section.
(a) "Farmworker" means a single person, or all members of a household, whether such persons are related or not, if the combined household income earned from farm work is at least $3,000 per calendar year.
(b) "Farm work" means services relating to:
(i) Cultivating the soil, raising or harvesting, or catching, netting, handling, planting, drying, packing, grading, storing, or preserving in its unmanufactured state any agricultural or aquacultural commodity;
(ii) Delivering to storage, market, or a carrier for transportation to market or to processing any agricultural or aquacultural commodity; or
(iii) Working in a processing plant and directly handling agricultural or aquacultural product.
(c) "Agricultural employer" means any person engaged in agricultural activity, including the growing, producing, or harvesting of farm or nursery products, or engaged in the forestation or reforestation of lands, which includes but is not limited to the planting, transplanting, tubing, precommercial thinning, and thinning of trees and seedlings, the clearing, piling and disposal of brush and slash, the harvest of Christmas trees, and other related activities as defined in RCW 19.30.010; and including any employer engaged in aquaculture as defined in RCW 15.85.020.
(d) "Farmworker housing" means all facilities provided by an agricultural employer, housing authority, local government, state or federal agency, nonprofit community or neighborhood-based organization that is exempt from income tax under section 501(c) of the Internal Revenue Code of 1986 (26 U.S.C. sec. 501(c)), or for-profit provider of housing for housing farmworkers on a year-round or seasonal basis, including bathing, food handling, hand washing, laundry, and toilet facilities, single-family and multifamily dwelling units and dormitories; and including labor camps as defined under RCW 70.114A.110.
(i) "Farmworker housing" may include the following:
(A) Mobile homes, travel trailers, mobile bunkhouses, modular homes, fabricated components of a house, and tents; and
(B) Housing occupied by a household with at least one member who is a farmworker; and
(C) Housing occupied by a farmworker on a seasonal basis, where the housing is not used as farmworker housing for a portion of the year, such as when it is rented to the general public when not being used for farmworker housing.
(ii) "Farmworker housing" does not include:
(A) Housing regularly provided on a commercial basis to the general public; and
(B) Housing provided by a housing authority unless at least 80 percent of the occupants are farmworkers whose adjusted income is less than 50 percent of median family income, adjusted for household size, for the county where the housing is provided; and
(C) Housing provided to farmworkers providing services related to the growing, raising, or producing of cannabis.
(e) "Person" means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, political subdivision of the state of Washington, corporation, limited liability company, association, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise and the United States or any instrumentality thereof. RCW 82.04.030.
(f) "Agricultural land" has the same meaning as "farm and agricultural land" in RCW 84.34.020(2).
(3) Retail sales and use tax exemptions for farmworker housing. RCW 82.08.02745 and 82.12.02685, respectively, provide retail sales tax and use tax exemptions for the purchase, construction, and use of farmworker housing.
(a) Retail sales tax levied under RCW 82.08.020 does not apply to charges for labor and services rendered by any person in respect to the constructing, repairing, decorating, or improving of new or existing buildings or other structures, in which at least 50 percent of housing units in the development are used as farmworker housing, or to sales of tangible personal property that becomes an ingredient or component of the buildings or other structures during the course of the constructing, repairing, decorating, or improving the buildings or other structures.
(b) Use tax levied under RCW 82.12.020 does not apply to the use of tangible personal property that becomes an ingredient or component of buildings or other structures, in which at least 50 percent of the housing units in the development are used as farmworker housing, during the course of constructing, repairing, decorating, or improving the buildings or other structures by any person.
(i) The use tax exemption for tangible personal property incorporated into buildings or other structures used as farmworker housing also applies to persons/consumers constructing these buildings or structures for the federal government or county housing authorities. See also WAC 458-20-17001 on government contracting.
(ii) An agricultural employer claiming the exemption who retitles a used mobile home or titles a new mobile home acquired from an out-of-state seller must provide a completed exemption certificate to the department of licensing or its agent to substantiate the exempt nature of the home.
(c) Both exemptions require that farmworker housing provided on a year-round basis only applies if that housing is built to the current building code for single-family or multifamily dwellings according to the state building code, chapter 19.27 RCW.
(d) Any farmworker housing built under this section must be used according to this section for at least five consecutive years from the date the housing is approved for occupancy.
(e) Neither of these exemptions apply to housing built for the occupancy of an employer, family members of an employer, or persons owning stock or shares in a farm partnership or corporation business.
(f) The exemption does not apply to housing built exclusively for workers in the United States on an H-2A visa under the United States citizenship and immigration services. If during any agricultural season in the qualifying five years the housing is occupied by a farmworker who does not have an H-2A visa, then the housing will be considered not to be exclusively built for workers on an H-2A visa.
(g) The exemption is provided for all housing units in the development and is available only if the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department by rule.
(h) Examples of tangible personal property that may become ingredients or components of buildings or other structures include, but are not limited to, cement, lumber, nails, paint, and wallpaper.
(i) Appliances and furniture including, but not limited to, stoves, refrigerators, bed frames, lamps and television sets, bolted or strapped directly to the building or structure are considered components of the building or structure. Additionally, appliances and furniture bolted or strapped to another item that is bolted or strapped directly to the building or structure (e.g., a television set bolted to a refrigerator that is strapped to the structure) are considered components of the building or structure.
(ii) Items that are not bolted or strapped directly to the building or structure, or to another item similarly bolted or strapped, do not qualify for this exemption. These items include, but are not limited to, kitchen utensils, mattresses, bedding, portable heating units, and throw rugs. Stoves, refrigerators, bed frames, lamps and television sets that are not bolted or strapped as discussed in (a)(i) of this subsection, also do not qualify as components of the building or structure.
(iii) Purchases of labor and transportation charges necessary to move and set up mobile homes, mobile bunkhouses, and other property and component parts as farmworker housing are exempt from retail sales tax.
(iv) As a condition for exemption, the seller must take from the buyer an exemption certificate completed by the buyer to document the exempt nature of the sale. This requirement may be satisfied by using the department of revenue's "Farmers' Certificate for Wholesale Purchases and Sales Tax Exemptions" which can be obtained through the following means:
(A) From the department's internet site at http://dor.wa.gov;
(B) By calling taxpayer services at 360-705-6705; or
(C) By writing to:
Taxpayer Services
Washington State Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
The seller may accept a legible fax or duplicate copy of an original exemption certificate. In all cases, the exemption certificate must be retained by the seller for a period of at least five years. An exemption certificate may be provided for a single purchase or for multiple purchases over a period of time. If the certificate is provided for multiple purchases over a period of time, the certificate is valid for as long as the buyer and seller have a recurring business relationship. A "recurring business relationship" means at least one sale transaction within a period of 12 consecutive months. RCW 82.08.050 (7)(c). Failure to comply with the provisions in this section may result in a denial of the exemption and the agricultural employer may be subject to use tax plus penalties and interest.
(4) Requirement to remit payment of tax if farmworker housing fails to continue to satisfy the conditions of exemption.
(a) Farmworker housing must be used for that purpose at least five consecutive years from the date the housing is approved for occupancy to retain the retail sales and use tax exemption. If this condition is not satisfied, the full amount of tax otherwise due is immediately due and payable together with interest, but not penalties, from the date the housing ceases to be used as farmworker housing until the date of payment.
(b) If at any time farmworker housing ceases to comply with the state's current building codes for single-family or multifamily dwellings, the full amount of tax otherwise due is immediately due and payable with interest, but not penalties, from the date the housing ceases to be used as farmworker housing until the date of payment.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 22-24-101, § 458-20-262, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.02745 and 82.12.02685. WSR 08-14-017, § 458-20-262, filed 6/20/08, effective 7/21/08. Statutory Authority: RCW 82.32.300 and 82.08.02745. WSR 98-24-069, § 458-20-262, filed 11/30/98, effective 12/31/98.]


PDF458-20-263

Exemptions from retail sales and use taxes for qualifying electric generating systems using renewable energy sources.

RCW 82.08.962 and 82.12.962 provide exemptions from the "retail sales tax" described in chapter 82.08 RCW and the "use tax" described in chapter 82.12 RCW paid with respect to the sale or use of machinery and equipment used directly in generating electricity using qualified renewable energy sources. This rule explains how these exemptions apply and is divided into three parts as follows:
PART 1: Exemptions as Applied to Qualified Solar Systems;
PART 2: Exemptions as Applied to Qualified Nonsolar Renewable Energy Systems; and
PART 3: General Provisions.
PART 1
Exemptions as Applied to Qualified Solar Systems
(101) Solar systems that generate more than 500 kilowatts.
(a) Partial exemptions. RCW 82.08.962 and 82.12.962 provide an exemption, in the form of a remittance (refund) from the department, equal to seventy-five percent of the retail sales and use taxes paid with respect to the sale or use of machinery and equipment used directly in solar energy systems capable of generating more than 500 kilowatts of electricity. The exemption also applies to amounts paid for labor and services rendered in respect to installing such machinery and equipment. The nameplate DC power rating of a system, which is an industry standard, is used to determine whether the solar energy system is capable of generating more than 500 kilowatts of electricity. The buyer must pay the total amount of the retail sales or use taxes due with the respect to the sale or use of the qualifying machinery, equipment, and labor charges to install the same. The buyer may then apply to the department for a refund of seventy-five percent of the state and local retail sales and use taxes paid. This partial exemption is effective beginning July 1, 2011, and expires January 1, 2020.
(b) Required annual tax performance report. Beginning January 1, 2018, buyers applying for a refund must complete and submit an annual tax performance report. The annual tax performance report must be filed with the department by May 31st of the year immediately following the year for which the refund is claimed. For more information see Part 3, subsection (301)(c) of this rule.
(102)(a) Solar systems that generate at least one kilowatt and no more than 500 kilowatts.
(b) Partial exemptions. RCW 82.08.962 and 82.12.962 provide an exemption, in the form of a remittance (refund) from the department, equal to seventy-five percent of the retail sales and use taxes paid with respect to the sale or use of machinery and equipment used directly in solar energy systems capable of generating at least one kilowatt and no more than 500 kilowatts of electricity. The exemption also applies to amounts paid for labor and services rendered in respect to installing such machinery and equipment. The nameplate DC power rating of a system, which is an industry standard, is used to determine whether the solar energy system is capable of generating at least one kilowatt and no more than 500 kilowatts of electricity. The buyer must pay the total amount of the retail sales or use taxes due with the respect to the sale or use of the qualifying machinery, equipment, and labor charges to install the same. The buyer may then apply to the department for a refund of seventy-five percent of the state and local retail sales and use taxes paid. This partial exemption is effective beginning July 1, 2011, and expired September 30, 2017.
PART 2
Exemptions as Applied to Qualified Nonsolar Renewable Energy Systems
(201) Qualified nonsolar renewable energy systems generating one kilowatt or more.
(a) Partial exemptions. RCW 82.08.962 and 82.12.962 provide an exemption equal to seventy-five percent of the retail sales and use taxes paid with respect to the sale or use of machinery and equipment used directly in a renewable energy system employing a qualified power source that generates at least 1000 watts (one kilowatt) or more of electricity. This exemption also applies to amounts paid for labor and services rendered in respect to installing such machinery and equipment. The buyer is eligible for the exemption in the form of a remittance (refund) from the department and must have paid to the seller or to the department the total amount of retail sales or use taxes due with respect to the sale or use of the machinery, equipment, and labor charges to install the same. To claim the exemption, the buyer must apply to the department for a refund. See Part 3, subsection (301) of this rule for instructions on how to file a claim for refund. This partial exemption is effective beginning July 1, 2011, and expires January 1, 2020.
(b) Refund procedure. Beginning July 1, 2011, the buyer is eligible for the exemption in the form of a remittance (refund) from the department. The buyer must pay the total amount of the retail sales or use taxes due with the respect to the sale or use of qualifying machinery or equipment and labor charges to install the same. The buyer may then apply to the department for a refund of seventy-five percent of the state and local retail sales and use taxes paid. These exemptions expire on January 1, 2020.
(c) Required tax performance report. Beginning January 1, 2018, buyers applying for a refund must complete and submit an annual tax performance report. The annual tax performance report must be filed with the department by May 31st of the year immediately following the year for which the refund is claimed. For more information see Part 3, subsection (301)(c) of this rule.
(202) Qualified power sources. The partial exemption permitted under Part 2, subsection (201)(a) of this rule applies only with respect to a renewable energy system that employs one of the following qualified power sources:
• Fuel cells;
• Wind;
• Biomass energy;
• Tidal or wave energy;
• Geothermal resources; and
• Technology that converts otherwise lost energy from exhaust.
(203) Definitions for these power sources. For purposes of Part 2 of this rule, the terms below are defined as or include within their definition the following:
(a) Biomass energy. "Biomass energy" includes:
(i) By-products of pulping and wood manufacturing processes;
(ii) Animal waste;
(iii) Solid organic fuels from wood;
(iv) Forest or field residues;
(v) Wooden demolition or construction debris;
(vi) Food waste;
(vii) Liquors derived from algae and other sources;
(viii) Dedicated energy crops;
(ix) Biosolids; and
(x) Yard waste.
"Biomass energy" does not include wood pieces that have been treated with chemical preservatives such as creosote, pentachlorophenol, or copper-chrome-arsenic; wood from old growth forests; or municipal solid waste.
(b) Fuel cell. "Fuel cell" means an electrochemical reaction that generates electricity by combining atoms of hydrogen and oxygen in the presence of a catalyst.
PART 3
General Provisions
(301) Requirements for a refund from the department of taxes paid, referred to as the seventy-five percent remittance.
(a) Required application. This exemption, in the form of a remittance (refund) from the department, equals seventy-five percent of the retail sales and use taxes paid with respect to the sale or use of the qualifying machinery and equipment. The form that the buyer must submit to the department is the Application for Sales Tax Refund on Purchases & Installation of Qualified Renewable Energy Equipment. This form is available through the department's website at dor.wa.gov under Get a form or publication. The application must be completed in full and mailed to the address provided on the form.
(b) Required records. The purchaser must provide records that will allow the department to determine whether the purchaser is entitled to a refund. The records include:
• Invoices;
• Proof of tax paid;
• Documents describing the machinery and equipment; and
• Electrical capacity of the system.
(c) File annual tax performance report. Effective January 1, 2018, any person claiming a seventy-five percent refund must electronically file an annual tax performance report with the department each year. This applies to buyers of solar systems generating electricity of more than ten kilowatts and other qualified renewable energy systems generating electricity of one kilowatt or more.
(d) Separate tax performance report for each system. The buyer must file a separate tax performance report for each system owned or operated in Washington. The annual tax performance report is due by May 31st of the year immediately following the year for which the exemption is claimed. (Systems installed in 2017 require a tax performance report to be completed by May 31, 2018.)
(e) Limitation on frequency for claiming exemption. A buyer may not apply to the department for a remittance (refund) more frequently than once per quarter.
(f) Qualified retail sales and use taxes. These exemptions apply to both state and local retail sales and use taxes.
(302) What is "machinery and equipment"? For purposes of RCW 82.08.962 and 82.12.962, "machinery and equipment" means fixtures, devices, and support facilities that are integral and necessary to the generation of electricity from qualifying sources of power.
A "support facility" is a part of a building, structure, or improvement used to contain or steady a fixture or device. A support facility must be specially designed and necessary for the proper functioning of the fixture or device and must perform a function beyond being a building, structure, or improvement. It must have a function relative to a fixture or a device. To determine if some portion of a building is a support facility, the department examines those parts of the building. For example, a highly specialized structure, like a vibration reduction slab under generators in a landfill gas generating facility, is a support facility. Without the slab, the generators would not function properly. The ceiling and walls of the building housing the generator are not support facilities if they only serve to define the space and do not have a function relative to a fixture or a device.
"Machinery and equipment" does not include:
(a) The utility grid system;
(b) Hand-powered tools;
(c) Property with a useful life of less than one year;
(d) Repair parts required to restore machinery and equipment to normal working order;
(e) Replacement parts that do not increase productivity, improve efficiency, or extend the useful life of the machinery and equipment;
(f) Buildings; or
(g) Building fixtures that:
(i) Are permanently affixed to and become a physical part of a building; but
(ii) Are not integral and necessary to the generation of electricity.
(303) When is machinery and equipment "used directly" in generating electricity? Machinery and equipment is used directly to generate electricity when it is used to:
(a) Capture the energy of the qualifying source of power;
(b) Convert that energy to electricity; and
(c) Store, transform, or transmit that electricity for entry into or operation in parallel with electric transmission and distribution systems.
(304) Examples of qualifying machinery and equipment. This section provides examples of machinery and equipment that may be used directly in generating electricity and could qualify for the exemptions from retail sales and use taxes. This list is illustrative only and is not intended to provide an exhaustive list of possible qualifying machinery and equipment.
(a) Solar. Where solar energy is the principal source of power: Solar modules; inverters; Stirling converters; power conditioning equipment; batteries; transformers; power poles; power lines; and connectors to the utility grid system or point of use.
(b) Wind. Where wind is the principal source of power: Turbines; blades; generators; towers and tower pads; substations; guy wires and ground stays; power conditioning equipment; anemometers; recording meters; transmitters; power poles; power lines; and connectors to the utility grid system or point of use.
(c) Fuel cells. Where fuel cells are the principal source of power: Fuel cell assemblies; fuel storage and delivery systems; power inverters; transmitters; transformers; power poles; power lines; and connectors to the utility grid system or point of use.
(305) Installation charges. The exemptions from retail sales and use taxes addressed in this rule apply to installation charges for qualifying machinery and equipment, including charges for labor and services. There are no exemptions from retail sales and use taxes for:
(a) Charges for labor and services rendered in respect to constructing buildings or access roads that may be necessary to install or use qualifying machinery and equipment;
(b) Tangible personal property, such as a crane or forklift, purchased or rented by the buyer, the contractor, or the installer to be used to install qualifying machinery and equipment; or
(c) Services that were included in the construction contract for design, planning, studies, project management, or other charges not directly related to the actual labor for installing the qualifying machinery and equipment.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 19-10-057, § 458-20-263, filed 4/30/19, effective 5/31/19; WSR 19-02-057, § 458-20-263, filed 12/27/18, effective 1/27/19. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-263, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.962, 82.08.963, 82.12.962, and 82.12.963. WSR 14-14-078, § 458-20-263, filed 6/27/14, effective 7/28/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 05-02-036, § 458-20-263, filed 12/30/04, effective 1/30/05. Statutory Authority: RCW 82.32.300. WSR 99-11-106, § 458-20-263, filed 5/19/99, effective 6/19/99. Statutory Authority: RCW 82.32.300 and 82.08.02567. WSR 97-03-027, § 458-20-263, filed 1/8/97, effective 2/8/97.]


PDF458-20-264

National Uniform Tobacco Settlement.

(1) Introduction. In 1998 the state of Washington entered into an agreement with cigarette manufacturers called the Master Settlement Agreement. Subsequent to entering into that agreement, the Legislature enacted chapter 393, Laws of 1999, codified as chapter 70.157 RCW. The statute requires the department of revenue (department) to promulgate regulations to ascertain the amount of excise tax paid by certain tobacco product manufacturers on "cigarettes" as that term is defined in RCW 70.157.010 and as set forth below. The department will do that by determining the number of cigarettes sold in Washington that were manufactured by nonparticipating tobacco product manufacturers. This rule explains the information to be reported to the department by retailers of tobacco products purchased from a person who is not required to file in Washington the report required by this rule, tobacco products distributors, and cigarette wholesalers. These reporting requirements are in addition to any other tax-reporting requirements.
(2) Definitions. For the purposes of WAC 458-20-264 the following definitions apply unless the context requires otherwise.
(a) "Affiliate" means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms "owns," "is owned" and "ownership" mean ownership of an equity interest, or the equivalent thereof, of ten percent or more, and the term "person" means an individual, partnership, committee, association, corporation or any other organization or group of persons.
(b) "Cigarette" means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains:
(i) Any roll of tobacco wrapped in paper or in any substance not containing tobacco; or
(ii) Tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or
(iii) Any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in clause (i) of this definition.
The term "cigarette" includes "roll-your-own" tobacco (i.e., any tobacco which, because of its appearance, type, packaging, or labeling is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes). For purposes of this definition of "cigarette," 0.09 ounces of "roll-your-own" tobacco shall constitute one individual "cigarette."
(c) "Cigarette wholesaler" means any person who is licensed pursuant to chapter 82.24 RCW.
(d) "Master Settlement Agreement" means the settlement agreement (and related documents) entered into on November 23, 1998, by the state and leading United States tobacco product manufacturers.
(e) "Nonparticipating manufacturer" means any manufacturer of cigarettes or "roll-your-own" tobacco who is not a signatory to the Master Settlement Agreement. A manufacturer ceases to be a nonparticipating manufacturer upon entering into the Master Settlement Agreement.
(f) "Tobacco products distributor" means any person who meets the definition of "distributor" found in RCW 82.26.010(8).
(g) "Tobacco product manufacturer" means an entity that after May 18, 1999, directly (and not exclusively through any affiliate):
(i) Manufactures cigarettes anywhere that such manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer (except where such importer is an original participating manufacturer (as that term is defined in the Master Settlement Agreement) that will be responsible for the payments under the Master Settlement Agreement with respect to such cigarettes as a result of the provisions of subsections II(mm) of the Master Settlement Agreement and that pays the taxes specified in subsection II(z) of the Master Settlement Agreement, and provided that the manufacturer of such cigarettes does not market or advertise such cigarettes in the United States);
(ii) Is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States; or
(iii) Becomes a successor of an entity described in paragraph (i) or (ii) of this definition.
The term "tobacco product manufacturer" does not include an affiliate of a tobacco product manufacturer unless such affiliate itself falls within any of (i) through (iii) above.
(h) "Units sold" means the number of individual cigarettes sold and each 0.09 ounces of "roll-your-own" tobacco sold in the state by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, as measured by excise taxes collected by the state on packs bearing the excise tax stamp of the state or "roll-your-own" tobacco containers.
(3) Report required. Every person who sells at retail tobacco products purchased from a person who is not required to file in Washington the report required by this subsection, every tobacco products distributor, and every cigarette wholesaler must file a report in a form and manner requested by the department. The report must be filed within the twenty-five days after the end of the month in which the sales were made. Mail the report to Department of Revenue, Taxpayer Account Administration, P.O. Box 47476, Olympia, WA 98504-7476.
The report must include the information listed below with respect to units sold that were manufactured by a nonparticipating tobacco product manufacturer.
(a) The number of units sold;
(b) The brand of the unit;
(c) The name and address of the person from whom each unit was purchased;
(d) The name and address of the manufacturer of the unit, if known; and
(e) The name and address of the importer of the unit, if known, and whether that importer is the exclusive importer of the unit, if known.
Example: A retailer may need to file the report required in subsection (3) when purchasing roll-your-own tobacco over the internet or through a catalog from a vendor located outside of Washington, from an enrolled member of an Indian tribe located on a reservation in Washington, or in person from a vendor located in another state.
(4) Recordkeeping requirement. Every person who sells at retail tobacco products purchased from a person who is not required to file in Washington the report required by the rule, every tobacco products distributor, and every cigarette wholesaler, must maintain complete and accurate records to support the data supplied pursuant to paragraph (3) of this section.
(5) Confidentiality. The data filed pursuant to this rule is confidential taxpayer information and subject to the protection provided in RCW 82.32.330.
[Statutory Authority: RCW 82.24.550, 82.32.300 and 82.01.060. WSR 20-24-068, § 458-20-264, filed 11/24/20, effective 12/25/20. Statutory Authority: RCW 70.157.010 and 82.32.300. WSR 00-23-117, § 458-20-264, filed 11/22/00, effective 12/23/00.]


PDF458-20-265

Sales and use tax exemption—Airplane maintenance repair stations.

(1)(a) Introduction. This rule explains the retail sales and use tax exemption, as described in RCW 82.08.025661 and 82.12.025661, for the construction of airplane maintenance repair stations operated by an eligible maintenance repair operator.
(b) Other rules that may apply. Readers may also want to refer to additional rules for further information, including the following:
(i) WAC 458-20-229 Refunds.
(ii) WAC 458-20-267 Annual tax performance reports for certain tax preferences.
(2) Definitions. For the purposes of this rule, the following definitions apply:
(a) "Airplane maintenance repair station" has the same meaning as "repair station" adopted by the National Air Transportation Association and is a maintenance facility that has a certificate issued by the Federal Aviation Administration under Title 14 of the Code of Federal Regulations (14 C.F.R.) Part 145 that is engaged in the maintenance, preventive maintenance, inspection, alteration of airplanes, and alteration of airplane products.
(b) "Commercial airplane," as defined in RCW 82.32.550(1), is an airplane certified by the Federal Aviation Administration for transporting persons or property, and any military derivative of such an airplane.
(c) "Component," as defined in RCW 82.32.550(2), means a part or system certified by the Federal Aviation Administration for installation or assembly into a commercial airplane.
(d) "Eligible maintenance repair operator" means a person classified by the Federal Aviation Administration as qualified to operate a Federal Aviation Regulation Part 145 certified repair station that is located in a commercial services airport owned by a county with a population less than 1,000,000 or a commercial services airport jointly owned by a city and county.
(e) "Operationally complete" means constructed to the point of being functionally capable of hosting the repair and maintenance of airplanes.
(3) Retail sales or use tax exemption.
(a) Subject to the requirements of RCW 82.08.025661 and this rule, state and local retail sales and use taxes do not apply to the items and services as described in (b) of this subsection that are charged or sold to, or purchased or used by:
(i) An eligible maintenance repair operator engaged in the maintenance of airplanes; or
(ii) A port district, political subdivision, or municipal corporation, if the new airplane maintenance repair station is to be leased to an eligible maintenance repair operator engaged in the maintenance of airplanes.
(b) The exempt items and services include:
(i) Labor and services to construct a new airplane maintenance repair station;
(ii) Tangible personal property that will be incorporated as an ingredient or component during the course of constructing the new airplane maintenance repair station; and
(iii) Labor and services to install, during the course of constructing the new airplane maintenance repair station, building fixtures not otherwise eligible for the exemption under RCW 82.08.02565.
(c) To qualify for the exemption described in this rule, the port district, political subdivision, or municipal corporation must have first entered into an agreement with an eligible maintenance repair operator to build the new facility, prior to starting construction of the new facility.
(4) Remittance application. The exemption described in this rule is a remittance.
(a) A business claiming the state and local retail sales or use tax exemption must first pay all applicable state and local retail sales or use taxes on all purchases qualifying for the exemption under subsection (3)(b) of this rule.
(b) The business may then file a quarterly remittance application with the department for the previously paid retail sales or use tax that is determined by the department to qualify for the exemption. The remittance form may be sent electronically to the department or to the mailing address found in (b)(ii) of this subsection.
(i) The remittance application must specify and separately identify the amount of the exempted state and local retail sales and use taxes claimed and the qualifying purchases or acquisitions for which the exemption is claimed, along with any supporting documents required by the department. Refer to the department's website at dor.wa.gov for documentation requirements.
(ii) The application for remittance is titled "Application for Refund or Credit" and is available on the department's website at dor.wa.gov. You may also contact the telephone information center at 360-705-6705 or write to the following address:
Attn: New Construction for FAR Part 145
  Repair Station Refunds
Taxpayer Account Administration Division
Department of Revenue
P.O. Box 47476
Olympia, WA 98504-7476
(c) Local retail sales and use taxes that qualify for this exemption are eligible for remittance the first quarter after construction commences.
(d) State retail sales and use taxes that qualify for this exemption are eligible for remittance the later of either:
(i) The date on which the airplane maintenance and repair station has been operationally complete for four years; or
(ii) December 1, 2021.
(e) The business must provide written notice to the department when the maintenance and repair station is operationally complete as defined in subsection (2)(e) of this rule. The notice should be sent electronically to the department or to the mailing address found in (b)(ii) of this subsection.
(f) The state and local retail sales and use taxes described in this rule are not eligible for remittance on purchases of items or services under subsection (3)(b) of this rule that occur on or after the exemption's expiration date of January 1, 2031.
(5) Department must determine eligibility.
(a) The department must determine eligibility for the exemption based on information provided by the business and through audit and other administrative records.
(b) The business must retain, in adequate detail to enable the department to determine whether the equipment or construction meets the criteria under this rule, construction invoices and documents including, but not limited to, invoices, proof of tax paid, and documents describing the location and size of new structures.
(c) By the end of the calendar quarter that follows the quarter in which the refund application was submitted, the department will remit qualified exempted amounts to a qualifying business, in accordance with subsection (4)(c) and (d) of this rule, for local and state retail sales and use taxes.
(d) The department may not remit the state portion of the retail sales and use taxes paid if the business did not report at least 100 average employment positions with an average annualized wage of $80,000 to the employment security department for four consecutive calendar quarters, beginning with the first calendar quarter after the date the facility is issued an occupancy permit by the local permit issuing authority. The business must provide the department with the unemployment insurance number provided to the employment security department for verification of employment requirements.
If a new airplane maintenance repair station owned by a port district, political subdivision, or municipal corporation is leased to an eligible maintenance repair operator engaged in the maintenance of airplanes, only the business lessee, and not the lessor, must meet the employment requirement described in (d) of this subsection.
(6) Annual tax performance report. An eligible maintenance repair operator receiving a remittance under this rule must electronically file an annual report with the department in accordance with RCW 82.32.534. For more information about filing an annual report, see WAC 458-20-267 and visit the department's website at dor.wa.gov or contact the telephone information center at 360-705-6705.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-04-002, § 458-20-265, filed 1/24/24, effective 2/24/24. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 22-24-103, § 458-20-265, filed 12/6/22, effective 1/6/23; WSR 17-09-089, § 458-20-265, filed 4/19/17, effective 5/20/17.]


PDF458-20-267

Annual tax performance reports for certain tax preferences.

(1) Introduction. Effective for tax reporting periods beginning January 1, 2018, taxpayers taking certain tax preferences must file an annual tax performance report with the department of revenue (department) providing information about their business. This rule explains how to file a report, the information that must be included in the report, due dates for filing, and other filing requirements.
(a) References to related rules. For tax reporting periods through December 31, 2017, readers may want to refer to the following rules:
(i) WAC 458-20-267A Annual reports for certain tax preferences;
(ii) WAC 458-20-268 Annual surveys for certain tax preferences.
(b) Definitions. For purposes of this rule the following definitions apply:
(i) Person. "Person" has the meaning under RCW 82.04.030 and also includes the state and its departments and institutions.
(ii) Tax preference. As defined under RCW 43.136.021, "tax preference" means:
(A) An exemption, exclusion, or deduction from the base of a state tax; a credit against a state tax; a deferral of a state tax; or a preferential state tax rate; and
(B) For purposes of this rule, tax preference includes only the tax preferences requiring an annual tax performance report under RCW 82.32.534.
(c) Elimination of annual survey. For tax preferences claimed for tax reporting periods beginning in January 2018 and later, taxpayers are no longer required to complete both an annual report and an annual survey.
(d) Examples. This rule includes examples that identify a set of facts and then state a conclusion. These examples should only be used as a general guide. The department will evaluate each case on its particular facts and circumstances.
(2) Tax preferences requiring an annual tax performance report. Taxpayers may refer to the department's website at dor.wa.gov for the "Annual Tax Performance Report for Preferential Tax Rates/Credits/Exemptions/Deferrals Worksheet." This worksheet lists tax preferences that require an annual tax performance report. Taxpayers may also contact the telephone information center at 360-705-6210 to determine whether they must file an annual tax performance report.
(3) How to file annual tax performance reports.
(a) Electronic filing. Annual tax performance reports must be filed electronically unless the department waives this requirement upon a showing of good cause. A report is filed electronically when the department receives the report in an electronic format through the "MyDOR" system at dor.wa.gov.
(b) Required paper form. If the department waives the electronic filing requirement for a person who shows good cause, that person must use the annual tax performance report form developed by the department unless that person obtains prior written approval from the department to file an annual tax performance report in an alternative format.
(c) How to obtain the form. Persons who have received a waiver of the electronic filing requirement from the department or who otherwise would like a paper copy of the report may obtain the annual tax performance report form from the department's website at dor.wa.gov. It may also be obtained by calling the department at 360-705-6705, or by contacting the department at:
Attn: Tax Incentive Team
Taxpayer Account Administration
Department of Revenue
Post Office Box 47476
Olympia, WA 98504-7476
(d) Special requirement for persons who did not file an annual tax performance report during the previous calendar year. If a person is a first-time filer or otherwise did not file an annual tax performance report with the department during the previous calendar year, or prior to 2019 did not file an annual report or annual survey, the annual tax performance report must include information on employment and wages for the two calendar years immediately preceding the due date of the report.
(e) Due date of annual tax performance report for tax preferences other than deferrals. Every person claiming a tax preference that requires an annual tax performance report under RCW 82.32.534 must file the report annually with the department in the year following the calendar year in which the person becomes eligible to claim the tax preference. The due date for filing the report is May 31st.
(f) Due date of annual tax performance report for tax preferences that are deferrals. If the tax preference is a deferral of tax, an annual tax performance report must be filed by May 31st in the year following the calendar year in which the investment project is certified by the department as operationally complete, and by May 31st succeeding calendar year through the calendar year in which the deferred taxes are fully repaid or are immediately due and payable because the recipient of the deferral is no longer eligible for the deferral.
(g) Due date extensions. The department may extend the due date for filing annual tax performance reports as provided in subsection (15) of this rule.
(h) Example 1. A manufacturer of commercial airplanes begins construction on a new facility in Washington. This facility will be used to manufacture fuselages of commercial airplanes. This firm first claimed the sales and use tax exemption provided by RCW 82.08.980 for construction of new facilities used to manufacture commercial airplanes, fuselages, or wings of commercial airplanes in 2020. By May 31, 2021, the aerospace firm was required to submit an annual tax performance report covering calendar years 2019 and 2020. If the aerospace firm continues to utilize the exemption provided by RCW 82.08.980 during calendar year 2021, an annual tax performance report is due by May 31, 2022, covering calendar year 2021.
(i) Example 2. An aluminum smelter first claimed the B&O tax rate provided by RCW 82.04.2909 for aluminum smelters on July 31, 2017. By May 31, 2018, the aluminum smelter must provide an annual report covering calendar years 2016 and 2017. If the aluminum smelter continues to claim the B&O tax rate provided by RCW 82.04.2909 during calendar year 2018, an annual tax performance report is due by May 31, 2019, covering calendar year 2018.
(4) Amount of tax preference. The annual tax performance report must include the amount of the tax preference claimed for the calendar year covered by the report.
(5) What employment positions are included in the annual tax performance report?
(a) General rule. Except as provided in (a)(i), (ii), or (b) of this subsection, the report must include information detailing employment positions in the state of Washington.
(i) Alternative to reporting employment and wage data. A person may elect to allow, on their behalf, the employment security department to release wage and employment data to the department and the joint legislative audit and review committee. Each taxpayer electing this option must affirm that election in accordance with procedures approved by the employment security department.
(ii) Additional reporting requirements for public research institutions claiming an exemption for machinery and equipment. For a person that claimed an exemption provided in RCW 82.08.025651 or RCW 82.12.025651, the report must include the amount of tax exempted under those sections in the prior calendar year for each general area or category of research and development for which exempt machinery and equipment and labor and services were acquired in the prior calendar year.
(b) Alternative method. Persons engaged in manufacturing commercial airplanes or their components may report employment positions per job at the manufacturing site.
(i) What is a "manufacturing site"? For purposes of the annual tax performance report, a "manufacturing site" is one or more immediately adjacent parcels of real property located in Washington state on which manufacturing occurs that support activities qualifying for a tax preference. Adjacent parcels of real property separated only by a public road comprise a single site. A manufacturing site may include real property that supports the qualifying activity, such as administration offices, test facilities, warehouses, design facilities, and shipping and receiving facilities. It may also include portions of the manufacturing site that support nonqualifying activities.
(ii) If the person files per job at the manufacturing site, which manufacturing site is included in the annual tax performance report for the aerospace manufacturing industry tax preferences? The location(s) where a person is manufacturing commercial airplanes or components of such airplanes within this state is the manufacturing site(s) included in the annual tax performance report. A "commercial airplane" has its ordinary meaning, which is an airplane certified by the Federal Aviation Administration (FAA) for transporting persons or property, and any military derivative of such an airplane. A "component" means a part or system certified by the FAA for installation or assembly into a commercial airplane.
(iii) Are there alternative methods for reporting separately for each manufacturing site? For purposes of completing the annual tax performance report, the department may agree to allow a person whose manufacturing sites are within close geographic proximity to consolidate its manufacturing sites onto a single annual tax performance report provided that the jobs located at the manufacturing sites have equivalent employment positions, and wages. A person may request written approval to consolidate manufacturing sites by contacting the department at:
Attn: Tax Incentive Team
Taxpayer Account Administration
Department of Revenue
Post Office Box 47476
Olympia, WA 98504-7476
(c) Example 3. ABC Airplanes, a company manufacturing FAA certified airplane landing gear, conducts activities at three locations in Washington state. ABC Airplanes claims the Aerospace Property and Leasehold Excise Tax B&O credit provided by RCW 82.04.4463 for property taxes paid on qualified buildings used exclusively in manufacturing commercial airplanes or component parts. In Seattle, WA, ABC Airplanes maintains its corporate headquarters and administrative offices. In Spokane, WA, ABC Airplanes manufactures the brake systems for the landing gear. In Vancouver, WA, ABC Airplanes assembles the landing gear using the components manufactured in Spokane, WA. If filing per manufacturing site, ABC Airplanes must file separate annual tax performance reports for employment positions at its manufacturing sites in Spokane and Vancouver because these are the Washington state locations in which manufacturing occurs that supports activities qualifying for a tax preference.
(6) What jobs are included in the annual tax performance report? The annual tax performance report covers all full-time, part-time, and temporary jobs in this state or, for persons filing as provided in subsection (5)(b) of this rule, at the manufacturing site as of December 31st of the calendar year for which an applicable tax preference is claimed. Jobs that support nonqualifying activities or support both nonqualifying and qualifying activities for a tax preference are included in the report if the job is located in Washington state or, for persons filing as provided in subsection (5)(b) of this rule, at the manufacturing site.
Example 4. XYZ Aluminum, an aluminum smelter company, manufactures aluminum in Tacoma, WA. The company is reporting tax under the B&O tax rate provided by RCW 82.04.2909 for aluminum smelters. XYZ Aluminum's annual tax performance report for its Tacoma, WA location will include all of its employment positions in this state, including its nonmanufacturing employment positions.
(7) How is employment detailed in the annual tax performance report? The annual tax performance report requires reporting of the total hours and wages for employees in Washington for each quarter or for the calendar year, as determined by the department.
(8) What is total employment? The annual tax performance report must provide information on all full-time, part-time, and temporary employment positions located in Washington. Total employment includes employees who are on authorized leaves of absences such as sick leave, vacation, disability leave, jury duty, military leave, regardless of whether those employees are receiving wages. Leaves of absences do not include separations of employment such as layoffs or reductions in force. Vacant positions are not included in total employment.
(9) What are full-time, part-time, and temporary employment positions? An employer must provide information on the total number of employees that are employed in full-time, part-time, or temporary employment positions on December 31st of the calendar year for which an applicable tax preference is claimed.
(a) Full-time and part-time employment positions. For a position to be treated as full time or part time, the employer must intend for the position to be filled for at least 52 consecutive weeks or 12 consecutive months. A full-time position is a position that satisfies any one of the following minimum thresholds:
(i) Works 35 hours per week for 52 consecutive weeks;
(ii) Works 455 hours, excluding overtime, each quarter for four consecutive quarters; or
(iii) Works 1,820 hours, excluding overtime, during a period of 12 consecutive months.
A part-time position is a position in which the employee works less than the hours required for a full-time position. In some instances, an employee may not be required to work the hours required for full-time employment because of paid rest and meal breaks, health and safety laws, disability laws, shift differentials, or collective bargaining agreements, but receives wages equivalent to a full-time job. If, in the absence of these factors, the employee would be required to work the number of hours for a full-time position to receive full-time wages, the position should be reported as a full-time employment position.
(b) Temporary positions. A temporary position is a position that is intended to be filled for period of less than 12 consecutive months. Positions in seasonal employment are temporary positions. Temporary positions include workers furnished by staffing companies regardless of the duration of the placement with the person required to file the annual tax performance report.
(c) The following facts apply to the examples in (c) of this subsection. National Airplane Inc. manufactures wings for commercial airplanes. National Airplane Inc. begins construction of a new facility to store raw materials used in manufacturing wings for commercial planes in Tacoma, WA, and claims the Aerospace Manufacturing Site Sales and Use Tax Exemption in RCW 82.08.980 and 82.12.980. National Airplane Inc. employs 100 people. Seventy-five of the employees work directly in the manufacturing operation and are classified as (U.S. Department of Labor Standard Occupation Code) SOC Production Occupations. Five employees work in the engineering and design division and are classified as SOC Architect and Engineering Occupations. Five employees are sales representatives and are classified as SOC Sales and Related Occupations. Five employees are service technicians and are classified as SOC Installation, Maintenance, and Repair Occupations. Five employees are administrative assistants and are classified as SOC Office and Administrative Support. Five executives are classified as SOC Management Occupations.
(i) Example 5. Through a college work-study program, National Airplane Inc. employs six interns from September through June in its engineering department. The interns each work 20 hours a week. The six interns are reported as temporary employees, and not as part-time employees, because the intern positions are intended to be filled for a period of less than 12 consecutive months. Assuming the five employees classified as SOC Architect and Engineering Occupations are full-time employees, National Airplane Inc. will report a total of 11 employment positions in SOC Architect and Engineering Occupations with five in full-time employment positions and six in temporary employment positions.
(ii) Example 6. National Airplane Inc. manufactures navigation systems in two shifts of production. The first shift works eight hours from 8:00 a.m. to 5:00 p.m. Monday through Friday. The second shift works six hours from 6:00 p.m. to midnight Monday through Friday. The second shift works fewer hours per week (30 hours) than the first shift (40 hours) as a pay differential for working in the evening. If a second shift employee transferred to the first shift, the employee would be required to work 40 hours with no overall increase in wages. The second shift employees should be reported as full-time employment positions, rather than part-time employment positions.
(iii) Example 7. On December 1st, 10 National Airplane Inc. full-time employees classified as SOC Production Occupations take family and medical leave for 12 weeks. National Airplane Inc. hires five people to perform the work of the employees on leave. Because the 10 employees classified as SOC Production Occupations are on authorized leave, National Airplane Inc. will include those employees in the annual tax performance report as full-time employment positions. The five people hired to replace the absent employees classified as SOC Production Occupations will be included in the report as temporary employees. National Airplane Inc. will report a total of 80 employment positions in SOC Production Occupations with 75 in full-time employment positions and five in temporary employment positions.
(iv) Example 8. On December 1st, one full-time employee classified as SOC Sales and Related Occupations resigns from her position. National Airplane Inc. contracts with Jane Smith d/b/a Creative Enterprises, Inc. to finish an advertising project assigned to the employee who resigned. Because Jane Smith is an independent contractor, National Airplane Inc. will not include her employment in the annual tax performance report. Because the resignation has resulted in a vacant position, the total number of employment positions National Airplane Inc. will report in SOC Sales and Related Occupations is reduced to four employment positions.
(v) Example 9. All National Airplane Inc. employees classified as SOC Office and Administrative Support Occupations work 40 hours a week, 52 weeks a year. On November 1st, one employee must limit the number of hours worked to 30 hours each week to accommodate a disability. The employee receives wages based on the actual hours worked each week. Because the employee works less than 35 hours a week and is not paid a wage equivalent to a full-time position, the employee's position is a part-time employment position. National Airplane Inc. will report a total of five employment positions in SOC Office and Administrative Support Occupations with four in full-time employment positions and one in part-time employment positions.
(10) What are wages? For the purposes of the annual tax performance report, "wages" means the base compensation paid to an individual for personal services rendered to an employer, whether denominated as wages, salary, commission, or otherwise. Generally, compensation in the form of overtime, tips, bonuses, benefits (insurance, paid leave, meals, etc.), stock options, and severance pay are not "wages." For employees that earn an annual salary, hourly wages are determined by dividing annual salary by 2080. If an employee is paid by commission, hourly wages are determined by dividing the total amount of commissions paid during the calendar year by 2080.
(11) How are wages detailed for the annual tax performance report?
(a) An employer must report the total wages for employees in Washington for each quarter or for the calendar year, as determined by the department.
(b) For purposes of the annual tax performance report, wages are measured on December 31st of the calendar year for which an applicable tax preference is claimed.
(12) Reporting workers furnished by staffing companies. For temporary positions filled by workers that are furnished by staffing companies, the person filling out the annual tax performance report must provide the following information:
(a) Total number of staffing company employees furnished by staffing companies;
(b) Average duration of all staffing company employees.
(13) Additional reporting for aluminum smelters and electrolytic processing businesses. For an aluminum smelter or electrolytic processing business, the annual tax performance report must indicate the quantity of product produced in this state during the time period covered by the report.
(14) Are annual tax performance reports confidential? Except for the additional information that the department and the joint legislative audit and review committee may request which it deems necessary to measure the results of, or to determine eligibility for the tax preference, annual tax performance reports are not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request.
(15) What are the consequences for failing to file a complete annual tax performance report?
(a) What is a "complete annual tax performance report"? An annual tax performance report is complete if:
(i) The annual tax performance report is filed on the form required by this rule or in an electronic format as required by law; and
(ii) The person makes a good faith effort to substantially respond to all report questions required by this rule.
Responses such as "varied," "various," or "please contact for information" are not considered good faith responses to a question.
(b) Amounts due for late filing. Except for deferrals, if a person does not timely file a required annual tax performance report, then the following amounts are immediately due and payable:
For reports due on or after July 1, 2017 or annual tax performance reports due on or after May 31, 2019:
(i) Thirty-five percent of the amount of the tax preference claimed for the previous calendar year; and
(ii) An additional 15 percent of the amount of the tax preference claimed for the previous calendar year if the person has previously been assessed under (b) of this subsection for failure to timely submit a report for the same tax preference.
(c) Tax deferrals. If the tax preference is a deferral of tax, an amount equal to the deferred tax divided by the number of years in the waiver/repayment period is immediately due. If the economic benefits of the deferral are passed to a lessee, the lessee is responsible for payment to the extent the lessee has received the economic benefit.
(d) Interest and penalties. The department may not assess interest or penalties on amounts due under (b) and (c) of this subsection.
(e) Extension for circumstances beyond the control of the taxpayer. If the department finds the failure of a taxpayer to file an annual tax performance report by the due date was the result of circumstances beyond the control of the taxpayer, the department will extend the time for filing the report. The extension will be for a period of 30 days from the date the department issues its written notification to the taxpayer that it qualifies for an extension under this rule. The department may grant additional extensions as it deems proper under RCW 82.32.590.
In determining whether the failure of a taxpayer to file an annual tax performance report by the due date was the result of circumstances beyond the control of the taxpayer, the department will apply the provisions in WAC 458-20-228 for the waiver or cancellation of penalties when the underpayment or untimely payment of any tax was due to circumstances beyond the control of the taxpayer.
(f) One-time only extension. A taxpayer that fails to file an annual tax performance report, as required under this rule, by the due date of the report is entitled to an extension of the due date. A request for an extension under this subsection must be made in writing to the department.
(i) To qualify for an extension, a taxpayer must have filed all annual tax performance reports, annual reports and annual surveys, if any, due in prior years by their respective due dates, beginning with annual reports and annual surveys due in the calendar year 2010.
(ii) The extension is for 90 days from the original due date of the annual tax performance report.
(iii) No taxpayer may be granted more than one 90-day extension.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 22-24-104, § 458-20-267, filed 12/6/22, effective 1/6/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 20-22-089, § 458-20-267, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-267, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-09-086, § 458-20-267, filed 4/19/17, effective 5/20/17; WSR 16-06-040, § 458-20-267, filed 2/24/16, effective 3/26/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.04.250, 82.32.600, and 82.32.534. WSR 14-19-018, § 458-20-267, filed 9/5/14, effective 10/6/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-22-087, § 458-20-267, filed 11/1/10, effective 12/2/10; WSR 10-10-037, § 458-20-267, filed 4/27/10, effective 5/28/10; WSR 06-20-004, § 458-20-267, filed 9/21/06, effective 10/22/06.]


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PDF458-20-267A

Annual reports for certain tax preferences.

(1) Introduction. Effective for calendar years in which a taxpayer claims a tax preference beginning January 1, 2018, Washington changed its annual reporting requirements. This rule addresses how taxpayers taking certain tax preferences must file an annual report with the department of revenue (department) providing information about their business for tax periods through December 31, 2017, only. See WAC 458-20-267 Annual tax performance reports for certain tax preferences for the proper way to report tax preferences for periods beginning January 1, 2018.
(a) Definitions. For purposes of this rule the following definitions apply:
(i) Person. "Person" has the meaning under RCW 82.04.030 and also includes the state and its departments and institutions.
(ii) Tax preference. As defined under RCW 43.136.021, "tax preference" means:
(A) An exemption, exclusion, or deduction from the base of a state tax; a credit against a state tax; a deferral of a state tax; or a preferential state tax rate; and
(B) Includes only the tax preferences requiring a report under RCW 82.32.534.
(b) Annual survey. Taxpayers taking certain tax preferences may be required to complete both an annual report and an annual survey. For information on the annual survey requirements, refer to RCW 82.32.585 and WAC 458-20-268.
(c) Examples. This rule includes examples that identify a set of facts and then state a conclusion. These examples should only be used as a general guide. The department will evaluate each case on its particular facts and circumstances.
(2) Tax preferences requiring an annual report. Taxpayers may refer to the department's website at dor.wa.gov for the "Annual Tax Incentive Report for Preferential Tax Rates/Credits/Exemptions/Deferrals Worksheet." This worksheet lists tax preferences that require an annual report. Taxpayers may also contact the telephone information center at 360-705-6705 to determine whether they must file an annual report.
(3) How to file annual reports.
(a) Electronic filing. Reports must be filed electronically unless the department waives this requirement upon a showing of good cause. A report is filed electronically when the department receives the report in an electronic format. A person accesses electronic filing through their department "My Account" at dor.wa.gov.
(b) Required paper form. If the department waives the electronic filing requirement for a person who shows good cause, that person must use the annual report form developed by the department unless that person obtains prior written approval from the department to file an annual report in an alternative format.
(c) How to obtain the form. Persons who have received a waiver of the electronic filing requirement from the department or who otherwise would like a paper copy of the report may obtain the annual report form from the department's website at dor.wa.gov. It may also be obtained by calling the telephone information center at 360-705-6705, or by contacting the department at:
Attn: Tax Incentive Team
Taxpayer Account Administration
Department of Revenue
Post Office Box 47476
Olympia, WA 98504-7476
(d) Special requirement for persons who did not file an annual report during the previous calendar year. If a person is a first-time filer or otherwise did not file an annual report with the department during the previous calendar year, the report must include information on employment, wages, and employer-provided health and retirement benefits for the two calendar years immediately preceding the due date of the report.
(e) Due date of annual report. Every person claiming a tax preference that requires a report under RCW 82.32.534 must file the report annually with the department in the year following the calendar year in which the person becomes eligible to claim the tax preference. The due date for filing the report is as follows:
(i) April 30th for reports due prior to 2017.
(ii) May 31st for reports due in or after 2017.
(f) Due date extensions. The department may extend the due date for filing annual reports as provided in subsection (18) of this rule.
(g) Example 1. An aerospace firm first claimed the B&O tax rate provided by RCW 82.04.260(11) for manufacturers and processors for hire of commercial airplanes and component parts on April 1, 2015. By April 30, 2016, the aerospace firm must submit an annual report covering calendar years 2014 and 2015. If the aerospace firm continues to claim the B&O tax rate provided by RCW 82.04.260(11) during calendar year 2016, an annual report is due by May 31, 2017, covering calendar year 2016.
(h) Example 2. An aluminum smelter first claimed the B&O tax rate provided by RCW 82.04.2909 for aluminum smelters on July 31, 2015. By April 30, 2016, the aluminum smelter must provide an annual report covering calendar years 2014 and 2015. If the aluminum smelter continues to claim the B&O tax rate provided by RCW 82.04.2909 during calendar year 2016, an annual report is due by May 31, 2017, covering calendar year 2016.
(4) What employment positions are included in the annual report?
(a) General rule. Except as provided in (b) of this subsection, the report must include information detailing employment positions in the state of Washington.
(b) Alternative method. Persons engaged in manufacturing commercial airplanes or their components may report employment positions per job at the manufacturing site.
(i) What is a "manufacturing site"? For purposes of the annual report, a "manufacturing site" is one or more immediately adjacent parcels of real property located in Washington state on which manufacturing occurs that support activities qualifying for a tax preference. Adjacent parcels of real property separated only by a public road comprise a single site. A manufacturing site may include real property that supports the qualifying activity, such as administration offices, test facilities, warehouses, design facilities, and shipping and receiving facilities. It may also include portions of the manufacturing site that support nonqualifying activities.
(ii) If the person files per job at the manufacturing site, which manufacturing site is included in the annual report for the aerospace manufacturing industry tax preferences? The location(s) where a person is manufacturing commercial airplanes or components of such airplanes within this state is the manufacturing site(s) included in the annual report. A "commercial airplane" has its ordinary meaning, which is an airplane certified by the Federal Aviation Administration (FAA) for transporting persons or property, and any military derivative of such an airplane. A "component" means a part or system certified by the FAA for installation or assembly into a commercial airplane.
(iii) Are there alternative methods for reporting separately for each manufacturing site? For purposes of completing the annual report, the department may agree to allow a person whose manufacturing sites are within close geographic proximity to consolidate its manufacturing sites onto a single annual report provided that the jobs located at the manufacturing sites have equivalent employment positions, wages, and employer-provided health and retirement benefits. A person may request written approval to consolidate manufacturing sites by contacting the department at:
Attn: Tax Incentive Team
Taxpayer Account Administration
Department of Revenue
Post Office Box 47476
Olympia, WA 98504-7476
(c) Example 3. ABC Airplanes, a company manufacturing FAA certified airplane landing gear, conducts activities at three locations in Washington state. ABC Airplanes is reporting tax under the B&O tax rate provided by RCW 82.04.260(11) for manufacturers and processors for hire of commercial airplanes and component parts. In Seattle, WA, ABC Airplanes maintains its corporate headquarters and administrative offices. In Spokane, WA, ABC Airplanes manufactures the brake systems for the landing gear. In Vancouver, WA, ABC Airplanes assembles the landing gear using the components manufactured in Spokane, WA. If filing per manufacturing site, ABC Airplanes must file separate annual reports for employment positions at its manufacturing sites in Spokane and Vancouver because these are the Washington state locations in which manufacturing occurs that supports activities qualifying for a tax preference.
(d) Example 4. Acme Engines, a company manufacturing engine parts, conducts manufacturing in five locations in Washington state. Acme Engines is reporting tax under the B&O tax rate provided by RCW 82.04.260 (11) for manufacturers and processors for hire of commercial airplanes and component parts. It manufactures FAA certified engine parts at its Puyallup, WA location. Acme Engines' four other locations manufacture non-FAA certified engine parts. If filing per manufacturing site, Acme Engines must file an annual report for employment positions at its manufacturing site in Puyallup because it is the only location in Washington state in which manufacturing occurs that supports activities qualifying for a tax preference.
(e) Example 5. Tacoma Rivets, with one in-state manufacturing site located in Tacoma, WA, manufactures rivets used in manufacturing airplanes. Half of the rivets Tacoma Rivets manufactures are FAA certified to be used on commercial airplanes. The remaining rivets Tacoma Rivets manufactures are not FAA certified and are used on military airplanes. Tacoma Rivets is reporting tax on its sales of FAA certified rivets under the B&O tax rate provided by RCW 82.04.260(11) for manufacturers and processors for hire of commercial airplanes and component parts. If filing per manufacturing site, Tacoma Rivets must file an annual report for employment positions at its manufacturing site in Tacoma because it is the location in Washington state in which manufacturing occurs that supports activities qualifying for a tax preference.
(f) Example 6. Dynamic Aerospace Composites is a company that manufactures only FAA certified airplane fuselage materials. Dynamic Aerospace Composites conducts activities at three separate locations within Kent, WA. Dynamic Aerospace Composites is reporting tax under the B&O tax rate provided by RCW 82.04.260(11) for manufacturers and processors for hire of commercial airplanes and component parts. If filing per manufacturing site, Dynamic Aerospace Composites must file separate annual reports for each of its three manufacturing sites.
(g) Example 7. Worldwide Aerospace, an aerospace company, manufactures wing systems for commercial airplanes in 20 locations around the world, but none located in Washington state. Worldwide Aerospace manufactures wing surfaces in San Diego, CA. Worldwide Aerospace sells the wing systems to an airplane manufacturer located in Moses Lake, WA and is reporting tax on these sales under the B&O tax rate provided by RCW 82.04.260(11) for sales, at retail or wholesale, of commercial airplanes, or components of such airplanes, manufactured by that person. Worldwide Aerospace is required to complete the annual report for any employment positions in Washington that are directly related to the qualifying activity.
(5) What jobs are included in the annual report? The annual report covers all full-time, part-time, and temporary jobs in this state or, for persons filing as provided in subsection (4)(b) of this rule, at the manufacturing site as of December 31st of the calendar year for which an applicable tax preference is claimed. Jobs that support nonqualifying activities or support both nonqualifying and qualifying activities for a tax preference are included in the report if the job is located in Washington state or, for persons filing as provided in subsection (4)(b) of this rule, at the manufacturing site.
(a) Example 8. XYZ Aluminum, an aluminum smelter company, manufactures aluminum in Tacoma, WA. The company is reporting tax under the B&O tax rate provided by RCW 82.04.2909 for aluminum smelters. XYZ Aluminum's annual report for its Tacoma, WA location will include all of its employment positions in this state, including its nonmanufacturing employment positions.
(b) Example 9. AAA Tire Company manufactures tires at one manufacturing site located in Centralia, WA. The company is reporting tax under the B&O tax rate provided by RCW 82.04.260(11) for manufacturers and processors for hire of commercial airplanes and component parts. FAA certified tires comprise only 20% of the products it manufactures and are manufactured in a separate building at the manufacturing site. If filing under the method described in subsection (4)(b) of this rule, AAA Tire Company must report all jobs at the manufacturing site, including the jobs engaged in the nonqualifying activities of manufacturing non-FAA certified tires.
(6) How is employment detailed in the annual report? The annual report is organized by employee occupational groups, consistent with the United States Department of Labor's Standard Occupation Codes (SOC) System. The SOC System is a universal occupational classification system used by government agencies and private industries to produce comparable occupational data. The SOC classifies occupations at four levels of aggregation:
(a) Major group;
(b) Minor group;
(c) Broad occupation; and
(d) Detailed occupation.
All occupations are clustered into one of 23 major groups. The annual report uses the SOC major groups to detail the levels of employment, wages, and employer-provided health and retirement benefits at the manufacturing site. A detailed description of the SOC System is available by consulting the United States Department of Labor, Bureau of Labor Statistics online at www.bls.gov/soc. The annual report does not require names of employees.
(7) What is total employment? The annual report must state the total number of employees for each SOC major group that are currently employed on December 31st of the calendar year for which an applicable tax preference is taken. Total employment includes employees who are on authorized leaves of absences such as sick leave, vacation, disability leave, jury duty, military leave, regardless of whether those employees are receiving wages. Leaves of absences do not include separations of employment such as layoffs or reductions in force. Vacant positions are not included in total employment.
(8) What are full-time, part-time, and temporary employment positions? An employer must provide information on the number of employees, as a percentage of total employment in the SOC major group, that are employed in full-time, part-time, or temporary employment positions on December 31st of the calendar year for which an applicable tax preference is claimed. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(a) Full-time and part-time employment positions. For a position to be treated as full time or part time, the employer must intend for the position to be filled for at least 52 consecutive weeks or 12 consecutive months. A full-time position is a position that satisfies any one of the following minimum thresholds:
(i) Works 35 hours per week for 52 consecutive weeks;
(ii) Works 455 hours, excluding overtime, each quarter for four consecutive quarters; or
(iii) Works 1,820 hours, excluding overtime, during a period of 12 consecutive months.
A part-time position is a position in which the employee works less than the hours required for a full-time position. In some instances, an employee may not be required to work the hours required for full-time employment because of paid rest and meal breaks, health and safety laws, disability laws, shift differentials, or collective bargaining agreements, but receives wages equivalent to a full-time job. If, in the absence of these factors, the employee would be required to work the number of hours for a full-time position to receive full-time wages, the position should be reported as a full-time employment position.
(b) Temporary positions. A temporary position is a position that is intended to be filled for period of less than 12 consecutive months. Positions in seasonal employment are temporary positions. Temporary positions include workers furnished by staffing companies regardless of the duration of the placement with the person required to file the annual report.
(c) The following facts apply to the examples in (c) of this subsection. National Airplane Inc. manufactures FAA certified navigation systems at a manufacturing site located in Tacoma, WA. National Airplane Inc. is claiming all the tax preferences available for manufacturers and processors for hire of commercial airplanes and component parts. National Airplane Inc. employs 100 people. Seventy-five of the employees work directly in the manufacturing operation and are classified as SOC Production Occupations. Five employees work in the engineering and design division and are classified as SOC Architect and Engineering Occupations. Five employees are sales representatives and are classified as SOC Sales and Related Occupations. Five employees are service technicians and are classified as SOC Installation, Maintenance, and Repair Occupations. Five employees are administrative assistants and are classified as SOC Office and Administrative Support. Five executives are classified as SOC Management Occupations.
(i) Example 10. Through a college work-study program, National Airplane Inc. employs six interns from September through June in its engineering department. The interns work 20 hours a week. The six interns are reported as temporary employees, and not as part-time employees, because the intern positions are intended to be filled for a period of less than 12 consecutive months. Assuming the five employees classified as SOC Architect and Engineering Occupations are full-time employees, National Airplane Inc. will report a total of 11 employment positions in SOC Architect and Engineering Occupations with 45% in full-time employment positions and 55% in temporary employment positions.
(ii) Example 11. National Airplane Inc. manufactures navigation systems in two shifts of production. The first shift works eight hours from 8:00 a.m. to 5:00 p.m. Monday thru Friday. The second shift works six hours from 6:00 p.m. to midnight Monday thru Friday. The second shift works fewer hours per week (30 hours) than the first shift (40 hours) as a pay differential for working in the evening. If a second shift employee transferred to the first shift, the employee would be required to work 40 hours with no overall increase in wages. The second shift employees should be reported as full-time employment positions, rather than part-time employment positions.
(iii) Example 12. On December 1st, 10 National Airplane Inc. full-time employees classified as SOC Production Occupations take family and medical leave for 12 weeks. National Airplane Inc. hires five people to perform the work of the employees on leave. Because the 10 employees classified as SOC Production Occupations are on authorized leave, National Airplane Inc. will include those employees in the annual report as full-time employment positions. The five people hired to replace the absent employees classified as SOC Production Occupations will be included in the report as temporary employees. National Airplane Inc. will report a total of 80 employment positions in SOC Production Occupations with 93.8% in full-time employment positions and 6.2% in temporary employment positions.
(iv) Example 13. On December 1st, one full-time employee classified as SOC Sales and Related Occupations resigns from her position. National Airplane Inc. contracts with Jane Smith d/b/a Creative Enterprises, Inc. to finish an advertising project assigned to the employee who resigned. Because Jane Smith is an independent contractor, National Airplane Inc. will not include her employment in the annual report. Because the resignation has resulted in a vacant position, the total number of employment positions National Airplane Inc. will report in SOC Sales and Related Occupations is reduced to four employment positions.
(v) Example 14. All National Airplane Inc. employees classified as SOC Office and Administrative Support Occupations work 40 hours a week, 52 weeks a year. On November 1st, one employee must limit the number of hours worked to 30 hours each week to accommodate a disability. The employee receives wages based on the actual hours worked each week. Because the employee works less than 35 hours a week and is not paid a wage equivalent to a full-time position, the employee's position is a part-time employment position. National Airplane Inc. will report a total of five employment positions in SOC Office and Administrative Support Occupations with 80% in full-time employment positions and 20% in part-time employment positions.
(9) What are wages? For the purposes of the annual report, "wages" means the base compensation paid to an individual for personal services rendered to an employer, whether denominated as wages, salary, commission, or otherwise. Compensation in the form of overtime, tips, bonuses, benefits (insurance, paid leave, meals, etc.), stock options, and severance pay are not "wages." For employees that earn an annual salary, hourly wages are determined by dividing annual salary by 2080. If an employee is paid by commission, hourly wages are determined by dividing the total amount of commissions paid during the calendar year by 2080.
(10) How are wages detailed for the annual report?
(a) An employer must provide information on the number of employees, as a percentage of the total employment in the SOC major group, paid a wage within the following five hourly wage bands:
Up to $10.00 an hour;
$10.01 an hour to $15.00 an hour;
$15.01 an hour to $20.00 an hour;
$20.01 an hour to $30.00 an hour; and
$30.01 an hour or more.
Percentages should be rounded to the nearest 1/10th of 1% (XX.X%). For purposes of the annual report, wages are measured on December 31st of the calendar year for which an applicable tax preference is claimed.
(b) The following facts apply to the examples in (b) of this subsection. Washington Airplane Inc. manufactures FAA certified navigation systems at a manufacturing site located in Tacoma, WA. Washington Airplane Inc. is claiming all the tax preferences available for manufacturers and processors for hire of commercial airplanes and component parts. Washington Airplane Inc. employs 500 people at the manufacturing site, which constitutes its entire work force in this state. Four hundred employees engage in activities that are classified as SOC Production Occupations. Fifty employees engage in activities that are classified as SOC Architect and Engineer Occupations. Twenty-five employees are engaged in activities classified as SOC Management Occupations. Twenty employees are engaged in activities classified as SOC Office and Administrative Support Occupations. Five employees are engaged in activities classified as SOC Sales and Related Occupations.
(i) Example 15. One hundred employees classified as SOC Production Occupations are paid $12.00 an hour. Two hundred employees classified as SOC Production Occupations are paid $17.00 an hour. One hundred employees classified as SOC Production Occupations are paid $25.00 an hour. For SOC Production Occupations, Washington Airplane Inc. will report 25% of employment positions are paid $10.01 an hour to $15.00 an hour; 50% are paid $15.01 an hour to $20.00 an hour; and 25% are paid $20.01 an hour to $30.00 an hour.
(ii) Example 16. Ten employees classified as SOC Architect and Engineering Occupations are paid an annual salary of $42,000; another 10 employees are paid $50,000 annually; and the remaining employees are all paid over $70,000 annually. To report wages, the annual salaries must be converted to hourly amounts by dividing the annual salary by 2080 hours. For SOC Architect and Engineering Occupations, Washington Airplane Inc. will report 40% of employment positions are paid $20.01 an hour to $30.00 an hour and 60% are paid $30.00 an hour or more.
(iii) Example 17. All the employees classified as SOC Sales and Related Occupations are sales representatives that are paid on commission. They receive $10.00 commission for each navigation system sold. Three sales representatives sell 2,500 navigation systems during the calendar year. Two sales representatives sell 3,500 navigation systems during the calendar year and receive a $10,000 bonus for exceeding company's sales goals. To report wages, the employee's commissions must be converted to hourly amounts by dividing the total commissions by 2080 hours. Washington Airplane Inc. will report that 60% of employment positions classified as SOC Sales and Related Occupations are paid $10.01 an hour to $15.00 an hour. Because bonuses are not included in wages, Washington Airplane Inc. will report 40% of employment positions classified as SOC Sales and Related Occupations are paid $15.01 an hour to $20.00 an hour.
(iv) Example 18. Ten of the employees classified as SOC Office and Administrative Support Occupations earn $9.50 an hour. The remaining 10 employees classified as SOC Office and Administrative Support Occupations earn wages between $10.01 an hour to $15.00 an hour. On December 1st, Washington Airplane Inc. announces that effective December 15th, all employees classified as SOC Office and Administrative Support Occupations will earn wages of at least $10.50 an hour, but no more than $15.00 an hour. Because wages are measured on December 31st, Washington Airplane Inc. will report 100% of employment positions classified as SOC Office and Administrative Support Occupations Sales and Related Occupations are paid $10.01 an hour to $15.00 an hour.
(11) Reporting workers furnished by staffing companies. For temporary positions filled by workers that are furnished by staffing companies, the person filling out the annual report must provide the following information:
(a) Total number of staffing company employees furnished by staffing companies;
(b) Top three occupational codes of all staffing company employees; and
(c) Average duration of all staffing company employees.
(12) What are employer-provided health benefits? For purposes of the annual report, "health benefits" means compensation, not paid as wages, in the form of a health plan offered by an employer to its employees. A health plan that is equally available to employees and the general public is not an "employer-provided" health benefit.
(a) "Dental care services" means services offered or provided by health care facilities and health care providers relating to the prevention, cure, or treatment of illness, injury, or disease of human teeth, alveolar process, gums, or jaw.
(b) "Dental care plan" means a health plan for the purpose of providing for its employees or their beneficiaries' dental care services.
(c) "Health plan" means any plan, fund, or program established, maintained, or funded by an employer for the purpose of providing for its employees or their beneficiaries, through the purchase of insurance or otherwise, medical care and dental care services. Health plans include any "employee welfare benefit plan" as defined by the Employee Retirement Income Security Act (ERISA), any "health plan" or "health benefit plan" as defined in RCW 48.43.005, any self-funded multiple employer welfare arrangement as defined in RCW 48.125.010, any "qualified health insurance" as defined in Section 35 of the Internal Revenue Code, an "Archer MSA" as defined in Section 220 of the Internal Revenue Code, a "health savings plan" as defined in Section 223 of the Internal Revenue Code, any "health plan" qualifying under Section 213 of the Internal Revenue Code, governmental plans, and church plans.
(d) "Medical care services" means services offered or provided by health care facilities and health care providers relating to the prevention, cure, or treatment of illness, injury, or disease.
(e) "Medical care plan" means a health plan for the purpose of providing for its employees or their beneficiaries' medical care services.
(13) How are employer-provided health benefits detailed in the annual report? The annual report is organized by SOC major group and by type of health plan offered to or with enrolled employees on December 31st of the calendar year for which an applicable tax preference is claimed.
(a) Detail by SOC major group. For each SOC major group, report the number of employees, as a percentage of total employment in the SOC major group, eligible to participate in an employer-provided medical care plan. An employee is "eligible" if the employee can currently participate in a medical care plan provided by the employer. Waiting periods, tenure requirements, minimum work hour requirements, preexisting conditions, and other limitations may prevent an employee from being eligible for coverage in an employer's medical care plan. If an employer provides multiple medical care plans, an employee is "eligible" if the employee can currently participate in one of the medical care plans. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(i) Example 19. On December 31st, Acme Engines has 100 employees classified as SOC Production Occupations. It offers these employees two medical care plans. Plan A is available to all employees at the time of hire. Plan B is available to employees after working 90 days. For SOC Production Occupations, Acme Engines will report 100% of its employees are eligible for employer-provided medical benefits because all of its employees are eligible for at least one medical care plan offered by Acme Engines.
(ii) Example 20. Apex Aluminum has 50 employees classified as SOC Transportation and Material Moving Occupations, all of whom have worked for Apex Aluminum for over five years. Apex Aluminum offers one medical care plan to its employees. Employees must work for Apex Aluminum for six months to participate in the medical care plan. On October 1st, Apex Aluminum hires 10 new employees classified as SOC Transportation and Material Moving Occupations. For SOC Transportation and Material Moving Occupations, Apex Aluminum will report 83.3% of its employees are eligible for employer-provided medical benefits.
(b) Detail by type of health plan. The report also requires detailed information about the types of health plans the employer provides. If an employer has more than one type of health plan, it must report each health plan separately. If a person offers more than one of the same type of health plan as described in (b)(i) of this subsection, the person may consolidate the detail required in (b) through (d) of this subsection by using ranges to describe the information. The details include:
(i) A description of the type of plan in general terms such as self-insured, fee for service, preferred provider organization, health maintenance organization, health savings account, or other general description. The report does not require a person to disclose the name(s) of their health insurance carrier(s).
(ii) The number of employees eligible to participate in the health plan, as a percentage of total employment at the manufacturing site or as otherwise reported. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(iii) The number of employees enrolled in the health plan, as a percentage of employees eligible to participate in the health plan at the manufacturing site or as otherwise reported. An employee is "enrolled" if the employee is currently covered by or participating in an employer-provided health plan. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(iv) The average percentage of premium paid by employees enrolled in the health plan. "Premium" means the cost incurred by the employer to provide a health plan or the continuance of a health plan, such as amounts paid to health carriers or costs incurred by employers to self-insure. Employers are generally legally responsible for payment of the entire cost of the premium for enrolled employees, but may require enrolled employees to share in the cost of the premium to obtain coverage. State the amount of premium, as a percentage, employees must pay to maintain enrollment under the health plan. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(v) If necessary, the average monthly contribution to enrolled employees. In some instances, employers may make contributions to an employee health plan, but may not be aware of the percentage of premium cost borne by the employee. For example, employers may contribute to a health plan sponsored by an employee organization, or may sponsor a medical savings account or health savings account. Under those circumstances in which the employee's contribution to the health plan is unknown, an employer must report its average monthly contribution to the health plan by dividing the employer's total monthly costs for the health plan by the total number of employees enrolled in the health plan.
(vi) Whether legal spouses, state registered domestic partners, and unmarried dependent children can obtain coverage under the health plan and if there is an additional premium for such coverage.
(vii) Whether part-time employees are eligible to participate in the health plan.
(c) Medical care plans. In addition to the detailed information required for each health plan, report the amount of enrolled employee point of service cost-sharing for hospital services, prescription drug benefits, and primary care physician services for each medical care plan. If differences exist within a medical care plan, the lowest cost option to the enrolled employee must be stated in the report. For example, if employee point of service cost-sharing is less if an enrolled employee uses a network of preferred providers, report the amount of point of service cost-sharing using a preferred provider. Employee point of service cost-sharing is generally stated as a percentage of cost, a specific dollar amount, or both.
(i) "Employee point of service cost-sharing" means amounts paid to health carriers directly providing medical care services, health care providers, or health care facilities by enrolled employees in the form of copayments, co-insurance, or deductibles. Copayments and co-insurance mean an amount specified in a medical care plan that is an obligation of enrolled employees for a specific medical care service which is not fully prepaid. A deductible means the amount an enrolled employee is responsible to pay before the medical care plan begins to pay the costs associated with treatment.
(ii) "Hospital services" means covered in-patient medical care services performed in a hospital licensed under chapter 70.41 RCW.
(iii) "Prescription drug benefit" means coverage to purchase a 30-day or less supply of generic prescription drugs from a retail pharmacy.
(iv) "Primary care provider services" means nonemergency medical care services provided in an office setting by the employee's primary care provider.
(d) Dental care plans. In addition to the health plan information required for each dental care plan, the annual maximum benefit for each dental care plan must be stated in the report. Most dental care plans have an annual dollar maximum benefit. This is the maximum dollar amount a dental care plan will pay toward the cost of dental care services within a specific benefit period, generally one year. The enrolled employee is personally responsible for paying costs above the annual maximum.
(e) The following facts apply to the examples in (e) of this subsection. Mosaic Aerospace employs 100 employees and offers two medical care plans as health benefits to employees at the time of hire. Plan A is a managed care plan (HMO). Plan B is a fee for service medical care plan.
(i) Example 21. Forty Mosaic Aerospace employees are enrolled in Plan A. It costs Mosaic Aerospace $750 a month for each employee covered by Plan A. Enrolled employees must pay $150 each month to participate in Plan A. If an enrolled employee uses its network of physicians, Plan A will cover 100% of the cost of primary care provider services with employees paying a $10.00 copayment per visit. If an enrolled employee uses its network of hospitals, Plan A will cover 100% of the cost of hospital services with employees paying a $200 deductible. If an enrolled employee does not use a network provider, Plan A will cover only 50% of the cost of any service with a $500 employee deductible. An enrolled employee must use a network of retail pharmacies to receive any prescription drug benefit. Plan A will cover the cost of prescription drugs with enrolled employees paying a $10.00 copayment. If an enrolled employee uses the mail-order pharmacy option offered by Plan A, copayment for prescription drug benefits is not required.
Mosaic Aerospace will report Plan A separately as a managed care plan. One hundred percent of its employees are eligible to participate in Plan A. The percentage of eligible employees enrolled in Plan A is 40%. The percentage of premium paid by an employee is 20%. Mosaic Aerospace will also report that employees have a $10.00 copayment for primary care provider services and a $200 deductible for hospital services because this is the lowest cost option within Plan A. Mosaic Aerospace will report that employees have a $10.00 copayment for prescription drug benefit. Mosaic Aerospace cannot report that employees do not have a prescription drug benefit copayment because "prescription drug benefit" is defined as coverage to purchase a 30-day or less supply of generic prescription drugs from a retail pharmacy, not a mail-order pharmacy.
(ii) Example 22. Fifty Mosaic Aerospace employees are enrolled in Plan B. It costs Mosaic Aerospace $1,000 a month for each employee covered by Plan B. Enrolled employees must pay $300 a month to participate in Plan B. Plan B covers 100% of the cost of primary care provider services and 100% of the cost of prescription drugs with employees paying a $200 annual deductible for each covered service. Plan B covers 80% of the cost of hospital services with employees paying a $250 annual deductible.
Mosaic Aerospace will report Plan B separately as a fee for service medical care plan. One hundred percent of its employees are eligible to participate in Plan B. The percentage of eligible employees enrolled in Plan B is 50%. The percentage of premium paid by an employee is 30%. Mosaic Aerospace will also report that employees have a $200 annual deductible for both primary care provider services and prescription drug benefits. Hospital services have a $250 annual deductible and 20% co-insurance obligation.
(iii) Example 23. On December 1st, Mosaic Aerospace acquires General Aircraft Inc., a company claiming all the tax preferences available for manufacturers and processors for hire of commercial airplanes and component parts. General Aircraft Inc. had 50 employees, all of whom were retained by Mosaic Aerospace. At General Aircraft Inc., employees were offered one managed care plan (HMO) as a benefit. The former General Aircraft Inc. employees will retain their current managed care plan until the following June when employees would be offered Mosaic Aerospace benefits. On December 31st, Mosaic Aerospace is offering employees two managed care plans. Mosaic Aerospace may report each managed care plan separately or may consolidate the detail required in (b) through (d) of this subsection for this type of medical care plan by using ranges to report the information.
(iv) Example 24. Aero Turbines employs 100 employees. It offers employees health savings accounts as a benefit to employees who have worked for the company for six months. Aero Turbines established the employee health savings accounts with a local bank and makes available to employees a high deductible medical care plan to be used in conjunction with the account. Aero Turbines deposits $500 a month into each employee's health savings account. Employees deposit a portion of their pretax earnings into a health savings account to cover the cost of primary care provider services, prescription drug purchases, and the high deductible medical care plan for hospital services. The high deductible medical care plan has an annual deductible of $2,000 and covers 75% of the cost of hospital services. Sixty-six employees open health savings accounts. Four employees have not worked for Aero Turbines for six months.
Aero Turbines will report the medical care plan as a health savings account. Ninety-six percent of employees are eligible to participate in health savings accounts. The percentage of eligible employees enrolled in health savings accounts is 68.8%. Because the amount of employee deposits into their health savings accounts will vary, Aero Turbines will report the average monthly contribution of $500 rather than the percentage of premium paid by enrolled employees. Because employees are responsible for covering their primary care provider services and prescription drugs costs, Aero Turbines will report that this health plan does not include these services. Because the high deductible medical care plan covers the costs of hospital services, Aero Turbines will report that the medical care plan has an annual deductible of $2,000 and employees have 25% co-insurance obligation.
(14) What are employer-provided retirement benefits? For purposes of the annual report, "retirement benefits" mean compensation, not paid as wages, in the form of a retirement plan offered by an employer to its employees. A "retirement plan" means any plan, account, deposit, annuity, or benefit, other than a life insurance policy, that provides for retirement income or deferred income to employees for periods extending to the termination of employment or beyond. Retirement plans include pensions, annuities, stock bonus plans, employee stock ownership plans, profit sharing plans, self-employed retirement plans, individual retirement accounts, individual retirement annuities, and retirement bonds, as well as any other plan or program, without regard to its source of funding, and without regard to whether the retirement plan is a qualified plan meeting the guidelines established in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. A retirement plan that is equally available to employees and the general public is not an "employer-provided" retirement benefit.
(15) How are employer-provided retirement benefits detailed in the annual report? The annual report is organized by SOC major group and by type of retirement plans offered to employees or with enrolled employees on December 31st of the calendar year for which an applicable tax preference is claimed. Inactive or terminated retirement plans are excluded from the annual report. An inactive retirement plan is a plan that is not offered to new employees, but has enrolled employees, and neither enrolled employees nor the employer are making contributions to the retirement plan.
(a) Detail by SOC major group. For each SOC major group, report the number of employees, as a percentage of total employment in the SOC major group, eligible to participate in an employer-provided retirement plan. An employee is "eligible" if the employee can currently participate in a retirement plan provided by the employer. Waiting periods, tenure requirements, minimum work hour requirements, and other limitations may prevent an employee from being eligible for coverage in an employer's retirement plan. If an employer provides multiple retirement plans, an employee is "eligible" if the employee can currently participate in one of the retirement plans. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(i) Example 25. Lincoln Airplane has 100 employees classified as SOC Production Occupations. Fifty employees were enrolled in defined benefit pension at the time of hire. All employees are eligible to participate in a 401(k) Plan. For SOC Production Occupations, Lincoln Airplane will report 100% of its employees are eligible for employer-provided retirement benefits because all of its employees are eligible for at least one retirement plan offered by Lincoln Airplane.
(ii) Example 26. Fly-Rite Airplanes has 50 employees classified in SOC Computer and Mathematical Occupations. Fly-Rite Airplane offers a SIMPLE IRA to its employees after working for the company one year. Forty-five employees classified in SOC Computer and Mathematical Occupations have worked for the company more than one year. For SOC Computer and Mathematical Occupations, Fly-Rite Airplanes will report 90% of its employees are eligible for retirement benefits.
(b) Detail by retirement plan. The report also requires detailed information about the types of retirement plans an employer offers employees. If an employer offers multiple retirement plans, it must report each type of retirement plan separately. If an employer offers more than one of the same type of retirement plan, but with different levels of employer contributions, it may consolidate the detail required in (i) through (iv) of this subsection by using ranges to describe the information. The report includes:
(i) The type of plan in general terms such as 401(k) Plan, SEP IRA, SIMPLE IRA, cash balance pension, or defined benefit plan.
(ii) The number of employees eligible to participate in the retirement plan, as a percentage of total employment at the manufacturing site, or as otherwise reported. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(iii) The number of employees enrolled in the retirement plan, as a percentage of employees eligible to participate in the retirement plan at the manufacturing site. An employee is "enrolled" if the employee currently participates in an employer-provided retirement plan, regardless of whether the employee has a vested benefit. Percentages should be rounded to the nearest 1/10th of 1% (XX.X%).
(iv) The maximum benefit the employer will contribute into the retirement plan for enrolled employees. The maximum benefit an employer will contribute is generally stated as a percentage of salary, specific dollar amount, or both. This information is not required for a defined benefit plan meeting the qualification requirements of Employee Retirement Income Security Act (ERISA) that provides benefits according to a flat benefit, career-average, or final pay formula.
(A) Example 27. General Airspace is a manufacturer of airplane components located in Centralia, WA. General Airspace employs 100 employees. Fifty employees are eligible for and enrolled in a defined benefit pension with a flat benefit at the time of retirement. Twenty-five employees are eligible for and enrolled in a cash balance pension with General Airspace contributing 7% of an employee's annual compensation with a maximum annual contribution of $10,000. All General Airspace employees can participate in a 401(k) Plan. Sixty-five employees are participating in the 401(k) Plan. General Airspace does not make any contributions into the 401(k) Plan. Five employees are former employees of United Skyways, a company General Airspace acquired. United Skyways employees were enrolled in a cash balance pension at the time of hire. When General Airspace acquired United Skyways, it did not terminate or liquidate the United Skyways cash balance plan. Rather, General Airspace maintains cash balance plan only for former United Skyways employees, allowing only interest to accrue to the plan.
(I) General Airspace will report that it offers three retirement plans - A defined benefit pension, a cash-balance pension, and a 401(k) Plan. General Airspace will not report the inactive cash balance pension it maintains for former United Skyways employees.
(II) For the defined benefit pension, General Airspace will report 50% of its total employment positions are eligible to participate. Of the employment positions eligible to participate, 100% are enrolled.
(III) For the cash-balance pension, General Airspace will report 25% of its total employment positions are eligible to participate. Of the employment positions eligible to participate, 100% are enrolled. General Airspace will report a maximum contribution of $10,000 or 7% of an employee's annual compensation.
(IV) For the 401(k) Plan, General Airspace will report 100% of its total employment positions are eligible to participate in the retirement plan. Of the employment positions eligible to participate, 65% are enrolled. General Airspace will report that it does not make any contributions into the 401(k) Plan.
(B) Example 28. Washington Alloys is an aluminum smelter located in Grandview, WA. Washington Alloys employs 200 employees. Washington Alloys offers a 401(k) Plan to its employees after one year of hire. One hundred seventy-five employees have worked for Washington Alloys for one year or more. Of that amount, 75 have worked more than five years. Washington Alloys will match employee contributions up to a maximum 3% of annual compensation. If an employee has worked for Washington Alloys for more than five years, Washington Alloys will contribute 5% of annual compensation regardless of the employee's contribution. One hundred employees receive a 3% matching contribution from Washington Alloys. Fifty employees receive a contribution of 5% of annual compensation.
(I) Washington Alloys may report each 401(k) Plan separately - A 401(k) Plan with a maximum employer contribution of 3% of annual compensation and a 401(k) Plan with a maximum employer contribution to 5% of annual compensation. Alternatively, Washington Alloys may report that it offers a 401(k) Plan with a maximum employer contribution ranging from 3% to 5% of annual compensation.
(II) If Washington Alloys reports each 401(k) Plan separately, for the 401(k) Plan with a maximum employer contribution of 3% of annual compensation, Washington Alloys will report 50% of its total employment positions are eligible to participate. Of the employment positions eligible to participate, 100% are enrolled.
For the 401(k) Plan with a maximum employer contribution of 5% of annual compensation, Washington Alloys will report 37.5% of its total employment positions are eligible to participate. Of the employment positions eligible to participate, 66.6% are enrolled.
(III) If Washington Alloys consolidates its detailed information about its 401(k) Plans, it will report that 87.5% of its total employment positions are eligible to participate in 401(k) Plans. Of the employment positions eligible to participate in the 401(k) Plans, 85.7% are enrolled.
(16) Additional reporting for aluminum smelters and electrolytic processing businesses. For an aluminum smelter or electrolytic processing business, the annual report must indicate the quantity of product produced in this state during the time period covered by the report.
(17) Are annual reports confidential? Except for the additional information that the department may request which it deems necessary to measure the results of, or to determine eligibility for the tax preference, annual reports are not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request.
(18) What are the consequences for failing to file a complete annual report?
(a) What is a "complete annual report"? An annual report is complete if:
(i) The annual report is filed on the form required by this rule or in an electronic format as required by law; and
(ii) The person makes a good faith effort to substantially respond to all report questions required by this rule.
Responses such as "varied," "various," or "please contact for information" are not considered good faith responses to a question.
(b) Amounts due for late filing. Except as otherwise provided by law, if a person claims a tax preference that requires an annual report under this rule, but fails to submit a complete report by the due dates described in subsection (3)(e) of this section, or any extension under RCW 82.32.590, the following amounts are immediately due and payable:
(i) For reports due prior to July 1, 2017, 100 percent of the amount of the tax preference claimed for the previous calendar year. Interest, but not penalties, will be assessed on the amounts due at the rate provided for under RCW 82.32.050, retroactively to the date the tax preference was claimed, and accruing until the taxes for which the tax preference was claimed are repaid.
(ii) For reports due on or after July 1, 2017:
(A) Thirty-five percent of the amount of the tax preference claimed for the previous calendar year; and
(B) An additional 15 percent of the amount of the tax preference claimed for the previous calendar year if the person has previously been assessed under (b)(ii) of this subsection for failure to timely submit a report for the same tax preference.
(c) Interest and penalties. The department may not assess interest or penalties on amounts due under (b)(ii) of this subsection.
(d) Extension for circumstances beyond the control of the taxpayer. If the department finds the failure of a taxpayer to file an annual report by the due date was the result of circumstances beyond the control of the taxpayer, the department will extend the time for filing the report. The extension will be for a period of 30 days from the date the department issues its written notification to the taxpayer that it qualifies for an extension under this rule. The department may grant additional extensions as it deems proper under RCW 82.32.590.
In determining whether the failure of a taxpayer to file an annual report by the due date was the result of circumstances beyond the control of the taxpayer, the department will apply the provisions in WAC 458-20-228 for the waiver or cancellation of penalties when the underpayment or untimely payment of any tax was due to circumstances beyond the control of the taxpayer.
(e) One-time only extension. A taxpayer who fails to file an annual report, as required under this rule, by the due date of the report is entitled to an extension of the due date. A request for an extension under this subsection must be made in writing to the department.
(i) To qualify for an extension, a taxpayer must have filed all annual reports and surveys, if any, due in prior years by their respective due dates, beginning with annual reports and surveys due in the calendar year 2010.
(ii) The extension is for 90 days from the original due date of the annual report.
(iii) No taxpayer may be granted more than one 90-day extension.


PDF458-20-268

Annual surveys for certain tax preferences.

(1) Introduction. Effective for calendar years in which a taxpayer claims a tax preference beginning January 1, 2018, Washington changed its annual reporting requirements. This rule addresses how taxpayers taking certain tax preferences must file an annual survey as provided under RCW 82.32.585 with the department of revenue (department) providing information about their business for tax periods through December 31, 2017, only. See WAC 458-20-267 Annual tax performance reports for certain tax preferences for the proper way to report tax preferences for periods beginning January 1, 2018.
(a) Definitions. For purposes of this rule the following definitions apply:
(i) Person. "Person" has the meaning under RCW 82.04.030 and also includes the state and its departments and institutions.
(ii) Tax preference. As defined under RCW 43.136.021, "tax preference" means:
(A) An exemption, exclusion, or deduction from the base of a state tax; a credit against a state tax; a deferral of a state tax; or a preferential state tax rate; and
(B) Includes only the tax preferences requiring a survey under RCW 82.32.585.
(b) Annual reports. Taxpayers taking certain tax preferences may be required to complete both an annual report and an annual survey. For information on the annual report requirements, refer to RCW 82.32.534 and WAC 458-20-267.
(c) Examples. This rule includes examples that identify a set of facts and then state a conclusion. These examples should only be used as a general guide. The department will evaluate each case on its particular facts and circumstances.
(2) Tax preferences requiring an annual survey. Taxpayers may refer to the department's website at dor.wa.gov for the "Annual Tax Incentive Survey for Preferential Tax Rates/Credits/Exemptions/Deferrals Worksheet." This worksheet lists tax preferences that require an annual survey. Taxpayers may also contact the telephone information center 360-705-6705 to determine whether they must file an annual survey.
(3) How to file annual surveys.
(a) Electronic filing. Surveys must be filed electronically unless the department waives this requirement upon a showing of good cause. A survey is filed electronically when the department receives the survey in an electronic format. A person accesses electronic filing through their department "My Account" at dor.wa.gov.
(b) Required paper form. If the department waives the electronic filing requirement for a person that shows good cause, that person must use the annual survey form developed by the department unless that person obtains prior written approval from the department to file an annual survey in an alternative format.
(c) How to obtain the form. Persons who have received a waiver of the electronic filing requirement from the department or who otherwise would like a paper copy of the survey may obtain the annual survey form from the department's website at dor.wa.gov. It may also be obtained by calling the telephone information center at 360-705-6705, or by contacting the department at:
Attn: Tax Incentive Team
Taxpayer Account Administration
Department of Revenue
Post Office Box 47476
Olympia, WA 98504-7476
(d) Special requirement for persons who did not file an annual survey during the previous calendar year. If a person is a first-time filer or otherwise did not file an annual survey with the department during the previous calendar year, the survey must include information on employment, wages, and employer-provided health and retirement benefits for the two calendar years immediately preceding the due date of the survey.
(e) Due date of annual survey. Every person claiming a tax preference that requires a survey under RCW 82.32.585 must file the survey annually with the department in the year following the calendar year in which the person becomes eligible to claim the tax preference. The due date for filing the survey is as follows:
(i) April 30th for surveys due prior to 2017.
(ii) May 31st for surveys due in 2017 or 2018.
(iii) If the tax preference is a deferral of tax, the first survey must be filed by April 30th (if prior to 2017) or by May 31st (if in 2017) of the calendar year following the calendar year in which the investment project is certified by the department as operationally complete. Thereafter, a survey must also be filed for each of the seven succeeding calendar years by April 30th (if prior to 2017) or by May 31st (if in 2017), or a tax performance report for tax preferences claimed in tax reporting periods in 2018 and after.
(f) Due date extensions. The department may extend the due date for filing annual surveys as provided in subsection (11) of this rule.
(g) Example 1. Advanced Computing, Inc. qualified for the B&O tax credit provided by RCW 82.04.4452 and applied it against taxes due in calendar year 2014. Advanced Computing filed an annual survey in March 2014 for credit claimed under RCW 82.04.4452 in 2013. Advanced Computing must electronically file an annual survey with the department by April 30, 2015, for credits taken in calendar year 2014. The tax preference in this example expired January 1, 2015.
(h) Example 2. In 2011, Biotechnology, Inc. applied for and received a sales and use tax deferral under chapter 82.63 RCW for an eligible investment project in qualified research and development. The investment project was operationally complete in 2012. Biotechnology filed an annual survey on April 30, 2013, for the sales and use tax deferral under chapter 82.63 RCW. Surveys are due from Biotechnology by April 30th each year through 2016 and by May 31st in 2017 and 2018, with tax performance reports due in 2019 through May 31, 2020.
(i) Example 3. Advanced Materials, Inc., a new business in 2014, has been conducting manufacturing activities in a building leased from Property Management Services. Property Management Services is a recipient of a deferral under chapter 82.60 RCW, and the department certified the building as operationally complete in 2014. To pass on the entire economic benefit of the deferral, Property Management Services charges Advanced Materials $5,000 less in rent each year. Advanced Materials is a first-time filer of annual surveys. Advanced Materials must file its annual survey with the department covering the 2014 calendar year by April 30, 2015. Surveys are due from Advanced Materials by April 30th for 2016 and by May 31st for 2017, with annual tax performance reports due in 2018 through May 31, 2022.
(j) Example 4. Fruit Canning, Inc. claims the B&O tax exemption provided in RCW 82.04.4266 for the canning of fruit in 2015. Fruit Canning is a first-time filer of annual surveys. Fruit Canning must file an annual survey with the department by April 30, 2016, covering calendar years 2014 and 2015. If Fruit Canning claims the B&O tax exemption during subsequent years, it must file an annual survey by May 31st in 2017 and 2018, and an annual tax performance report by May 31st in 2019 and each subsequent year.
(4) What information does the annual survey require? The annual survey requires the following:
(a) Amount of tax deferred, the amount of B&O tax exempted, the amount of B&O tax credit taken, or the amount of B&O tax reduced under the preferential rate;
(b) For taxpayers claiming the tax deferral under chapter 82.60 or 82.63 RCW:
(i) The number of new products or research projects by general classification; and
(ii) The number of trademarks, patents, and copyrights associated with activities at the investment project;
(c) For taxpayers claiming the B&O tax credit under RCW 82.04.4452:
(i) The qualified research and development expenditures during the calendar year for which the credit was claimed;
(ii) The taxable amount during the calendar year for which the credit was claimed;
(iii) The number of new products or research projects by general classification;
(iv) The number of trademarks, patents, and copyrights associated with the research and development activities for which the credit was claimed; and
(v) Whether the credit has been assigned and who assigned the credit.
The credit provided under RCW 82.04.4452 expired January 1, 2015.
(d) The following information for employment positions in Washington state:
(i) The total number of employment positions;
(ii) Full-time, part-time, and temporary employment positions as a percent of total employment. Refer to subsection (7) of this rule for information about full-time, part-time, and temporary employment positions;
(iii) The number of employment positions according to the wage bands of less than $30,000; $30,000 or greater, but less than $60,000; and $60,000 or greater. A wage band containing fewer than three individuals may be combined with the next lowest wage band; and
(iv) The number of employment positions that have employer-provided medical, dental, and retirement benefits, by each of the wage bands; and
(e) Additional information the department requests that is necessary to measure the results of, or determine eligibility for the tax preferences.
(i) Prior to its repeal effective January 1, 2018, RCW 82.32.585 requires the department to report to the legislature summary descriptive statistics by category and the effectiveness of certain tax preferences, such as job creation, company growth, and such other factors as the department selects or as the statutes identify. The department has included questions related to measuring these effects.
(ii) In addition, the department has included questions related to:
(A) The taxpayer's use of the sales and use tax exemption for machinery and equipment used in manufacturing provided in RCW 82.08.025651 and 82.12.025651; and
(B) The Unified Business Identifier used with the Washington state employment security department and all employment security department reference numbers used on quarterly tax reports that cover the employment positions reported in the annual survey.
(5) What is total employment in the annual survey?
(a) Employment as of December 31st. The annual survey requires information on all full-time, part-time, and temporary employment positions located in Washington state on December 31st of the calendar year covered by the survey. Total employment includes persons who are on leaves of absence such as sick leave, vacation, disability leave, jury duty, military leave, and workers compensation leave, regardless of whether those persons are receiving wages. Total employment does not include separations from employment such as layoffs and reductions in force. Vacant positions are not included in total employment.
(b) The following facts apply to the examples in (b)(i) through (iv) of this subsection. National Construction Equipment (NCE) manufactures bulldozers, cranes, and other earth-moving equipment in Ridgefield and Kennewick, WA. NCE received a deferral of taxes under chapter 82.60 RCW for sales and use taxes on its new manufacturing site in Kennewick.
(i) Example 5. NCE employs 200 workers in Ridgefield manufacturing construction cranes. NCE employs 250 workers in Kennewick manufacturing bulldozers and other earth-moving equipment. Although NCE's facility in Ridgefield does not qualify for any tax preferences, NCE's annual survey must report a total of 450 employment positions. The annual survey includes all Washington state employment positions, which includes employment positions engaged in activities that do not qualify for tax preferences.
(ii) Example 6. On November 20th, NCE lays off 75 workers. NCE notifies 10 of the laid off workers on December 20th that they will be rehired and begin work on January 2nd. The 75 employment positions are excluded from NCE's annual survey, because a separation of employment has occurred. Although NCE intends to rehire 10 employees, those employment positions are vacant on December 31st.
(iii) Example 7. On December 31st, NCE has 100 employees on vacation leave, five employees on sick leave, two employees on military leave, one employee who is scheduled to retire as of January 1st, and three vacant employment positions. The employment positions of employees on vacation, sick leave, and military leave must be included in NCE's annual survey. The one employee scheduled to retire must be included in the annual survey because the employment position is filled on December 31st. The three vacant positions are not included in the annual survey.
(iv) Example 8. In June, NCE hires two employees from a local college to intern in its engineering department. When the academic year begins in September, one employee ends the internship. The other employee's internship continues until the following June. NCE must report one employment position on the annual survey, representing the intern employed on December 31st.
(6) When is an employment position located in Washington state? The annual survey seeks information only about Washington employment positions. An employment position is located in Washington state if:
(a) The service of the employee is performed entirely within the state;
(b) The service of the employee is performed both within and without the state, but the service performed without the state is incidental to the employee's service within the state;
(c) The service of the employee is performed both within and without the state, and the employee's base of operations is within the state;
(d) The service of the employee is performed both within and without the state, but the service is directed or controlled in this state; or
(e) The service of the employee is performed both within and without the state and the service is not directed or controlled in this state, but the employee's individual residence is in this state.
(f) The following facts apply to the examples in (f)(i) through (iv) of this subsection. Acme Computer, Inc. develops computer software and receives a deferral of taxes under chapter 82.60 RCW for sales and use taxes on an eligible investment project in a high unemployment county. Acme Computer, headquartered in California, has employees working at four locations in Washington state. Acme Computer also has offices in Oregon and Texas.
(i) Example 9. Ed is a software engineer in Acme Computer's Vancouver office. Ed occasionally works at Acme Computer's Portland, Oregon office when other software engineers are on leave. Ed's position must be included in the number of total employment positions in Washington state that Acme Computer reports on the annual survey. Ed performs services both within and without the state, but the services performed without the state are incidental to the employee services within the state.
(ii) Example 10. John is an Acme Computer salesperson. John travels throughout Washington, Oregon, and Idaho promoting sales of new Acme Computer products. John's activities are directed by his manager in Acme Computer's Spokane office. John's position must be included in the number of total employment positions in Washington state that Acme Computer reports on the annual survey. John performs services both within and without the state, but the services are directed or controlled in Washington state.
(iii) Example 11. Jane, vice president for product development, works in Acme Computer's Portland, Oregon office. Jane regularly travels to Seattle to review the progress of research and development projects conducted in Washington state. Jane's position should not be included in the number of total employment positions in Washington state that Acme Computer reports on the annual survey. Although Jane regularly performs services within Washington state, her activities are directed or controlled in Oregon.
(iv) Example 12. Roberta, a service technician, travels throughout the United States servicing Acme Computer products. Her activities are directed from Acme Computer's corporate offices in California, but she works from her home office in Tacoma. Roberta's position must be included in the number of total employment positions in Washington state that Acme Computer reports on the annual survey. Although Roberta performs services both within and without the state and the service is not directed or controlled in this state, her residence is in Washington state.
(7) What are full-time, part-time, and temporary employment positions? The survey must separately identify the number of full-time, part-time, and temporary employment positions as a percent of total employment.
(a) Full-time and part-time employment positions. A position is considered full-time or part-time if the employer intends for the position to be filled for at least 52 consecutive weeks or 12 consecutive months, excluding any leaves of absence.
(i) Full-time positions. A full-time position is a position that requires the employee to work, excluding overtime hours, 35 hours per week for 52 consecutive weeks, 455 hours a quarter for four consecutive quarters, or 1,820 hours during a period of 12 consecutive months.
(ii) Part-time positions. A part-time position is a position in which the employee may work less than the hours required for a full-time position.
(iii) Exceptions for full-time positions. In some instances, an employee may not be required to work the hours required for full-time employment because of paid rest and meal breaks, health and safety laws, disability laws, shift differentials, or collective bargaining agreements. If, in the absence of these factors, the employee would be required to work the number of hours for a full-time position to receive their current wage, the position must be reported as a full-time employment position.
(b) Temporary positions. There are two types of temporary positions.
(i) Employees of the person required to complete the survey. In the case of a temporary employee directly employed by the person required to complete the survey, a temporary position is a position intended to be filled for a period of less than 52 consecutive weeks or 12 consecutive months. For example, seasonal employment positions are temporary positions. These temporary positions must be included in the information required in subsections (5), (8), and (9) of this rule.
(ii) Workers furnished by staffing companies. A temporary position also includes a position filled by a worker furnished by a staffing company, regardless of the duration of the placement. These temporary positions must be included in the information required in subsections (5), (8), and (9) of this rule. In addition, the person filling out the annual survey must provide the following additional information:
(A) Total number of staffing company employees furnished by staffing companies;
(B) Top three occupational codes of all staffing company employees; and
(C) Average duration of all staffing company employees.
(c) The following facts apply to the examples in (c)(i) through (vi) of this subsection. Worldwide Materials, Inc. is a developer of materials used in manufacturing electronic devices. Worldwide Materials receives a deferral of taxes under chapter 82.60 RCW for sales and use taxes on an eligible investment project in a high unemployment county. Worldwide Materials has 100 employees.
(i) Example 13. On December 31st, Worldwide Materials has five employees on workers' compensation leave. At the time of the work-related injuries, the employees worked 40 hours a week and were expected to work for 52 consecutive weeks. Worldwide Materials must report these employees as being employed in a full-time position. Although the five employees are not currently working, they are on workers' compensation leave and Worldwide Materials had intended for the full-time positions to be filled for at least 52 consecutive weeks.
(ii) Example 14. In September, Worldwide Materials hires two employees on a full-time basis for a two-year project to design composite materials to be used in a new airplane model. Because the position is intended to be filled for a period exceeding 12 consecutive months, Worldwide Materials must report these positions as full-time positions.
(iii) Example 15. Worldwide Materials has two employees who clean laboratories during the evenings. The employees regularly work 5:00 p.m. to 11:00 p.m., Monday through Friday, 52 weeks a year. Because the employees work less than 35 hours a week, the employment positions are reported as part-time positions.
(iv) Example 16. On November 1st, a Worldwide Materials engineer begins 12 weeks of family and medical leave. The engineer was expected to work 40 hours a week for 52 consecutive weeks. While the engineer is on leave, Worldwide Materials hires a staffing company to furnish a worker to complete the engineer's projects. Worldwide Materials must report the engineer as a full-time position on the annual survey. Worldwide Materials must also report the worker furnished by the staffing company as a temporary employment position and include the information as required in (b) of this subsection.
(v) Example 17. Worldwide Materials allows three of its research employees to work on specific projects with a flexible schedule. These employees are not required to work a set amount of hours each week, but are expected to work 12 consecutive months. The three research employees are paid a comparable wage as other research employees who are required to work a set schedule of 40 hours a week. Although the three research employees may work fewer hours, they are receiving comparable wages as other research employees working 40 hours a week. Worldwide Materials must report these positions as full-time employment positions, because each position is equivalent to a full-time employment position.
(vi) Example 18. Worldwide Materials has a large order to fulfill and hires 10 employees for the months of June and July. Five of the employees leave at the end of July. Worldwide Materials decides to have the remaining five employees work on an on-call basis for the remainder of the year. As of December 31st, three of the employees are working for Worldwide Materials on an on-call basis. Worldwide Materials must report three temporary employment positions on the annual survey and include these positions in the information required in subsections (5), (8), and (9) of this rule.
(8) What are wages? For the purposes of the annual survey, "wages" means compensation paid to an individual for personal services, whether denominated as wages, salary, commission, or otherwise as reported on the W-2 forms of employees. Stock options granted as compensation to employees are wages to the extent they are reported on the W-2 forms of the employees and are taken as a deduction for federal income tax purposes by the employer. The compensation of a proprietor or a partner is determined in one of two ways:
(a) If there is net income for federal income tax purposes, the amount reported subject to self-employment tax is the compensation.
(b) If there is no net income for federal income tax purposes, reasonable cash withdrawals or cash advances is the compensation.
(9) What are employer-provided benefits? The annual survey requires persons to report the number of employees that have employer-provided medical, dental, and retirement benefits, by each of the wage bands. An employee has employer-provided medical, dental, and retirement benefits if the employee is currently eligible to participate or receive the benefit. A benefit is "employer-provided" if the medical, dental, and retirement benefit is dependent on the employer's establishment or administration of the benefit. A benefit that is equally available to employees and the general public is not an "employer-provided" benefit.
(a) What are medical benefits? "Medical benefits" means compensation, not paid as wages, in the form of a health plan offered by an employer to its employees. A "health plan" means any plan, fund, or program established, maintained, or funded by an employer for the purpose of providing for its employees or their beneficiaries, through the purchase of insurance or otherwise, medical and/or dental care services.
(i) Health plans include any:
(A) "Employee welfare benefit plan" as defined by the Employee Retirement Income Security Act (ERISA);
(B) "Health plan" or "health benefit plan" as defined in RCW 48.43.005;
(C) Self-funded multiple employer welfare arrangement as defined in RCW 48.125.010;
(D) "Qualified health insurance" as defined in Section 35 of the Internal Revenue Code;
(E) "Archer MSA" as defined in Section 220 of the Internal Revenue Code;
(F) "Health savings plan" as defined in Section 223 of the Internal Revenue Code;
(G) "Health plan" qualifying under Section 213 of the Internal Revenue Code;
(H) Governmental plans; and
(I) Church plans.
(ii) "Health care services" means services offered or provided by health care facilities and health care providers relating to the prevention, cure, or treatment of illness, injury, or disease.
(b) What are dental benefits? "Dental benefits" means a dental health plan offered by an employer as a benefit to its employees. "Dental health plan" has the same meaning as "health plan" in (a) of this subsection, but is for the purpose of providing for employees or their beneficiaries, through the purchase of insurance or otherwise, dental care services. "Dental care services" means services offered or provided by health care facilities and health care providers relating to the prevention, cure, or treatment of illness, injury, or disease of human teeth, alveolar process, gums, or jaw.
(c) What are retirement benefits? "Retirement benefits" means compensation, not paid as wages, in the form of a retirement plan offered by an employer to its employees. An employer contribution to the retirement plan is not required for a retirement plan to be employer-provided. A "retirement plan" means any plan, account, deposit, annuity, or benefit, other than a life insurance policy, that provides for retirement income or deferred income to employees for periods after employment is terminated. The term includes pensions, annuities, stock bonus plans, employee stock ownership plans, profit sharing plans, self-employed retirement plans, individual retirement accounts, individual retirement annuities, and retirement bonds, as well as any other plan or program, without regard to its source of funding, and without regard to whether the retirement plan is a qualified plan meeting the guidelines established in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.
(d) The following facts apply to the examples in (d)(i) through (v) of this subsection. Medical Resource, Inc. is a pharmaceutical manufacturer that receives a deferral of taxes under chapter 82.60 RCW for sales and use taxes on an eligible investment project in a high unemployment county. It employs 200 full-time employees and 50 part-time employees. Medical Resource also hires a staffing company to furnish 75 workers.
(i) Example 19. Medical Resource offers its employees two different health plans as a medical benefit. Plan A is available at no cost to full-time employees. Employees are not eligible to participate in Plan A until completing 30 days of employment. Plan B costs employees $200 each month. Full-time and part-time employees are eligible for Plan B after six months of employment. One hundred full-time employees are enrolled in Plan A. One hundred full-time and part-time employees are enrolled in Plan B. Forty full-time and part-time employees chose not to enroll in either plan. Ten part-time employees are not yet eligible for either Plan A or Plan B. Medical Resource must report 200 employees as having employer-provided medical benefits, because that is the number of employees enrolled in the health plans it offers.
(ii) Example 20. Medical Resource does not offer medical benefits to the employees of the staffing company. However, 25 of these workers have enrolled in a health plan through the staffing company. Medical Resource must report these 25 employment positions as having employer-provided medical benefits.
(iii) Example 21. Medical Resource does not offer its employees dental insurance, but has arranged with a group of dental providers to provide all employees with a 30% discount on any dental care service. Medical Resource employment is the sole requirement to receive this benefit. Unlike the medical benefit, employees are eligible for the dental benefit as of the first day of employment. This benefit is not provided to the workers furnished by the staffing company. Medical Resource must report 250 employment positions as having dental benefits, because that is the number of employees enrolled in this dental plan.
(iv) Example 22. Medical Resource offers a 401(k) Plan to its full-time and part-time employees after six months of employment. Medical Resource makes matching contributions to an employee's 401(k) Plan after two years of employment. On December 31st, 225 workers are eligible to participate in the 401(k) Plan. Two hundred workers are enrolled in the 401(k) Plan. One hundred of these workers receive matching contributions. Medical Resource must report 200 employment positions as having employer-provided retirement benefits, because that is the number of employees enrolled in the 401(k) Plan.
(v) Example 23. Medical Resource coordinates with a bank to insert information in employee paycheck envelopes on the bank's Individual Retirement Account (IRA) options offered to bank customers. Employees who open an IRA with the bank can arrange to have their contributions directly deposited from their paychecks into their accounts. Fifty employees open IRAs with the bank. Medical Resource cannot report that these 50 employees have employer-provided retirement benefits. IRAs are not an employer-provided benefit because the ability to establish the IRA is not dependent on Medical Resource's participation or sponsorship of the benefit.
(10) Is the annual survey confidential? The annual survey is subject to the confidentiality provisions of RCW 82.32.330. However, information on the amount of tax preference taken is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public, except as provided in (c) of this subsection.
(a) Failure to timely file a complete annual survey subject to disclosure. If a taxpayer fails to timely file a complete annual survey, then the amount required to be repaid as a result of the taxpayer's failure to file a complete annual survey is not confidential and may be disclosed to the public.
(b) Amount reported in annual survey is different from the amount claimed or allowed. If a taxpayer reports a tax preference amount on the annual survey that is different than the amount actually claimed on the taxpayer's tax returns or otherwise allowed by the department, then the amount actually claimed or allowed may be disclosed.
(c) Tax preference is less than $10,000. If the tax preference is less than $10,000 during the period covered by the annual survey, the taxpayer may request that the department treat the amount of the tax preference as confidential under RCW 82.32.330.
(11) What are the consequences for failing to timely file a complete annual survey?
(a) What is a "complete annual survey"? An annual survey is complete if:
(i) The annual survey is filed on the form required by this rule or in an electronic format as required by law; and
(ii) The person makes a good faith effort to substantially respond to all survey questions required by this rule.
Responses such as "varied," "various," or "please contact for information" are not considered good faith responses to a question.
(b) Amounts due for late filing. Unless the tax preference is a deferral of tax, as described in (c) of this subsection, or as otherwise provided by law, if a person claims a tax preference that requires an annual survey under this rule, but fails to submit a complete survey by the due dates described in subsection (3)(e) of this rule, or any extension under RCW 82.32.590, the following amounts are immediately due and payable:
(i) For surveys due prior to July 1, 2017, 100 percent of the amount of the tax preference claimed for the previous calendar year. Interest, but not penalties, will be assessed on the amounts due at the rate provided for under RCW 82.32.050, retroactively to the date the tax preference was claimed, and accruing until the taxes for which the tax preference was claimed are repaid.
(ii) For surveys due on or after July 1, 2017:
(A) Thirty-five percent of the amount of the tax preference claimed for the previous calendar year; and
(B) An additional 15 percent of the amount of the tax preference claimed for the previous calendar year if the person has previously been assessed under (b)(ii) of this subsection for failure to timely submit a survey for the same tax preference.
(c) Tax deferrals. If the tax preference is a deferral of tax, 12.5 percent of the deferred tax is immediately due. If the economic benefits of the deferral are passed to a lessee, the lessee is responsible for payment to the extent the lessee has received the economic benefit.
(d) Interest and penalties. The department may not assess interest or penalties on amounts due under (b)(ii) and (c) of this subsection.
(e) Extension for circumstances beyond the control of the taxpayer. If the department finds the failure of a taxpayer to file an annual survey by the due date was the result of circumstances beyond the control of the taxpayer, the department will extend the time for filing the survey. The extension will be for a period of 30 days from the date the department issues its written notification to the taxpayer that it qualifies for an extension under this rule. The department may grant additional extensions as it deems proper under RCW 82.32.590.
In determining whether the failure of a taxpayer to file an annual survey by the due date was the result of circumstances beyond the control of the taxpayer, the department will apply the provisions in WAC 458-20-228 for the waiver or cancellation of penalties when the underpayment or untimely payment of any tax was due to circumstances beyond the control of the taxpayer.
(f) One-time only extension. A taxpayer who fails to file an annual survey, as required under this rule, by the due date of the survey is entitled to an extension of the due date. A request for an extension under this subsection must be made in writing to the department.
(i) To qualify for an extension, a taxpayer must have filed all annual reports and surveys, if any, due in prior years by their respective due dates, beginning with annual reports and surveys due in the calendar year 2010.
(ii) The extension is for 90 days from the original due date of the annual survey.
(iii) No taxpayer may be granted more than one 90-day extension.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-268, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.534, 82.32.585, 82.32.590, 82.32.600, 82.32.605, 82.32.607, 82.32.710, 82.32.790, 82.32.808, 82.04.240, 82.04.2404, 82.04.260, 82.04.2909, 82.04.426, 82.04.4277, 82.04.4461, 82.04.4463, 82.04.448, 82.04.4481, 82.04.4483, 82.04.449, 82.08.805, 82.08.965, 82.08.9651, 82.08.970, 82.08.980, 82.08.986, 82.12.022, 82.12.025651, 82.12.805, 82.12.965, 82.12.9651, 82.12.970, 82.12.980, 82.16.0421, 82.29A.137, 82.60.070, 82.63.020, 82.63.045, 82.74.040, 82.74.050, 82.75.040, 82.75.070, 82.82.020, 82.82.040, 84.36.645, and 84.36.655. WSR 18-13-094, § 458-20-268, filed 6/19/18, effective 7/20/18. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-09-086, § 458-20-268, filed 4/19/17, effective 5/20/17; WSR 16-12-072, § 458-20-268, filed 5/27/16, effective 6/27/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.585, 82.32.605, 82.32.607, 82.32.808, 43.136.057, 43.136.058, 82.04.2404, 82.04.294, 82.08.025651, 82.08.956, 82.08.9651, 82.12.025651, 82.12.956, and 82.12.9651. WSR 15-04-002, § 458-20-268, filed 1/21/15, effective 2/21/15. Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.32.600 and 82.32.585. WSR 14-14-033, § 458-20-268, filed 6/24/14, effective 7/25/14. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 10-22-087, § 458-20-268, filed 11/1/10, effective 12/2/10; WSR 10-10-038, § 458-20-268, filed 4/27/10, effective 5/28/10; WSR 07-02-074, § 458-20-268, filed 12/29/06, effective 1/29/07.]


PDF458-20-269

Waiver of public disclosure of certain new tax preferences.

(1) Introduction. RCW 82.32.808(7) explains that the amount claimed by a taxpayer for any new tax preference is subject to public disclosure, with certain limitations. Under certain circumstances, the department may waive this public disclosure requirement for those new tax preferences specifically provided in chapter 13, Laws of 2013 2nd sp. sess.
(2) Definitions.
(a) "New tax preference" means a "tax preference" as defined in (b) of this subsection that initially takes effect after August 1, 2013, or a tax preference in effect as of August 1, 2013, that is expanded or extended after August 1, 2013, even if the expanding or extending amendment includes any other change to the tax preference.
(b) "Tax preference" means, with respect to any state tax administered by the department (except for the Washington estate and transfer tax in chapter 83.100 RCW and chapter 458-57 WAC), an exemption, exclusion, or deduction from the base of a state tax; a credit against a state tax; a deferral of a state tax; or a preferential state tax rate.
(3) When will the department disclose new tax preference amounts?
(a) New tax preference amounts claimed by a taxpayer that do not require a survey under RCW 82.32.585 are subject to public disclosure, upon request, 24 months after the taxpayer first claimed the new tax preference reportable under RCW 82.32.808(6). Taxpayers reporting a tax preference requiring a survey should refer to RCW 82.32.585 and WAC 458-20-268 Annual surveys for certain tax preferences, for those requirements.
(b) Any new tax preference, other than a tax preference requiring a survey under RCW 82.32.585, claimed by a taxpayer in a calendar year for which the amount of the tax reduced or saved is less than $10,000 is not subject to public disclosure.
(4) When may the department waive public disclosure of new tax preference amounts?
(a) Good cause waiver. RCW 82.32.808 (7)(b) provides that the department may waive public disclosure of new tax preference amounts for good cause. A waiver is available only for the following new tax preferences:
(i) Paymaster services business and occupation (B&O) tax deduction (RCW 82.04.43393);
(ii) Clay targets retail sales (RCW 82.08.205) and use (RCW 82.12.205) tax exemptions;
(iii) Food flavoring products retail sales (RCW 82.08.210) and use (RCW 82.12.210) tax exemptions;
(iv) Cooperative finance organizations B&O tax deduction in RCW 82.04.4276;
(v) Investment data for investment firms retail sales (RCW 82.08.207) and use (RCW 82.12.207) tax exemptions;
(vi) Large private airplane retail sales (RCW 82.08.215) and use (RCW 82.12.215) tax exemptions;
(vii) Blood banks B&O tax exemption (RCW 82.04.324); and
(viii) Mint growers retail sales (RCW 82.08.220) and use (RCW 82.12.220) tax exemptions.
(b) What is good cause? Good cause is demonstrated by a reasonable showing of economic harm to a taxpayer if public disclosure of the new tax preference amount were to occur. To make a reasonable showing of economic harm, the taxpayer must provide facts that demonstrate that economic harm is likely to occur, and not merely speculative or theoretical. Economic harm may include, but is not limited to, a quantifiable financial loss such as decreased income, lost profits, and diminished business value. It may also include a reduction in a business's goodwill or an unfair competitive advantage to the taxpayer's competitors if the tax preference information is released.
(5) What is the process for applying for the waiver?
(a) Taxpayers do not need to request a waiver for a new tax preference for any calendar year for which the amount of tax reduced or saved for that new tax preference is less than $10,000. Such amounts are not subject to public disclosure as described in subsection (3)(b) of this rule.
(b) Taxpayers eligible to claim a waiver of disclosure under subsection (4) of this rule may apply to the department at any time, but should note that any reported new tax preference amount is no longer confidential 24 months after the tax preference is first claimed as described in subsection (3)(a) of this rule.
(c) To apply for the waiver, the taxpayer must provide the department with a completed waiver request form and include a detailed explanation describing how disclosure of the new tax preference information will cause economic harm. The required waiver request form can be found on the department's website at dor.wa.gov.
(d) Taxpayers who have their waiver requests approved prior to the date of disclosure, as described in subsection (3)(a) of this rule, will not have their new tax preference amount subject to public disclosure.
(e) An approval by the department to waive public disclosure of new tax preference information will remain in effect indefinitely unless the department has reason to believe that good cause no longer exists. If this occurs, the department will contact the taxpayer for additional information prior to any public disclosure of new tax preference information.
(6) Denial of good cause waiver request.
(a) Taxpayers who have their waiver requests denied may submit additional documentation to the department to support their eligibility for the waiver within 30 days of the postmark date of the department's determination. Upon receiving the additional information from the taxpayer, the department will conduct a second review and notify the taxpayer whether good cause exists. If additional documentation is not submitted, then the initial determination is considered the final determination.
(b) A final determination by the department to deny a waiver request is considered a final agency action for purposes of review under RCW 34.05.570(4) and may be appealed to superior court as provided in RCW 34.05.514.
[Statutory Authority: RCW 82.32.085. WSR 24-01-097, § 458-20-269, filed 12/18/23, effective 1/18/24. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 17-09-068, § 458-20-269, filed 4/18/17, effective 5/19/17.]


PDF458-20-270

Telephone program excise tax rates.

RCW 82.72.020 requires the department of revenue (department) to collect certain telephone program excise taxes. Those taxes include the tax on switched access lines imposed by RCW 43.20A.725 (telephone relay service—TRS) and 80.36.430 (Washington telephone assistance program—WTAP). Pursuant to those statutes, the department must annually determine the rate of each respective tax according to the statutory formulas.
Effective August 1, 2013, Second Engrossed Second Substitute House Bill No. 1971 (chapter 8, Laws of 2013 2nd sp.s.) repeals the TRS and WTAP taxes. Telephone service providers will no longer collect these taxes as of the effective date.
The monthly telephone program excise tax rates per switched access line are as follows:
Period
TRS Rate
WTAP Rate
7/1/2009 - 6/30/2010
11 cents
13 cents
7/1/2010 - 6/30/2011
19 cents
14 cents
7/1/2011 - 6/30/2012
19 cents
14 cents
7/1/2012 - 6/30/2013
17 cents
14 cents
7/1/2013 - 7/31/2013
17 cents
14 cents
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 43.20A.725, and 80.36.430. WSR 13-15-074, § 458-20-270, filed 7/16/13, effective 8/16/13; WSR 12-14-039, § 458-20-270, filed 6/27/12, effective 7/28/12; WSR 11-13-110, § 458-20-270, filed 6/21/11, effective 7/22/11; WSR 10-14-032, § 458-20-270, filed 6/28/10, effective 7/29/10; WSR 09-14-037, § 458-20-270, filed 6/24/09, effective 7/25/09; WSR 08-16-054, § 458-20-270, filed 7/30/08, effective 8/30/08; WSR 07-17-110, § 458-20-270, filed 8/17/07, effective 9/17/07; WSR 06-16-137, § 458-20-270, filed 8/2/06, effective 9/2/06; WSR 05-18-017, § 458-20-270, filed 8/26/05, effective 9/26/05.]


PDF458-20-272

Tire fee—Studded tire fee—Core deposits or credits.

(1) Introduction. This rule describes the tire fee imposed under RCW 70A.205.405 and the studded tire fee imposed under RCW 46.37.427. This rule also describes how business and occupation (B&O), sales, and use taxes apply to tire fees, battery core charges and core deposits or credits, including the exemptions described in RCW 82.08.036 and 82.12.038.
(a) Other rules that may be relevant. Readers may want to refer to other rules for additional information, including those in the following list:
(i) WAC 458-20-228 Returns, payments, penalties, extensions, interest, stays of collection.
(ii) WAC 458-20-278 Returned goods, defective goods—Motor vehicle lemon law.
(b) Examples. This rule contains examples that identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.
(2) Tire fee.
(a) What is the tire fee? The tire fee as described in RCW 70A.205.405 is a one-dollar fee collected by the seller from the buyer on every retail sale of each new replacement vehicle tire. If new tires are leased, the fee must be collected once at the beginning of the lease.
(b) How do I report the tire fee? A seller must report on the excise tax return the number of new replacement vehicle tires sold. Tire sellers may retain 10 percent of the fee and must remit the remainder to the department of revenue (department). As a result, the amount that must be reported and paid to the department is the number of new replacement vehicle tires sold during the tax reporting period multiplied by 90 cents.
(c) What if the seller fails to collect the fee or does not pay the fee on time? The seller is personally liable for payment of the fee, whether or not the fee is collected from the buyer. Any seller who appropriates or converts the fee collected to their own use or to any use other than the payment of the fee by the due date, minus the 10 percent retained, is guilty of a gross misdemeanor. Interest and penalties apply to late payments.
(d) What happens if a buyer fails to pay the fee? The tire fee, until paid by the buyer to the seller or the department, is considered a debt from the buyer to the seller. Any buyer who refuses to pay the fee is guilty of a misdemeanor.
(e) Is sales tax imposed on the tire fee? No. The measure of the sales tax does not include the tire fee. See RCW 82.08.036.
(f) Is the 10 percent amount retained by the seller subject to B&O tax? Yes. The seller must report the retained amount as gross income under the service and other activities tax classification on the excise tax return.
(g) What tires are subject to the tire fee? All new replacement vehicle tires are subject to the tire fee. Refer to RCW 70A.205.015 for the definition of "vehicle."
(i) Examples of vehicles for which new replacement tires are subject to the fee include:
(A) Automobiles;
(B) Trucks;
(C) Recreational vehicles;
(D) Trailers;
(E) All-terrain vehicles (ATVs);
(F) Agricultural vehicles, such as tractors or combines;
(G) Industrial vehicles, such as forklifts;
(H) Construction vehicles, such as loaders or graders; and
(I) Golf carts.
(ii) Bicycles, wheelbarrows, and hand trucks are examples of devices to which the new replacement tire fee does not apply.
(iii) The tire fee does not apply to the sale of retreaded vehicle tires. Nor does it apply to tires provided free of charge under the terms of a recall or warranty.
(h) May I refund the fee if a tire is returned? If a customer returns the purchased new tire and the entire selling price is refunded to the customer, the one-dollar tire fee is likewise refundable. The refunded amount may be claimed on the excise tax return in the same manner as refunded sales tax. If the seller does not refund the full sales price to the customer, the one-dollar fee is not refundable.
(i) Does the tire fee apply on sales to the federal government or Indians and Indian tribes? The tire fee is not imposed on sales to the federal government and need not be collected by the seller. The tire fee does not apply to sales of tires delivered to enrolled members or tribes in "Indian country." For information on sales to the federal government, see WAC 458-20-190 Sales to and by the United States and certain entities created by the United States—Doing business on federal reservations—Sales to foreign governments, and for sales to Indians and Indian tribes, see WAC 458-20-192 Indians—Indian country.
(j) If the sale is exempt from sales tax, is the tire fee due? Statutory exemptions from sales tax do not apply to the tire fee. The tire fee is due on every retail sale of a new replacement tire whether or not sales tax is due.
(3) Studded tire fee.
(a) What is the studded tire fee? The studded tire fee as described in RCW 46.37.427 is a five dollar fee imposed on the retail sale of each new tire sold that contains studs. The seller will collect the fee from the buyer. For the purpose of this subsection, "new tire sold that contains studs" means a tire that is manufactured for vehicle purposes and contains metal studs, and does not include bicycle tires or retreaded vehicle tires.
(b) Who remits the studded tire fee to the department? The seller collects the five dollar fee from the buyer and holds it in trust until paid to the department; however, the seller may retain 10 percent of the fee collected.
(c) What if the seller fails to collect the fee or does not pay the fee on time? Interest and penalties, as described in subsection (2)(c) of this rule also apply to the studded tire fee.
(d) What happens if a buyer fails to pay the fee? As with the tire fee, a buyer who refuses to pay the fee is guilty of a misdemeanor. See subsection (2)(d) of this rule.
(e) Is sales tax imposed on the tire fee? No. The seller is collecting the fee as an agent for the state and thus the measure of sales tax does not include the studded tire fee. For additional information on taxpayers acting as collecting agents, see WAC 458-20-195 Taxes, deductibility.
(f) Is the 10 percent amount retained by the seller subject to B&O tax? Yes. As with the tire fee, the seller must report the retained amount as gross income under the service and other activities tax classification on the excise tax return.
(g) Is the studded tire fee refundable if the tire is returned? If a new studded tire is returned, the studded tire fee is handled the same as the tire fee as described in subsection (2)(h) of this rule.
(h) Does the studded tire fee apply to tires sold to the federal government or Indians and Indian tribes? With respect to these sales, the studded tire fee is handled the same as the tire fee described in subsection (2)(i) of this rule.
(i) If the sale is exempt from sales tax, is the studded tire fee due? As with the tire fee described in subsection (2)(j) of this rule, statutory exemptions from sales tax do not apply to the studded tire fee.
(4) Core deposits or credits - Battery core charges.
(a) Definitions. For purposes of this rule, the following definitions apply:
(i) Core deposits or credits. "Core deposits or credits" means the amount representing the value of returnable products such as batteries, starters, brakes, and other products with returnable value added for purposes of recycling or remanufacturing.
(ii) Battery core charge. "Battery core charge" refers to a core deposit, not less than five dollars, that a seller by law must retain when a retail purchaser has no used battery to exchange or trade in. A buyer may return within 30 days of the purchase with a used battery of equivalent size and claim the core charge amount. See RCW 70A.205.515 and 70A.205.520.
(b) How is tax calculated when the buyer receives a core deposit or credit? Retail sales and use taxes do not apply to consideration received in the form of core deposits or credits when a purchaser exchanges or trades in a core for recycling or remanufacturing. Therefore, the measure of the sales or use tax may be reduced by the amount of the core deposit or credit. See RCW 82.08.036 and 82.12.038. The core deposit and credit exemptions apply only to the retail sales and use taxes. There is no equivalent exemption or deduction for B&O tax purposes. Therefore, the amount reported under the appropriate B&O tax classification must include the value of core deposits or credits.
(c) Examples.
(i) Example 1. A customer purchases at retail a new replacement battery and reconditioned starter, providing the seller with a battery core and a starter core in exchange. The selling price of the new battery, including the battery core charge, is $60.00. The customer is allowed a $5.00 credit because a battery core is exchanged, meaning the cost of the battery to the customer, excluding sales tax, is $55.00. The selling price of the starter is $50.00. The seller allows a $3.00 credit for the starter core, meaning the cost to the customer, excluding sales tax, is $47.00. Retailing B&O tax is due upon the total value of cash plus core value, in this case $110.00, or $60.00 plus $50.00. However, the $8.00 of core deposits or credits may be deducted from the measure of the retail sales tax under RCW 82.08.036. Thus, retail sales tax is due on $102.00, or $55.00 plus $47.00.
(ii) Example 2. The seller in Example 1 delivers the starter and battery cores accepted in the exchange to wholesalers. A starter wholesaler issues a refund and a battery wholesaler issues a credit memorandum to be applied against future wholesale battery purchases. The return of the used products by the auto parts store for recycling or remanufacturing and subsequent receipt of a refund or credit for the core deposit or credit is not considered taxable consideration for purposes of the B&O tax.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 23-23-124, § 458-20-272, filed 11/16/23, effective 12/17/23; WSR 20-22-093, § 458-20-272, filed 11/3/20, effective 12/4/20. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-07-047, § 458-20-272, filed 3/14/16, effective 4/14/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), 70.95.630, and 70.95.640. WSR 09-19-136, § 458-20-272, filed 9/22/09, effective 10/23/09. Statutory Authority: RCW 82.32.330, 82.01.060(2), and 34.05.230. WSR 06-12-017, § 458-20-272, filed 5/26/06, effective 6/26/06.]


PDF458-20-274

Staffing services.

(1) Introduction. This section explains the application of business and occupation (B&O) tax, public utility tax (PUT); and the retail sales tax collection responsibilities of staffing businesses providing staffing services.
(2) To whom does this section apply? This section applies to any person engaged in the business activity of providing staffing services. This section does not apply to persons providing professional employer services. Persons providing professional employer services should refer to RCW 82.04.540 for information on their tax-reporting responsibilities.
(3) What is the definition of a staffing business and staffing services? A "staffing business" is a person engaged in the business activity of providing staffing services. "Staffing services" means services consisting of a person:
• Recruiting and hiring its own employees;
• Finding other organizations that need the services of those employees;
• Assigning those employees on a temporary basis to perform work at or services for the other organizations to support or supplement the other organizations' work forces, or to provide assistance in special work situations such as, but not limited to, employee absences, skill shortages, seasonal workloads, or to perform special assignments or projects, all under the direction and supervision of the customer; and
• Customarily attempting to reassign the employees to other organizations when they finish each assignment.
(4) Generally, what kinds of business activities are workers assigned by a staffing business? Business activities may include, but are not limited to, services rendered with respect to:
• Construction (both custom and speculative);
• Customer software design and implementation;
• Manufacturing and light industrial activities;
• Professional services including medical and clerical; and
• Other skilled and unskilled labor.
(5) Is the gross income received by a staffing business subject to Washington tax? Yes, the gross income received by a staffing business is subject to B&O and/or PUT tax.
(6) Is the tax paid by a staffing business or is the tax collected from the client to whom the workers are assigned?
• B&O tax and/or PUT are paid by the staffing business.
• When the activity of the assigned worker is a retail sale, retail sales tax must be collected from the client unless a specific exemption or exclusion, such as the activity being a sale for resale, applies. The collected tax is paid by the staffing business to the department.
(7) May a staffing business deduct payroll and other business expenses from gross income?
• Chapters 82.04 and 82.16 RCW provide limited deductions from the B&O tax and PUT.
• The requirements of each specific deduction or exemption must be met to qualify for the deduction or exemption.
• Generally, amounts paid to the worker, amounts deducted for payroll taxes, or any other expenses paid or accrued may not be deducted by a staffing business.
• But income received for work performed outside the state may be deducted from gross income for B&O tax purposes. Similarly, an interstate haul is deducted from the PUT.
• Bad debts on which tax has been paid and which may be written off for federal tax purposes may be deducted from the gross income of both B&O and PUT.
• Exemptions, deductions and special tax rates that may apply to the client do not automatically also apply to the staffing business.
• Example 1.
– Under the Revenue Act, certain nonprofit hospitals may qualify for a B&O tax deduction for income received through medicare.
– Also, nonprofit and public hospitals are taxable under a special B&O tax classification.
– However, because the staffing business does not meet the criteria for the B&O tax deduction for income received through medicare or, for the B&O tax special nonprofit hospital classification, the income received by a staffing business from assigning physicians, nurses, or other health care workers to the hospital is taxable under the service and other activities classification.
• Example 2.
– Similarly, the Revenue Act exempts from B&O tax income received by licensed adult family homes.
– However, the gross income received by a staffing business from assigning a health care worker to the adult family home is taxable under the service and other activities B&O tax classification.
(8) What if an activity is not subject to sales tax because it is a sale for resale?
• When a service that would otherwise be a retail sale is performed for a person that resells that service, such as construction work performed for a general contractor, sales tax is not collected when the staffing business receives a completed resale certificate (WAC 458-20-102A) for sales made before January 1, 2010, or a reseller permit (WAC 458-20-102) for sales made on or after January 1, 2010, from the client reselling the service. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
• When a resale certificate for sales made before January 1, 2010, or a seller permit for sales made on or after January 1, 2010, is received, the staffing business must report such charges for the worker under the wholesaling B&O tax classification.
(9) What is the tax rate?
• The B&O tax rate and/or the PUT rate is determined by the classification of the activity engaged in by the assigned worker.
• The retail sales tax rate is determined, generally, by the location of where the retail sale is performed. See WAC 458-20-145.
(10) If the B&O tax rate is determined by the B&O tax classification, who determines or identifies the correct classification?
• It is the responsibility of the staffing business to determine or identify the applicable B&O tax classification for the activity performed by the assigned worker.
• This determination should be made prior to dispatching the worker to the customer.
• It is important for the staffing business to know whether retail sales tax should be collected from the customer, or if a resale certificate, reseller permit, exemption certificate, or other documentation should be received from the customer as evidence of a sales tax exemption.
(11) Is the proper B&O tax classification as reported by the staffing business always the same classification as reported by the client customer to whom the worker is assigned?
• Regardless of the nature of the customer's business, the staffing business looks to the activity engaged in by the worker assigned.
• The staffing business should not assume that the income it receives through the activities of its workers is taxable under the same classification that the customer reports.
• It is the activity of each worker, not the reporting classification of the customer that determines the tax classification.
• Example:
– A person operating an insurance agency is taxable under the insurance agents B&O tax classification.
– If the staffing business assigns a receptionist for the insurance agency, the gross income received for the receptionist's services is subject to B&O tax under the service and other activities classification. The service classification applies because the receptionist is not providing services under the authority of an insurance agent's license.
– However, if the staffing business assigns a worker licensed as an insurance agent to an insurance agency, and the licensed insurance agent performs services under the authority of his/her license, the related income is taxable under the insurance agents B&O tax classification.
(12) What are the major B&O tax classifications? The major B&O tax classifications include:
• Retailing.
• Wholesaling.
• Manufacturing.
• Processing for hire.
• Service and other activities.
• Stevedoring.
• Travel agent activities.
(13) Where can I get a description of the activities included in the major B&O tax classification? Where can I get a complete list of the B&O tax classifications and more information?
• The department's Staffing Industry Guide provides detailed information on the staffing industry and includes a description of the activities included in the major B&O tax classifications. The Staffing Industry Guide is located on the department's website http://dor.wa.gov/
• A complete list of the B&O tax classifications and more information about the B&O and PUT can be found on the department's website http://dor.wa.gov/
(14) What is the public utility tax (PUT)?What are the major classifications of PUT?
• The public utility tax is a tax on gross receipts, similar to the B&O tax.
• It applies to most utility services, such as water, power, and gas distribution, and sewerage collection.
• It also applies to providing transportation of persons or property for hire within five miles of the city limits (urban transportation classification) and beyond (motor transportation classification).
– These classifications apply whether or not the person performing the work owns the vehicle with which the activity is being performed.
– Examples include taxi cab service, limousine service, and hauling goods belonging to others (hauling for hire).
(15) How is income reported when the assigned worker is engaging in more than one activity?
• An assigned worker provided by a staffing business to a client may engage in several different activities while on the same job.
• The different activities may be taxable under separate B&O tax and/or PUT classifications.
• If the staffing business separates the amounts it charges the client by activities, the separated charges are reported.
• If the staffing business does not separate its charge to the client the charge is reported under the classification of the predominant activity.
• "Predominant activity" for two worker activities is when more than fifty percent of the worker's time is spent working in one tax classified activity.
• "Predominant activity" for more than two worker activities is the activity the worker spends the greatest amount of time doing.
• When two or more workers, engaged in different activities, are assigned to one client, the charge for each worker is reported based on the predominant activity of each individual worker.
• Example 1:
– A staffing business assigns a housekeeper whose primary job is to clean an apartment (subject to the service and other activities B&O tax classification).
– The job also calls for the housekeeper to prepare one meal per day (subject to retailing B&O tax and retail sales tax).
– The majority (over half) of the time spent is associated with the housekeeping service (apartment cleaning - subject to the service and other activities B&O tax classification).
– No segregated charge is made for the preparation of the meal.
– In this case, the predominant activity is cleaning the apartment.
– Therefore, the gross income received by staffing business from the charge to the client is reportable under the service and other activities B&O tax classification. Retail sales tax will not apply.
• Example 2:
– A staffing business assigns a construction worker to a client that is a developer/property owner performing construction-related services (subject to retailing B&O tax and retail sales tax).
– The assigned worker has a commercial driver's license and is only occasionally required to drive the client's truck within the city to pick up a load of gravel (an activity subject to the urban transportation PUT classification).
– The worker also spends about one hour per day helping in the office.
– The predominant activity is the retailing activity of performing construction work because the greatest amount of time is spent performing retailing construction work.
– The staffing business has not segregated charge for the other lesser activities.
– In this case, the staffing business reports the gross amount charged to the client under the retailing B&O tax classification. Additionally, the staffing business must also collect from the client retail sales tax measured by the gross charge to the client.
• Example 3:
– Same facts as Example 2, except the staffing business also provides a receptionist to the client (developer/property owner).
– As demonstrated in Example 2, the staffing business is subject to the retailing B&O tax on the gross amount charged to the client for work done by the construction worker; and retail sales tax must be collected on this charge.
– However, the staffing business is subject to service and other activities B&O tax on the gross amount charged to the client for the receptionist's work. The service and other activities B&O tax classification is the proper classification notwithstanding the client reports under the retailing classification.
(16) Is the staffing business required to keep documentation of the activities their assigned workers performed?
• The staffing business must keep documentation showing what services their assigned workers performed.
• All available information should be recorded concurrently with the assignment of the worker and the charge for the service.
• It is important that the client's labor and skill requirements are detailed up front as much as possible prior to dispatch.
• This is particularly important for purposes of billing retail sales tax.
• Documentation may be in the form of a copy of a client order or other documented request by a client for a worker.
• The documentation must state the specific work to be performed, and/or the worker skills requested by the client.
• If the client's request comes in by telephone, the staffing business should ask exactly what type of services are required and write them down on an order form, or as a memo to the client's file.
• Also, the worker can provide a written explanation of the services actually performed.
• Documentation to support the B&O tax classification must be sufficiently detailed to support the classification reported.
• The classification of primary interest to the client is retailing. Only under retailing is the staffing company, as seller of the service, required to collect retail sales tax from the client.
• Any other classification which does not directly impact the client may be of less interest to the client. Nevertheless, because the rates may vary between classifications, it is in the person providing staffing service's best interest to gather enough information to classify all services correctly.
• If, subsequent to filing a return, it is later determined that income has been incorrectly classified, amended returns should be submitted to the department to make the appropriate adjustment.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), chapters 82.04, 82.08, 82.12 and 82.32 RCW. WSR 10-06-070, § 458-20-274, filed 2/25/10, effective 3/28/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 07-17-132, § 458-20-274, filed 8/20/07, effective 9/20/07.]


PDF458-20-277

Certified service provider—Compensation.

(1) Introduction.
(a) Washington has entered into the streamlined sales and use tax agreement (SSUTA) pursuant to RCW 82.58.030. Washington became an associate member state on July 1, 2007, and was granted full membership status as of July 1, 2008.
(b) This rule explains the monetary allowances for certified service providers (CSPs) with respect to CSP-compensated sellers (also referred to as "model 1 sellers"). See RCW 82.32.020, 82.32.715, and 82.58.080. The rule also lists rights and responsibilities applicable to these CSPs when collecting and remitting retail sales and use taxes in Washington.
(c) This rule is effective for periods beginning January 1, 2021, and is guided by the terms specified in the CSP contract approved by the streamlined sales tax governing board as of August 31, 2020, to be effective January 1, 2021, (CSP contract). The CSP contract is the agreement executed between each CSP and the streamlined sales tax governing board under which CSPs perform services in SSUTA associate and member states. To the extent there is a conflict between RCW 82.32.715 and the CSP contract, RCW 82.32.715 controls.
(d) For periods prior to January 1, 2021, refer to terms of the applicable CSP contract in effect for such prior period.
(e) For more information concerning SSUTA visit the SSUTA website located at: http://www.streamlinedsalestax.org. The SSUTA website may include a list of the current member and associate states, information concerning the CSP contract, CSP certification, and a list of current CSPs, and other information referenced in this rule. The SSUTA website is not maintained by Washington or the department of revenue (department) and may contain recommendations or provisions that require a change to Washington law prior to becoming effective in Washington.
(2) Definitions.
(a) What is a CSP for purposes of this rule? A CSP is an agent of the CSP-compensated seller certified under the SSUTA to perform a seller's retail sales and use tax functions, other than the seller's obligation to remit retail sales and use tax on its own purchases. The sales and use tax functions contemplated are those services necessary to:
(i) Set up and integrate a CSP's certified automated system with a seller's system, including a product mapping process;
(ii) Calculate the amount of tax due on a transaction at the time of sale, including determining the jurisdiction to which each of a seller's transactions is sourced, determining whether the transaction is subject to tax, and determining the amount of state and local sales or use tax due on the transaction;
(iii) Generate and file the required sales and use tax returns, including compiling and maintaining the required data, preparing the simplified electronic return (SER), filing the required SER, and remitting tax funds;
(iv) Respond to and provide supporting documentation with respect to notices and sales tax and use tax audits;
(v) Protect the privacy of tax information it obtains; and
(vi) Maintain compliance with the streamlined organization's minimum standards for certification.
(b) What is a CSP-compensated seller? A CSP-compensated seller is a seller that has selected a CSP, as agent, to perform that seller's retail sales and use tax functions as described in subsection (2)(a) of this rule, who has registered through the streamlined sales tax registration system (SSTRS), and meets all of the criteria to qualify as a CSP-compensated seller under the terms of Section D.2(b) of the CSP contract.
(c) What are member states and associate member states? Member states are those states that have petitioned and been granted full membership under the SSUTA. Associate member states are those states that have petitioned and been designated associate member status under the SSUTA.
(d) What are monetary allowances? As a condition of becoming an associate member and member state, Washington has agreed to permit CSPs to act as agents for sellers in collecting and remitting sales and use taxes in Washington. Washington has agreed to provide monetary allowances to CSPs acting as agents for CSP-compensated sellers. A CSP will obtain these monetary allowances by retaining a portion of the Washington retail sales and use taxes covered by the SSUTA that they collect. However, monetary allowances will not reduce the retail sales and use taxes collected for and remitted to local taxing jurisdictions. The calculation of these monetary allowances is discussed in subsection (3) of this rule.
(e) What is a certified automated system (CAS)? A certified automated system is software certified by Washington under the SSUTA: To calculate the sales and use tax imposed by each taxing jurisdiction on a transaction; to determine the amount of tax to remit; and to maintain a record of the transaction.
(3) How are monetary allowances calculated? The formula for determining monetary allowances in this rule is guided by the compensation formula set out in Section D.5 of the CSP contract. This monetary allowance is the CSP's sole form of compensation with respect to CSP-compensated sellers. The formula is the same with respect to all CSPs.
The monetary allowance is calculated as a percentage of the taxes that are covered by the SSUTA due to Washington:
(a) CSP-compensated sellers with gross sales in preceding calendar year less than or equal to $100,000. For CSP-compensated sellers with gross sales in Washington less than or equal to $100,000 in the preceding calendar year, the allowance equals six percent of the first $8,000 of taxes due in Washington in the calendar year. Thereafter, the allowance is five percent of taxes due in Washington that exceed $8,000 but do not exceed $500,000 in the calendar year, and two percent of the taxes due in Washington in excess of the first $500,000 in the current calendar year.
(b) CSP-compensated sellers with gross sales in the preceding calendar year exceeding $100,000. For CSP-compensated sellers who had gross sales in Washington exceeding $100,000 in the preceding calendar year, the allowance equals five percent of the first $500,000 of taxes due in Washington and two percent of the taxes due in Washington in excess of the first $500,000 in the current calendar year.
(4) Change in status of CSP-compensated sellers.
(a) Can CSP-compensated sellers lose CSP-compensated seller status? CSP-compensated seller status ceases when, as a result of activities the seller conducts in Washington, the seller fails to meet one or more of the criteria required for qualification as a CSP-compensated seller identified in subsection (2) of this rule.
(b) Seller statements. Each CSP-compensated seller must periodically send written statements or written representations (statement) to the CSP verifying that the seller continues to qualify as a CSP-compensated seller in Washington. The CSP-compensated seller must send the first statement twenty-four consecutive months from the date on which the CSP began remitting sales and use taxes for the CSP-compensated seller in Washington. Subsequently, CSP-compensated sellers will send a statement every year. A CSP may request a statement verifying a seller's CSP-compensated seller status at any time. If the statement indicates a seller is no longer a CSP-compensated seller, the CSP must provide notice of the change in status. The change in status is then effective on the first day of the month following the calendar month the statement was obtained. A CSP-compensated seller's failure to respond to CSP may result in that person losing its status as a CSP-compensated seller.
(c) When will monetary allowances terminate? Generally, a CSP is entitled to retain monetary allowances granted prior to receiving a statement indicating that the seller has lost CSP-compensated seller status. However, entitlement to monetary allowances will end on the first day of the month following notice of change in status. Regardless, a CSP will be entitled to monetary allowances for services performed under this rule with respect to a CSP-compensated seller for a period of twenty-four months (beginning on the date the CSP commenced remitting sales and use taxes for the CSP-compensated seller in Washington and ending twenty-four consecutive months later). If a CSP fails to obtain a statement and the seller is determined not to be a CSP-compensated seller, the CSP will forfeit compensation and such compensation will be forfeited to the later of the due date of the missing statement or the date the seller lost its status as a CSP-compensated seller. Additionally, Washington may also challenge the status of a CSP-compensated seller if the state believes it does not meet the requirements for a CSP-compensated seller.
(5) CSP rights and responsibilities.
(a) Responsibility for retail sales and use taxes. A CSP is liable to the member states and associate member states for the retail sales and use taxes on the sales transactions that it processes.
If the CSP does not remit the collected retail sales and use taxes when due, those taxes are delinquent. Washington may send a notice of delinquency to a CSP for these delinquent taxes. The CSP must then remit the delinquent taxes within ten business days of that notification. If the CSP does not remit the delinquent taxes within those ten business days, the CSP is not entitled to monetary allowances with respect to the delinquent taxes and is liable for the payment of the taxes along with penalties and interest. However, if the taxes are delinquent because a seller has not remitted part or all of the delinquent taxes to the CSP, the CSP will be given relief if it properly notifies the department and timely files the required return. In order to obtain this relief, the CSP must notify the department of the seller's failure to remit the retail sales and use taxes to the CSP and file the required return within ten business days of the date on which those delinquent taxes should have been remitted to the department. If the CSP has timely filed the return without payment and provided the notice required under the CSP contract, and the seller subsequently remits the taxes due to the CSP within sixty days of the due date of the remittance, the CSP will still be entitled to the monetary allowance provided in the CSP contract for those taxes, provided the CSP remits the taxes due to Washington within ten business days after receiving the taxes due from the seller. Notice by the CSP under this subsection must be provided consistent with the notice provisions contained in the CSP contract.
(b) CSP liability relief. The department is responsible for maintaining the state's taxability matrix.
(i) A CSP is not liable for charging or collecting the incorrect amount of sales or use tax where that error results from reliance on incorrect data provided in the department's taxability matrix, or from tax rates, boundaries, and taxing jurisdiction assignments listed in Washington's rates and boundaries databases.
(ii) Beginning July 1, 2015, if the taxability matrix is amended, sellers and certified service providers are relieved from liability to the state and to local jurisdictions to the extent that the seller or certified service provider relied on the immediately preceding version of the state's taxability matrix. Relief under this subsection (5)(b) of this rule is available until the first day of the calendar month that is at least thirty days after the department submits notice of a change to the state's taxability matrix to the streamlined sales tax governing board.
(iii) To obtain a copy of the taxability matrix, visit the SSUTA website located at: streamlinedsalestax.org. Additionally, CSPs will be held harmless and not liable for sales and use taxes, interest, and penalties on those taxes not collected due to reliance on Washington's certification of the CSP's CAS. Pursuant to RCW 82.58.080, sellers that contract with a CSP are not liable to Washington for sales or use tax due on transactions processed by the certified service provider unless the seller misrepresents the type of items it sells or commits fraud.
(c) Seller's contract with the CSP. A CSP must provide the department with a copy of its agreement with contracting sellers if requested.
(d) Credits or refunds with respect to bad debt. A CSP may, on the behalf of a seller, claim credits or refunds for sales taxes paid on bad debts. Bad debts have the same meaning provided in 26 U.S.C. Section 166, as amended in 2003. Bad debts do not include expenses incurred in collecting bad debts; repossessed property; and amounts due on property in the possession of the seller until the full purchase price has been paid. See RCW 82.08.037, 82.12.037, and WAC 458-20-196 for more information regarding bad debts.
(e) Retention of personally identifiable consumer information. With limited exceptions, CSPs must perform their services without retaining personally identifiable consumer information. A CSP may retain personally identifiable consumer information only as long as it is needed to ensure the validity of tax exemptions or to show the intended use of the goods or services purchased. See RCW 82.32.735 for more information regarding personally identifiable consumer information.
(f) Filing of tax returns and remittance of retail sales and use taxes. CSP will file retail sales and use excise tax returns using Washington's electronic filing system (E-file). CSPs will remit retail sales and use taxes due with respect to these returns using ACH Debit, ACH Credit, or the Fedwire Funds Transfer System.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.32.715. WSR 21-14-015, § 458-20-277, filed 6/25/21, effective 7/26/21. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-040, § 458-20-277, filed 2/24/16, effective 3/26/16. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.32.715. WSR 08-01-017, § 458-20-277, filed 12/7/07, effective 1/7/08.]


PDF458-20-27701

Model 2 volunteer sellers—Compensation.

(1) Introduction. As a requirement of membership in the Streamlined Sales and Use Tax Agreement (SSUTA), Washington has agreed to provide compensation to model 2 volunteer sellers collecting and remitting retail sales and use taxes in Washington. For more information concerning the SSUTA, visit streamlinedsalestax.org. This rule explains who qualifies as a model 2 volunteer seller and the compensation available to such sellers as authorized under RCW 82.32.715.
The website referenced in this rule is not maintained by Washington or the department of revenue (department). This referenced website may contain recommendations that require a change to Washington law before becoming effective in Washington. The website is current as of the date of adoption of this rule, but may change in future periods by action of the owner of the website without notice.
(2) Model 2 volunteer sellers. This subsection discusses the qualifications for status as a model 2 seller and a model 2 volunteer seller. Only those model 2 sellers qualifying as model 2 volunteer sellers are eligible to receive compensation for remitting sales and use taxes to Washington under subsection (3) of this rule. A taxpayer that qualifies as a model 2 volunteer seller under this subsection will be referred to as a "qualified seller."
(a) What is a model 2 seller? You will qualify as a model 2 seller if you meet all of the following conditions:
(i) You use a certified automated system to perform part of your sales and use tax functions. (See (f) of this subsection for a definition of certified automated system); and
(ii) You retain the responsibility for remitting your sales and use taxes to Washington.
(b) What is a model 2 volunteer seller? If you are a model 2 seller under (a) of this subsection, you will be a model 2 volunteer seller if you are registered through the SSUTA central registration system (CRS) as a model 2 seller and you meet the following additional conditions:
(i) You have represented that you do not have a legal requirement to register and do not in fact have a legal requirement to register in Washington at the time you register with the CRS, regardless of any previous registration you may have made in Washington; or
(ii) You register with Washington through the CRS after November 12, 2002, and you meet all of the following requirements immediately before the date of your registration with Washington through the CRS (and you do not cease to meet these requirements thereafter pursuant to subsection (3)(d) of this rule):
(A) You have no fixed place of business in Washington for more than thirty days;
(B) You have less than fifty thousand dollars of property in Washington;
(C) You have less than fifty thousand dollars of payroll in Washington; and
(D) You have less than twenty-five percent of your total property or payroll in Washington.
If you have registered in Washington because you had a legal requirement to register resulting from an administrative, legislative, or judicial action before October 1, 2005, you cannot be a model 2 volunteer seller under this subsection.
(c) If I am a qualified seller, do I still need to register with the department for Washington state tax purposes under RCW 82.32.030(1)? Your status as a qualified seller does not impact your requirement to register with the department. If you meet the conditions for registration with the department under RCW 82.32.030, you must register with the department.
(d) What is property for purposes of (b) of this subsection and how is it valued? Property refers to the "average value" of the real property and tangible personal property that you own and rent. You will value owned property at its original cost basis. Rented property will be valued at eight times the net annual rental rate of that property. The net annual rental rate is the annual rental rate paid by you less any annual rental rates you receive from subrentals.
You must determine the "average value" of this property by averaging the value of property at the beginning of the twelve-month period immediately before the date you register with Washington with the value of property at the end of the twelve-month period immediately before you register with Washington.
(e) What is payroll for purposes of (b) of this subsection? Payroll is the total amount paid by you for compensation during the twelve-month period immediately preceding the date you register with Washington. Compensation means wages, salaries, commissions, and any other form of payment to employees or similar persons that meet the definition of gross income under section 61 of the Internal Revenue Code in effect on the effective date of this rule.
Compensation is deemed to be payroll in Washington if:
(i) The employee's service is performed entirely within Washington;
(ii) The employee's service is performed both within and outside Washington, and the performance of services outside Washington is merely incidental to the services performed within Washington;
(iii) The employee performs some services within Washington, and the base of operations or the place from which the services are directed or controlled is within Washington; or
(iv) The employee performs some services within Washington, and the base of operations or place from which the services are directed or controlled is not within any state (where some part of the services are performed), but the employee's residence is within Washington.
(f) What is a certified automated system for purposes of this rule? A certified automated system is software certified by Washington under the SSUTA: To calculate the sales and use tax imposed by each taxing jurisdiction on a transaction; to determine the amount of tax to remit; and to maintain a record of the transaction.
(3) Qualified seller compensation. This subsection explains compensation available to qualified sellers.
(a) What type of compensation is available to qualified sellers? If you are a qualified seller, you are eligible to receive monetary allowances from Washington under this subsection and this is in addition to any existing discount afforded by each member state. You may view a list of SSUTA member and associate member states at streamlinedsalestax.org. You obtain these monetary allowances from Washington by retaining a portion of the Washington state retail sales and use taxes you collect and report to Washington. You are not entitled to monetary allowances unless you are a qualified seller and have filed and paid a timely return.
(b) How long are qualified sellers permitted to receive monetary allowances? If you install a certified automated system on or after July 1, 2007, you are eligible to receive monetary allowances under this subsection for a period up to twenty-four months from the date that you install your certified automated system.
(c) How do qualified sellers calculate their monetary allowances? You will calculate your monetary allowance under the following formula:
(Applicable rate) multiplied by (Washington retail sales and use taxes you collect and report).
The applicable rate for this formula is one and one-half percent. Your total monetary allowance for the first twelve months of the twenty-four month period described in (b) of this subsection cannot exceed ten thousand dollars. Your total monetary allowance for the second twelve months of the twenty-four month period described in (b) of this subsection cannot exceed ten thousand dollars. For purposes of determining when each ten thousand dollar limit is reached, affiliated qualified sellers must be treated as a single qualified seller if they would qualify as "related persons" under sections 267(b) or 707(b) of the Internal Revenue Code in effect on the effective date of this rule.
You may not retain monetary allowances under this subsection based on any sales taxes determined or calculated without the use of a certified automated system. Moreover, you may not retain monetary allowances under this subsection based on any sales taxes determined or calculated with a certified automated system that you have failed to update or modify in accordance with your agreement with your certified automated system provider. It is your duty to make sure all updates and modifications to your certified automated system are properly implemented.
(d) Can a qualified seller continue to receive monetary allowances if it ceases to be a qualified seller? No. If you cease to be a qualified seller, you are not entitled to monetary allowances. If you cease to be a qualified seller during any part of a calendar month, you will not be entitled to monetary allowances for that entire month. You will cease to be a qualified seller if you conduct activities in Washington that would require you to register in Washington and as a result of these activities fail to meet one or more of the requirements of subsection (2)(b)(ii)(A) through (D) of this rule. The meanings given to property and payroll in subsection (2)(d) and (e) of this rule apply for purposes of this subsection (3)(d). However, you must determine the "average value" of property and the amount of payroll under this subsection (3)(d) as follows:
(i) You must determine the "average value" of property by averaging the values at the beginning and end of your last fiscal year that terminates at least thirty days before the date the determination is made.
(ii) You must determine payroll, by calculating the total amount of compensation paid to employees during your last fiscal year that terminates at least thirty days before the date the determination is made.
(e) Are monetary allowances funded from both Washington state and local retail sales and use taxes? No, monetary allowances will only be funded from the Washington state portion of the retail sales and use taxes that you collect and must remit.
(4) Do qualified sellers have any liability protections when operating in Washington? You are not liable for charging or collecting the incorrect amount of sales or use tax when that error results from reliance on incorrect data provided in the state's taxability matrix.
(a) Beginning July 1, 2015, if the taxability matrix is amended, sellers and certified service providers are relieved from liability to the state and to local jurisdictions to the extent that the seller or certified service provider relied on the immediately preceding version of the state's taxability matrix. Relief under this subsection (4)(a) of this rule is available until the first day of the calendar month that is at least thirty days after the department submits notice of a change to the state's taxability matrix to the streamlined sales tax governing board. To obtain a copy of the taxability matrix, visit the SSUTA website located at: streamlinedsalestax.org.
(b) Additionally, you will be held harmless and not liable for sales and use taxes, including interest and penalties on those taxes, not collected due to reliance on Washington's certification of the certified automated system you use. However, you will not be held harmless for the incorrect classification of an item or transaction into a product based exemption certified by the department unless that item or transaction is listed within a product definition approved by the SSUTA's governing board or the department. See also RCW 82.32.745.
(5) Filing returns and remitting taxes. Qualified sellers must electronically file retail sales and use excise tax returns and must remit retail sales and use taxes due with respect to these returns using ACH Debit, ACH Credit, or the Fed Wire Funds Transfer System.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 16-06-040, § 458-20-27701, filed 2/24/16, effective 3/26/16. Statutory Authority: RCW 82.32.300, 82.32.715, and 82.01.060(2). WSR 08-22-048, § 458-20-27701, filed 10/31/08, effective 12/1/08.]


PDF458-20-278

Returned goods, defective goods—Motor vehicle lemon law.

(1) Introduction. This rule explains how sellers should report business and occupation (B&O) tax and retail sales tax when goods are returned and refunds or credits are granted.
(a) Contract of sale. Generally, when a contract of sale is made subject to cancellation at the option of one of the parties or to revision in the event the goods sold are defective, the gross proceeds actually derived from the contract and the selling price are determined by the transaction as finally completed.
(b) Examples. The examples in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) Returned goods. When sales are made either upon approval or upon a sale or return basis, and the buyer returns the property purchased and the entire selling price is refunded or credited to the buyer, the seller may deduct an amount equal to the selling price from gross proceeds of sales in computing tax liability. A deduction is available under the retail sales tax classification only if the amount of sales tax previously collected from the buyer has been refunded by the seller to the buyer. If the property purchased is not returned within the guaranty period as established by contract, or if the full selling price is not refunded or credited to the buyer, a presumption is raised, subject to rebuttal by a preponderance of the evidence, that the property returned is not a returned good but is an exchange or a repurchase by the seller.
(a) Example 1. Stan sells an article for $60.00 and credits his sales account with the sale. The buyer returns the article purchased within the guaranty period and the purchase price and the sales tax previously paid by the buyer is refunded or credited to the buyer. If the sale has not been reported to the department of revenue, Stan may deduct $60.00 for the returned article from his gross sales amount. If Stan has already reported the sale on his excise tax return, he may take a deduction for $60.00 for the returned article on his next filed excise tax return.
(b) Restocking fees charged on returned goods. A "restocking fee" is a fee intended to cover the cost, by the seller, of restoring returned items to saleable condition and returning them to inventory. The restocking fee is the same regardless of when a purchased item is returned to the seller by the buyer.
If all the conditions of this subsection are met for returned merchandise with the exception of a restocking fee, the transaction will be viewed as a sale return and not as a repurchase. When a sale return occurs, a deduction may be taken under the appropriate tax classification used in reporting the original sale. However, the restocking fee is considered income and taxable under the service and other business activities B&O tax classification.
(i) Example 2. Ace Auto Parts (Ace) sells a catalytic converter to Stan for $400.00 plus tax. The receipt that Ace gives Stan states that returns must be made within 30 days and a $35.00 restocking fee will apply to returns. Stan realizes after he gets the part home that it is the wrong one for his car. When Stan returns the part, he finds that Ace does not have the catalytic converter that he needs for his car. Ace computes Stan's refund of $400.00 plus sales tax minus the $35.00 restocking fee. Ace may reduce its gross retail sales by $400.00, but must report the $35.00 restocking fee under the service and other business activities B&O tax classification.
(ii) Example 3. Breen's Department Store (Breen's) accepts returned items, in new condition, but may discount the original purchase price based on the time elapsed since purchase.
Return within
Amount of credit
0 – 30 days from receipt
100% of original purchase price
31 – 60 days from receipt
75% of original purchase price
61 + days from receipt
50% of original purchase price
For example, Jill purchases a dress from Breen's and returns the dress 45 days after purchase. Breen's refunds or provides a credit to her of 75 percent of the cost of the dress. The amount retained by Breen's is not considered a restocking fee. This is considered a repurchase by Breen's, and thus no deductions are allowed under the retailing B&O tax or retail sales tax classifications on Breen's excise tax return.
(3) Defective goods. This subsection does not apply to new motor vehicles under an original manufacturer's warranty. See subsection (4) of this rule regarding new motor vehicles under an original manufacturer's warranty.
When bona fide refunds, credits, or allowances are given within the guaranty period by a seller to a buyer on account of defects in goods sold, the seller may deduct the amount of such refunds, credits, or allowances in computing its tax liability, if the seller has refunded the proportionate amount of the sales tax it previously collected from the buyer.
Example 4. On April 5th, Stan sells an item to Bob for $60.00. Stan records the sale as gross income. The item is later found to be defective by Bob.
(a) Bob returns the item prior to Stan reporting the sale on his excise tax return, and remitting B&O tax and the collected retail sales tax. Stan refunds Bob the purchase price including the retail sales tax. Stan may subtract $60.00 from his gross income when completing his excise tax return.
(b) Bob returns the defective article and Stan allows him a full credit of $60.00 towards another article. The new article's price is $80.00. Bob pays, in cash, the additional $20.00 plus retail sales tax on the $20.00. Stan records the $20.00 as gross sales. The allowance for the defective article ($60.00) is already included in Stan's gross sales, thus only the $20.00 ($60.00 credit and $20.00 cash = $80.00 purchase price) should be added to the gross sales amount.
(c) Bob waits a month to return the defective item for a refund. Stan refunds Bob the full purchase price of $60.00 plus the retail sales tax. As Stan has already reported the sale on his excise tax return, he may deduct $60.00 under "Returns" for both the retailing B&O tax and retail sales tax classifications on his next excise tax return.
(d) Bob is willing to keep the defective item but requests a partial refund to offset repair costs. Stan refunds Bob $25.00 of the purchase price, plus the applicable retail sales tax. As Stan has already reported the sale on his excise tax return, he may take a deduction for $25.00 under both the retailing B&O tax and retail sales tax classifications on his next excise tax return.
(4) Motor vehicle warranties - Lemon law. A manufacturer that replaces or repurchases a new motor vehicle under warranty because of a defective condition is required to refund to the consumer the "collateral charges" (RCW 19.118.021(2)) which include retail sales tax. The refund will be made to the consumer by the manufacturer or by the dealer for the manufacturer. The department of revenue will then verify calculations and credit or refund the correct amount of the tax so refunded. For information on the lemon law, other than retail sales tax, contact the attorney general's office.
(a) What documentation is needed for credit or refund? To receive a credit or refund, the manufacturer or dealer must provide the following information to the department of revenue establishing that the dealer collected the retail sales tax and that it was refunded to the consumer:
(i) A complete copy of the new motor vehicle arbitration board decision including the owner signed acceptance/denied page; or
(ii) The Lemon Law Refund Request Verification Form completed in nonarbitrated situations; and
(iii) A statement signed and dated by the consumer accepting the arbitration board decision or the manufacturer's nonarbitrated repurchase offer. The statement must include the consumer's name, repurchase offer date, total repurchase amount, sales tax amount refunded, the name of the manufacturer issuing the refund and any other supporting documents needed to substantiate the claim; and
(iv) A copy of the dealer invoice (purchase order) or lease agreement, signed by the consumer, that shows the amount of retail sales tax paid; and
(v) A copy of the manufacturer's refund check(s) for repurchase drawn payable to the consumer and/or lien holder; and
(vi) For the calculation of reasonable offset for mileage provide all supporting documentation necessary to verify the calculation used and documentation (e.g., all dealer repair records or service records) to verify the attempted repairs to the vehicle did comply with RCW 19.118.041.
(b) Where can I obtain the Lemon Law Refund Request Verification Form? The "Lemon Law Refund Request Verification Form" is available on the department's website at dor.wa.gov, or by calling the department's telephone information center at 360-705-6705, or writing to:
Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
(c) Where should documentation be sent? All documentation from manufacturers for credit or refund on lemon law refunds should be sent to:
Audit Division/Lemon Law Refund Section
Department of Revenue
P.O. Box 47474
Olympia, WA 98504-7474
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-14-002, § 458-20-278, filed 6/21/23, effective 7/22/23. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-15-157, § 458-20-278, filed 7/21/15, effective 8/21/15.]


PDF458-20-279

Clean alternative fuel vehicles and high gas mileage vehicles.

(1) Introduction. This rule provides information about the requirements for retail sales and use tax exemptions for clean alternative fuel vehicles that were in effect from January 1, 2009, through July 1, 2015. For information on available exemptions after July 1, 2015, refer to RCW 82.08.809, 82.08.9999, or dor.wa.gov.
(2) Exemption periods. The exemption periods provided for clean alternative fuel vehicles and high gas mileage vehicles differ.
(a) Clean alternative fuel vehicles.
(i) New vehicles. The exemptions provided for new passenger cars, light duty trucks, and medium duty passenger vehicles that are exclusively powered by a clean alternative fuel apply to purchases made from January 1, 2009, through July 1, 2015.
(ii) Used vehicles. The exemptions provided for qualifying used passenger cars, light duty trucks, and medium duty passenger vehicles, which were modified after their initial purchase, with an EPA certified conversion to be exclusively powered by a clean alternative fuel apply to purchases made from July 12, 2010, through July 1, 2015.
(iii) Use of previously exempt vehicles on or after July 1, 2015. Use tax does not apply to the use, on or after July 1, 2015, of a vehicle if:
• The person used the vehicle in this state before July 1, 2015; and
• The use prior to July 1, 2015, was exempt from use tax as described in (a)(i) or (ii) of this subsection.
(b) High gas mileage vehicles. The exemptions provided for new passenger cars, light duty trucks, and medium duty passenger vehicles that utilize hybrid technology and have a United States Environmental Protection Agency estimated highway gasoline mileage rating of at least forty miles per gallon apply as follows:
(i) January 1, 2009, through July 31, 2009. The exemptions apply to all retail sales and use taxes.
(ii) August 1, 2009, through December 31, 2010. The exemption is limited to the 0.3 percent retail sales tax imposed by RCW 82.08.020(3) on retail sales of motor vehicles.
(3) Definitions. The following definitions apply throughout this section:
(a) "Clean alternative fuel" means natural gas, propane, hydrogen, or electricity, when used as a fuel in a motor vehicle that meets the California motor vehicle emission standards in Title 13 of the California code of regulations, effective January 1, 2005, and the rules of the Washington state department of ecology. See RCW 82.08.809(3) and 82.12.809(2).
(b) "Gross vehicle weight rating" is the value specified by the manufacturer as the maximum design loaded weight of a single vehicle. See WAC 173-423-040(4).
(c) "Hybrid technology" means propulsion units powered by both electricity and gasoline. See RCW 82.08.813(3) and 82.12.813(2).
(d) "Light duty truck" is any vehicle certified to the standards in Title 13, CCR, section 1961 (a)(1) rated at eight thousand five hundred pounds gross vehicle weight or less, and any other motor vehicle rated at six thousand pounds gross vehicle weight or less, which is designed primarily for the purposes of transportation of property or is a derivative of such vehicle, or is available with special features enabling off-street or off-highway operation and use. See WAC 173-423-040(8).
(e) "Medium duty passenger vehicle" is any medium duty vehicle with a gross vehicle weight rating of less than ten thousand pounds that is designed primarily for the transportation of persons. The medium duty passenger vehicle definition does not include any vehicle which:
(i) Is an "incomplete truck," i.e., is a truck that does not have the primary load carrying device or container attached; or
(ii) Has a seating capacity of more than twelve persons; or
(iii) Is designed for more than nine persons in seating rearward of the driver's seat; or
(iv) Is equipped with an open cargo area of seventy-two inches in interior length or more. A covered box not readily accessible from the passenger compartment will be considered an open cargo area for the purpose of this definition. See WAC 173-423-040(9).
(f) "Medium duty vehicle" is a vehicle with a gross vehicle weight rating of eight thousand five hundred one to fourteen thousand pounds. See WAC 173-423-100(2).
(g) "Model year" is the manufacturer's annual production period which includes January 1 of a calendar year. If the manufacturer has no annual production period, "model year" is the calendar year. In the case of any vehicle manufactured in two or more stages, the time of manufacture shall be the date of completion of the chassis. See WAC 173-423-040(10).
(h) "New motor vehicle" is any motor vehicle that:
• Is self-propelled;
• Is required to be registered and titled under Title 46 RCW;
• Has not been previously titled to a retail purchaser or lessee; and
• Is not a vehicle which has been sold, bargained, exchanged, given away, or title transferred from the person who first took title to it from the manufacturer or first importer, dealer, or agent of the manufacturer or importer, and so used as to have become what is commonly known as "secondhand" within the ordinary meaning thereof. See RCW 46.70.011 and 46.04.660.
The model year of the vehicle is not determinative of whether it meets the definition of "new motor vehicle."
(i) "Passenger car" means every motor vehicle except motorcycles and motor-driven cycles designed primarily for transportation of persons and having a design capacity of twelve persons or less. See WAC 173-423-040(13) and RCW 46.04.382.
(j) "Qualifying used passenger cars, light duty trucks, and medium duty passenger vehicles" means vehicles that:
• Are part of a fleet of at least five vehicles, all owned by the same person;
• Have an odometer reading of less than thirty thousand miles;
• Are less than two years past their original date of manufacture; and
• Are being sold for the first time after modification.
(4) New passenger cars, light duty trucks, and medium duty passenger vehicles. In order to qualify for the exemptions, the vehicle must meet the definition of "passenger car," "light duty truck," or "medium duty passenger vehicle" in addition to meeting the definition of "new motor vehicle."
(5) Purchases of previously owned clean alternative fuel or high gas mileage vehicles. The exemptions do not apply to purchases of used vehicles unless they are qualifying used passenger cars, light duty vehicles, or medium passenger vehicles, which were modified after their initial purchase, with an EPA certified conversion to be exclusively powered by clean alternative fuel.
(a) Example 1. Mike purchases a used 2009 model year hybrid vehicle from a dealer or private party in July 2011. The purchase would not qualify for the exemptions. The exemption for vehicles using hybrid technology only applies to new vehicles.
(b) Example 2. Nicole purchases a new 2008 model year hybrid vehicle in July 2009 from a dealer. This purchase would be exempt (assuming it meets the other requirements). A new vehicle could be any model year as long as it has not been previously titled to a retail purchaser or lessee.
(c) Example 3. Joe purchases a new 2009 model year hybrid vehicle on August 5, 2009, from a dealer. This purchase is not exempt from all retail sales taxes but, assuming it meets the other requirements, is exempt from the 0.3 percent retail sales tax on retail sales of motor vehicles.
(6) Conversions. For purposes of this section, a conversion refers to the alteration of an otherwise nonqualifying vehicle exclusively powered by gasoline or diesel into a qualifying vehicle that either:
(a) Is exclusively powered by clean alternative fuel; or
(b) Utilizes hybrid technology and has a United States environmental protection agency estimated highway gasoline mileage rating of at least forty miles per gallon.
(i) Purchases of converted vehicles. The purchase of a new vehicle, or a used vehicle satisfying the requirements described in subsection (2)(a)(ii) of this section, that is converted prior to or as part of the retail sale to the purchaser and that otherwise satisfies the requirements of the exemptions will qualify for the exemptions. If the conversion is performed after the retail sale, the purchase of the vehicle will not qualify for the exemptions.
(ii) Purchases of the service of converting vehicles. While the purchase of a new vehicle converted by the seller prior to or as part of the retail sale to the purchaser qualifies for the exemptions as described in subsection (6)(a) of this section, the purchase of the service of converting a vehicle does not qualify for the exemptions. However, if the seller hires a third party to convert the vehicle, it can give the third party a resale certificate (WAC 458-20-102A) for work completed before January 1, 2010, or a reseller permit (WAC 458-20-102) for work completed on or after January 1, 2010. Even though resale certificates are no longer used after December 31, 2009, they must be kept on file by the seller for five years from the date of last use or December 31, 2014.
(A) Example 1. Tom wants to purchase a new nonqualifying vehicle from Dealer but have it converted as a part of the purchase transaction. Dealer hires John's Shop to convert the vehicle for Tom, and Tom purchases the converted vehicle from Dealer. Tom's purchase of the converted vehicle qualifies for the exemptions.
(B) Example 2. Tom purchases a new nonqualifying vehicle from Dealer. Tom then hires John's Shop to convert the vehicle. The purchase of the nonqualifying vehicle does not qualify for the exemptions, even if Dealer delivers the vehicle directly to John's Shop on Tom's behalf for conversion.
(7) Use tax. The use of a qualifying vehicle by the original title holder is exempt from use tax if the vehicle is purchased during the applicable exemption period specified in subsection (2) of this section.
(a) Example 1. Will, a Washington resident, purchases a new qualifying clean alternative fuel vehicle in Oregon from Dealer on February 1, 2009, and returns to Washington in the vehicle on February 2, 2009. Will's use of the vehicle in Washington is exempt from use tax.
(b) Example 2. Oliver, an Oregon resident, purchases a new qualifying hybrid vehicle from Dealer in Oregon on April 1, 2009. Oliver moves to Washington on May 15, 2009. Oliver's use of the vehicle in Washington is exempt from use tax. Note: In the absence of the exemptions discussed in this section, Oliver's purchase would be subject to use tax since his first use of the vehicle in Washington occurred within 90 days of his acquisition and use of the vehicle in another state. See RCW 82.12.0251.
(8) Extended warranties and maintenance agreements. The sale of an extended warranty or maintenance agreement is subject to retail sales tax even though the vehicle itself may qualify for the exemptions. See WAC 458-20-257.
(9) Replacement parts and/or repair services. The sale of replacement parts or repair services is subject to retail sales tax even though the vehicle itself may have qualified for the exemptions. Only the purchase and use of a qualifying vehicle is exempt from retail sales and use taxes.
(10) Accessories. A qualifying vehicle includes all accessories installed or sold as part of the sale of the vehicle.
(a) Example 1. A dealership installs a ski rack and applies pinstriping on an otherwise qualifying vehicle on January 5, 2009, before a customer purchases the vehicle. Any separate, itemized charges for the accessories listed on the vehicle sales invoice are exempt from retail sales tax.
(b) Example 2. On January 5, 2009, a customer purchases an otherwise qualifying vehicle, and as a condition of the purchase requires that the seller install stereo speakers and apply paint sealant. The seller does not have the accessories in stock, but the customer takes delivery of the vehicle. The customer then brings the vehicle back to the seller, and the accessories are installed and applied on January 12, 2009. Any separate, itemized charges for the accessories listed on the vehicle sales invoice are exempt from retail sales tax.
(11) Leases. A vehicle is exempt from retail sales and use taxes on a lease if the other requirements are met. If the vehicle is new, registered, and titled in the lessee's name during the applicable exemption period specified in subsection (2) of this section, the retail sales tax exemption will apply only to amounts due during the exemption period. See also WAC 458-20-103 and 458-20-235.
(a) Example 1. Alex leases a new hybrid vehicle that he registers and titles on December 8, 2008. None of his lease payments will qualify for the exemptions because the vehicle was registered and titled prior to January 1, 2009.
(b) Example 2. Beth leases a new clean alternative fuel vehicle that she registers and titles on December 8, 2010. Assuming that the other requirements of the exemptions are met, any amounts due under the lease before January 1, 2011, are exempt from retail sales tax.
(12) Payments made prior to January 1, 2009. Any payment made toward the purchase of an otherwise qualifying vehicle prior to the effective date of the exemptions, January 1, 2009, qualifies for the exemptions if:
(a) The vehicle sold is titled and registered on or after January 1, 2009, but before the applicable exemption expires; and
(b) The purchaser takes possession of the vehicle on or after January 1, 2009, but before the applicable exemption expires. See WAC 458-20-103, 458-20-197, and 458-20-235.
Example. Greg makes a down payment toward the purchase of a new qualifying hybrid vehicle on November 7, 2008, but does not actually take possession of the vehicle at the dealership lot until January 2, 2009. The vehicle is titled and registered on January 9, 2009. The purchase of the vehicle is exempt from all retail sales taxes.
(13) Payments made prior to the expiration date of the applicable exemption. Any payment made toward the purchase of an otherwise qualifying vehicle prior to the expiration date of the applicable exemption does not qualify for the exemption if:
(a) The vehicle sold is titled or registered on or after the expiration date of the exemption; or
(b) The purchaser takes possession of the vehicle on or after the expiration date of the exemption. See WAC 458-20-103, 458-20-197, and 458-20-235.
Example. Craig makes a down payment toward the purchase of a new qualifying clean alternative fuel vehicle on November 7, 2010, but does not actually take possession of the vehicle at the dealership lot until January 2, 2011. The vehicle is titled and registered on January 11, 2011. The purchase of the vehicle is subject to retail sales tax and the 0.3 percent retail sales tax imposed by RCW 82.08.020(3) on retail sales of motor vehicles.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 19-24-083, § 458-20-279, filed 12/3/19, effective 1/3/20. Statutory Authority: RCW 82.32.300 and 82.01.60 [82.01.060]. WSR 10-17-069, § 458-20-279, filed 8/13/10, effective 9/13/10. Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 09-02-051, § 458-20-279, filed 12/31/08, effective 1/31/09.]


PDF458-20-27901

Clean alternative fuel vehicles and plug-in hybrid vehicles.

(1)(a) Introduction. This rule provides information about the retail sales and use tax exemption (exemption) in RCW 82.08.9999 and 82.12.9999 for the purchase, lease, or use of clean alternative fuel vehicles and certain plug-in hybrid vehicles.
(b) Other rules that may apply. Readers may want to refer to other rules for additional information, including the following:
(i) WAC 458-20-108 Selling price—Credit card service fees, foreign currency, discounts, patronage dividends.
(ii) WAC 458-20-178 Use tax and the use of tangible personal property.
(iii) WAC 458-20-247 Trade-ins, selling price, sellers' tax measures.
(iv) WAC 458-20-257 Tangible personal property warranties and service contracts.
(c) Examples. This rule includes examples that identify certain facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Definitions. The following definitions apply throughout this rule:
(a) "Clean alternative fuel" means natural gas, propane, hydrogen, or electricity, when used as a fuel in a motor vehicle that meets the California motor vehicle emission standards in Title 13 of the California Code of Regulations, effective January 1, 2019, and the rules of the Washington state department of ecology.
(b) "Fair market value" has the same meaning as "value of the article used" in RCW 82.12.010 and, for the purposes of this rule, the fair market value of a leased clean alternative fuel or plug-in hybrid vehicle is generally determined according to the retail selling price at the place of use of vehicles of similar quality and character. The fair market value includes delivery charges or any other services necessary to complete the lease. RCW 82.12.010; WAC 458-20-178.
(c) "New vehicle" has the same meaning as "new motor vehicle" in RCW 46.04.358 and means any motor vehicle that:
(i) Is self-propelled;
(ii) Is required to be registered and titled under Title 46 RCW;
(iii) Has not been previously titled to a retail purchaser or lessee; and
(iv) Is not a used vehicle as defined in (h) of this subsection.
(d) "Plug-in hybrid vehicle" is a vehicle that uses at least one method of propulsion capable of being reenergized by an external source of electricity and capable of traveling at least 30 miles using only battery power.
(e) "Qualification period end date" means August 1, 2025.
(f) "Qualification period start date" means August 1, 2019.
(g) "Selling price" has the same meaning as used in RCW 82.08.010. Selling price includes charges for delivery and installation, for vehicle accessories purchased as part of the purchase of the vehicle, and any other charges for services necessary to complete the sale. RCW 82.08.010; WAC 458-20-108; 458-20-178; 458-20-247. The selling price does not include the value of any trade-in. However, for purposes of this exemption, the value of any trade-in is added to the selling price to determine exemption eligibility.
(h) "Used vehicle" has the same meaning as "used vehicle" in RCW 46.04.660 and means a vehicle that:
(i) Has been sold, bargained, exchanged, given away, or title transferred from the person who first took title to it from the manufacturer or first importer, dealer, or agent of the manufacturer or importer; and
(ii) Is used in a manner to have become what is commonly known as "secondhand."
(3) Exemption. A sales and use tax exemption applies to new or used passenger cars, light duty trucks, or medium duty passenger vehicles that meet the power requirements and are within the value limitations described below. A person may not claim this exemption if the exemption under RCW 82.08.993 or 82.12.817(2) is claimed.
(a) Power requirements. The exemption applies only to the sale, lease, or use of a vehicle either exclusively powered by a clean alternative fuel or a plug-in hybrid vehicle.
(b) List of eligible vehicles. The department of licensing must maintain and publish a list of all vehicle models eligible for this tax exemption and is authorized to issue final rulings on vehicle model eligibility. A seller or lessor is not responsible for repayment of the tax exemption if a vehicle was listed as of the date it was purchased or the lease agreement was signed, and met the other exemption requirements, and is subsequently removed from the list.
(c) Eligible vehicle values. The selling price plus the trade-in value of property of like kind for vehicle sales at the time of purchase, or the fair market value for vehicles at the inception of the lease agreement, may not exceed the following amounts:
(i) New vehicles: $45,000.
(ii) Used vehicles: $30,000.
(d) Trade-in values. When determining whether a new or used vehicle is eligible for the exemption in this rule, the value of any trade-in vehicle must be added to the selling price of the vehicle.
Example 1. An automobile dealer sells a new clean alternative fuel vehicle for $53,000. As part of the sale, the dealer accepts a trade-in vehicle from the buyer with an agreed upon value of $10,000, resulting in a taxable selling price of $43,000. The new vehicle does not qualify for the exemption because the selling price, as defined in subsection (2) of this rule, plus the vehicle trade-in value of $10,000, exceeds the new vehicle value limit of $45,000.
(e) Determining amount subject to retail sales tax. After determining the new or used vehicle qualifies for the exemption, the seller must then determine the eligible exemption amount as described in the table in this subsection (3)(e). The amount subject to retail sales tax is calculated by subtracting the exemption amount and the trade-in allowance, if any, from the selling price. In the case of a lease, the exemption amount applies up to the eligible exemption amount identified in the table in this subsection (3)(e) for lease payments made, and any additional selling price of the leased vehicle if the original lessee purchases the leased vehicle before the qualification period end date. The exemption amounts are provided below and based on the date of purchase or date of the signed lease agreement.
Date of purchase/Date of signed lease agreement
Exemption amount
(New vehicles)
Exemption amount
(Used vehicles)
August 1, 2019 - July 31, 2021
$25,000
Total sales price or $16,000, whichever is less
August 1, 2021 - July 31, 2023
$20,000
August 1, 2023 - July 31, 2025
$15,000
Example 2. In February 2024, an automobile dealer sells a new clean alternative fuel vehicle for $44,000, before factoring in a trade-in allowance. The purchaser provides a down payment of $5,000 and the dealer accepts a trade-in vehicle from the buyer with an agreed upon value of $7,000 and finances the remaining $32,000. The new vehicle qualifies for the exemption because the taxable selling price of $37,000, plus the value of the buyer's trade-in vehicle of $7,000, does not exceed the $45,000 limit. To determine the amount of the sale subject to retail sales tax, the dealer will subtract the exemption amount indicated in the chart in subsection (3)(e) of this rule and the trade-in value from the vehicle's selling price. The seller is required to report $44,000 in gross revenue under the retailing B&O and retail sales tax classifications, then report a $7,000 trade-in allowance deduction and a $15,000 clean alternative fuel vehicle deduction from the retail sales tax classification. The retail sales taxable amount is $22,000. The retailing B&O taxable amount is $44,000.
Example 3. On March 1, 2025, ABC Vehicles LLC (ABC), an automobile dealer (who is assigned a monthly tax reporting frequency), leased a new clean alternative fuel vehicle to a customer with a fair market value of $42,000. The new leased vehicle qualifies for the exemption because its fair market value is $45,000 or less. The maximum allowable exemption amount is $15,000. The lease covers a 36-month period, and the monthly lease payment is $400. The lessee decides to purchase the vehicle following the expiration of the lease on March 1, 2028, for $27,600. Because the lessee paid $14,400 in total lease payments prior to purchasing the vehicle, the remaining available exemption is $600, which may be deducted from the selling price of $27,600, resulting in a retail sales taxable amount of $27,000.
For the entire 36-month lease period, ABC is required to report $400 in gross revenue from monthly vehicle lease payments under the retailing B&O and retail sales tax classifications on each of its monthly excise tax returns, then report a $400 deduction from the retail sales tax classification, resulting in a retail sales taxable amount of $0. ABC may not claim a deduction for B&O tax purposes, resulting in a retailing B&O taxable amount of $400. For the March 2028 return, ABC is required to report $27,600 in gross revenue under the retailing B&O and retail sales tax classifications, then report a $600 clean alternative fuel vehicle deduction from the retail sales tax classification. The retail sales taxable amount is $27,000. The retailing B&O taxable amount is $27,600.
(f) Exemption eligibility dates.
(i) Sales. For vehicle sales, the sale must be made between August 1, 2019, and July 31, 2025, to qualify for the exemption. Sales of vehicles after July 31, 2025, do not qualify for the exemption.
(ii) Leases. For vehicle leases, the lease agreement must be signed between August 1, 2019, and July 31, 2025, to qualify for the exemption. Lease agreements signed after July 31, 2025, do not qualify for the exemption. However, leases that qualified for the exemption before August 1, 2025, will continue to receive the exemption on any lease payments due through the remainder of the lease through July 31, 2028. RCW 82.08.9999(7). Any unused exemption amounts are forfeited and may not be applied once the exemption expires on August 1, 2028.
Example 4. A lessee signs a four-year vehicle lease agreement for an eligible vehicle on June 15, 2025, with the first payment due on July 15, 2025, and the last payment due on June 15, 2029. Because this exemption expires on August 1, 2028, the retail sales tax exemption will be applied to each lease payment, beginning July 15, 2025, and continue until the earlier of July 31, 2028, or until the available exemption amount is reduced to zero. Any unused exemption amounts are forfeited and may not be applied once the exemption expires on August 1, 2028.
(4) Recordkeeping. The seller, or lessor in the case of a lease, of any eligible vehicle, new or used, must keep the following records, in paper or electronic form, necessary for the department of revenue to verify eligibility:
(a) Vehicle make, model, and year;
(b) Whether the vehicle was sold or leased;
(c) Selling price for purchased vehicles, or fair market value at the inception of the lease for leased vehicles;
(d) Date of sale or start date of lease;
(e) Terms of lease, including monthly lease payment and length of lease; and
(f) Total amount qualifying for the incentive claimed for each vehicle, including the future monthly amount to be claimed for each leased vehicle.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 24-13-098, § 458-20-27901, filed 6/18/24, effective 7/19/24.]


GENERAL RULE: TAX AVOIDANCE

PDF458-20-280

Introduction.

This rule is organized into eight parts, as follows:
•Purpose and general scope
•Transactions or arrangements specifically identified as potential tax avoidance
•Relevant factors in transactions deemed unfair tax avoidance
•Economic positions of participants
•Substantial nontax reasons for entering into an arrangement
•Results of unfair tax avoidance transactions
•Tax periods affected
•Penalty provisions
Other rules. There are three auxiliary rules that address the following three types of arrangements.
•WAC 458-20-28001 Construction joint ventures and similar arrangements described in RCW 82.32.655 (3)(a);
•WAC 458-20-28002 Disguised income arrangements described in RCW 82.32.655 (3)(b); and
•WAC 458-20-28003 Sales and use tax avoidance arrangements described in RCW 82.32.655 (3)(c).
(1) Purpose and general scope. Chapter 23, Laws of 2010 1st sp. sess., enacted as RCW 82.32.655 and 82.32.660, as well as amended RCW 82.32.090, to address unfair tax avoidance. Although taxpayers have the right to enter into arrangements or transactions that have lower tax consequences, the legislature recognized that certain arrangements and transactions are contrary to the intent of the taxation statutes. The legislation and this rule address certain identified arrangements and transactions that unfairly avoid taxes and prescribe specific remedial actions to be taken by the department in such cases. The legislation and this rule do not affect or apply to any other remedies available to the department by statute or common law, as these remedies are expressly preserved by the legislation.
(a) Rule examples. This rule includes a number of examples that identify a set of facts and then state a conclusion. The examples should be used only as a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority. An example that concludes an arrangement or transaction is not unfair tax avoidance under this rule does not mean that the taxpayer is entitled to any particular tax treatment or that the arrangement or transaction is approved by the department under other authority. It may still be disregarded or disapproved by the department under other statutory or common law authority.
In addition, each fact pattern in each example is self-contained (i.e., "stands on its own") unless otherwise indicated by reference to another example. Examples concluding that sales tax applies to the transaction assume that no exclusions or exemptions apply, and the sale is sourced to Washington.
(b) Definitions.
(i) "Potential tax avoidance" and "identified transaction" both refer to an arrangement or transaction that has the potential to be unfair tax avoidance because it meets the elements of an arrangement or transaction described in subsection (2) of this rule.
(ii) "Unfair tax avoidance" means an arrangement or transaction that meets the elements of an arrangement or transaction described in subsection (2) of this rule, and that is also determined under all the facts and circumstances to be unfair tax avoidance based on the factors identified in subsection (3) of this rule.
(iii) "Affiliated" means under common control.
(iv) "Common control" means two or more entities controlled by the same person or entity.
(v) "Control" means the possession, directly or indirectly, of more than fifty percent of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting shares, by contract, or otherwise. A person's power to cause the direction of management and policies includes power that is held by:
(A) Persons related to the taxpayer; and
(B) Persons with whom the taxpayer acts in concert to direct the management or policies of the entity.
(vi) "Related" includes:
(A) An entity's parent, owner, subsidiary, or affiliate under common control;
(B) An individual person's spouse, grandparent, parent, sibling, child, or grandchild; and
(C) In the case of a trust, the trust or a related person as defined in (A) or (B) of this subsection that:
(I) Has a beneficial interest in the trust;
(II) Has control over the trust or trust property; or
(III) Is the settlor and has retained significant control over the trust.
(vii) "Moving" or "moves" is any act or series of acts to ensure that income is received by a person who is not taxable in Washington on that income; and that the taxpayer or a related person receives substantially all the benefit of the income. Such acts may include without limitation: An assignment, transfer, lease, or license of income-producing assets; the sale of property or services at less than could be obtained in an arm's length transaction; and capital contributions and distributions from a capital account.
(viii) "Specific written instructions" means tax reporting instructions that specifically address an arrangement or transaction and specifically identify the taxpayer to whom the instructions apply. Specific written instructions may be provided as part of an audit, tax assessment, determination, closing agreement, or in response to a binding ruling request.
Specific written instructions will not be construed as revoked by operation of this rule or its statutory authority, but the department may revoke specific written instructions by written notice to the taxpayer.
(ix) "Person" or "company" has the same meaning as provided in RCW 82.04.030.
(2) Transactions or arrangements specifically identified as potential tax avoidance: Under RCW 82.32.655(3), the following arrangements or transactions are specifically identified as potential tax avoidance.
(a) Certain construction ventures. Arrangements that are, in form, a joint venture or similar arrangement between a construction contractor and the owner or developer of a construction project but that are, in substance, substantially guaranteed payments for the purchase of construction services and that are characterized by a failure of the parties' agreement to provide for the contractor to share substantial profits and bear significant risk of loss in the venture. See WAC 458-20-28001 for more information.
(b) Redirecting income. Arrangements through which a taxpayer attempts to avoid business and occupation tax by disguising income received, or otherwise avoiding tax on income from a person that is not affiliated with the taxpayer from business activities that would be taxable in Washington by moving that income to another entity that would not be taxable in Washington. See WAC 458-20-28002 for more information.
(c) Property ownership by controlled entity. Arrangements through which a taxpayer attempts to avoid retail sales or use tax by engaging in a transaction to disguise its purchase or use of tangible personal property by vesting legal title or other ownership interest in another entity over which the taxpayer exercises control in such a manner as to effectively retain control of the tangible personal property. See WAC 458-20-28003 for more information.
(3) Factors in a specifically identified arrangement or transaction deemed unfair tax avoidance: An arrangement or transaction identified in subsection (2) of this rule, is not "unfair tax avoidance" unless the arrangement or transaction is determined to be unfair tax avoidance under consideration of one or more of the factors in this subsection. These factors do not constitute a list of discrete elements that must be met for an arrangement or transaction to be unfair tax avoidance.
(a) Whether there has been a meaningful change in the economic positions of the participants in an arrangement or transaction, apart from its tax effects, when the arrangement is considered in its entirety;
(b) Whether substantial nontax reasons exist for entering into an arrangement or transaction;
(c) Whether an arrangement or transaction is a reasonable means of accomplishing a substantial nontax purpose;
(d) An entity's relative contributions to the work that generates income;
(e) The location where work is performed1; and
1
For apportionable activities, see WAC 458-20-19401 through 458-20-19404.
(f) Other relevant factors.
(g) Application of factors:
(i) To the extent relevant, the department may consider any or all factors listed in this subsection as part of an analysis of whether an arrangement or transaction has sufficient substance to be respected for tax purposes. The department may consider evidence of a taxpayer's actual subjective intent, but the department is not required to prove that tax avoidance was the subjective intent of any particular arrangement or transaction.
(ii) Right of rebuttal. If the department determines that the arrangement or transaction meets the elements identified in WAC 458-20-28001, 458-20-28002, or 458-20-28003 and that one or more of the factors identified in this subsection indicate unfair tax avoidance, the department presumes the arrangement or transaction is unfair tax avoidance. The taxpayer may rebut the presumption by proving that:
(A) The arrangement or transaction changes in a meaningful way, apart from its tax effects, the economic positions of the participants in the arrangement when considered as a whole; and
(B) One or more substantial nontax reasons were the taxpayer's primary reason for entering into the arrangement or transaction.
(4) When does an arrangement or transaction change in a meaningful way, apart from its tax effects, the economic positions of the participants in the arrangement when considered as a whole?
(a) Whole transaction. In evaluating any change to the economic positions of the participants, the department considers all facts and circumstances relevant to the individual economic position of each participant in the arrangement or transaction as a whole.
(b) Meaningful change defined. Meaningful change in economic position means, apart from its tax benefits, a bona fide and substantial increase in profit or profit potential or a bona fide and substantial reduction in costs or expenses between the form of the arrangement or transaction chosen by the taxpayer and the actual substance of the arrangement or transaction. The reasonably expected profit from the arrangement or transaction must be substantial when compared to the reasonably expected tax benefits that would be allowed if the arrangement or transaction is to be respected.
(c) Shifting profits insufficient. An arrangement or transaction that merely shifts income or value between related persons does not result in a meaningful change in economic position.
(5) When do substantial nontax reasons or purposes exist for entering into an arrangement or transaction?
(a) Subjective purpose. In evaluating whether a taxpayer had a substantial nontax reason or purpose for an arrangement or transaction, the department will consider all facts and circumstances that are relevant to determining the taxpayer's subjective intent. However, the department is not required to prove that tax avoidance was the subjective intent of any particular arrangement or transaction, but may presume such intent from the presence of other relevant factors.
(b) Substantial nontax reason defined. A substantial nontax reason is a bona fide nontax reason that is a substantial motivating factor to the taxpayer's decision to enter into the arrangement or transaction in this state. A bona fide nontax reason may include the purpose of obtaining tax benefits from another government, provided the benefits are not the same type, kind, or nature of any substantial Washington state tax benefit obtained under the arrangement or transaction.
(c) Partial safe harbor. For purposes of applying this rule, the department will treat a stated nontax purpose as a bona fide reason where all participants in an arrangement or transaction are substantive operating businesses, adequately capitalized, and carrying on substantial business activities using their own property or employees. For purposes of applying common law or statutory remedies other than under RCW 82.32.655, the department may treat stated nontax reasons as other than bona fide, if appropriate under all facts and circumstances.
(6) Results of an unfair tax avoidance transaction:
(a) Determination of proper amount of tax. For tax benefits received on or after January 1, 2006, the department must disregard the form of an unfair tax avoidance arrangement or transaction and determine the amount of tax based on the actual substance of the arrangement or transaction, except as provided in subsection (7) of this rule.
(b) Amount of tax benefit defined. The tax benefit of an unfair tax avoidance arrangement or transaction is the difference between the amount of tax due based on the actual substance of the arrangement or transaction and the amount of tax actually paid by the taxpayer based on the form of the arrangement or transaction. In determining the amount of the tax benefit, the department will credit the tax previously paid by the taxpayer against total tax assessed on the revised transaction in accordance with customary department practice.
(c) Actual substance. The actual substance of an unfair tax avoidance arrangement or transaction is:
(i) For transactions or arrangements described in subsection (2)(a) of this rule and WAC 458-20-28001, a sale of construction services from the construction contractor to the developer or owner.
(ii) For transactions or arrangements described in subsection (2)(b) of this rule and WAC 458-20-28002, a sale of property or services by a person subject to Washington taxes on the arrangement or transaction.
(iii) For transactions or arrangements described in subsection (2)(c) of this rule and WAC 458-20-28003, direct ownership of the tangible personal property by the user.
(7) Tax periods affected: The legislation addressed in this rule applies to tax benefits received on or after January 1, 2006. The legislation also contains exceptions to an application based on when an arrangement or transaction is initiated. The relationship between when the tax benefit is received and when the arrangement or transaction is initiated is explained as follows:
(a) When is an arrangement or transaction initiated? An arrangement or transaction is initiated when the first tax benefits are received.
(b) When are tax benefits received? For purposes of this rule, the timing of receipt of tax benefits is not dependent on the date on which the tax return is required to be filed, but instead:
(i) Business and occupation tax benefits are received on the date that, in the absence of tax avoidance, the taxpayer would have been subject to B&O tax under RCW 82.04.220.
(ii) Retail sales tax benefits are received on the date of the retail sale; and
(iii) Use tax benefits are received on the date of first use in Washington.
(c) Tax benefits received January 1, 2006, through April 30, 2010. The department will not deny tax benefits received by a taxpayer during this period if any of the following are true:
(i) The taxpayer reported its tax liability in conformance with unrevoked specific written instructions issued to that taxpayer or a person affiliated with the taxpayer as defined under subsection (1)(b)(iii), and the taxpayer's arrangement or transaction does not differ materially from that addressed in the specific written instructions.
(ii) The taxpayer reported its tax liability in conformance with a determination or other document made available by the department to the general public that specifically identifies and clearly approves the arrangement or transaction, and the taxpayer's arrangement or transaction does not differ materially from that addressed in the determination or document.
(iii) The department has completed a field audit of the taxpayer and the arrangement or transaction is covered by the audit. An arrangement or transaction is covered by an audit if the audit covered the same tax type (e.g., sales, use, business and occupation) as the tax benefit obtained by the taxpayer from the arrangement or transaction. An audit is complete when closed by the department.
(d) Arrangement or transaction initiated before May 1, 2010, and tax benefits received after April 30, 2010. The department will not deny tax benefits received by the taxpayer on or after May 1, 2010, if either of the following is true:
(i) The taxpayer has reported its tax liability in conformance with unrevoked specific written instructions issued to that taxpayer or a person affiliated with the taxpayer as defined under subsection (1)(b)(iii) of this rule, and the taxpayer's arrangement or transaction does not differ materially from that addressed in the specific written instructions.
(ii) The taxpayer has reported its tax liability in conformance with a determination or other document made available by the department to the general public that specifically identifies and clearly approves the arrangement or transaction, and the taxpayer's arrangement or transaction does not differ materially from that addressed in the determination or document.
(e) Arrangement or transaction initiated on or after May 1, 2010. For arrangements and transactions initiated on or after May 1, 2010, the department will not deny tax benefits received by the taxpayer if the taxpayer reports its tax liability in conformance with unrevoked specific written instructions issued to that taxpayer, and the taxpayer's arrangement or transaction does not materially differ from that addressed in the specific written instructions. Specific written instructions for this purpose do not include instructions provided to any other person. Further, taxpayers may not rely on any determination or other document made available by the department to the general public prior to May 1, 2010, to the extent inconsistent with this rule.
(f) When do transactions or arrangements materially differ from those addressed in written guidance? An arrangement or transaction materially differs from that addressed in written guidance when there is a material change in the form or substance of the arrangement or transaction, including without limitation, when there is a change of any participant identified in specific written instructions.
Example 1. A taxpayer identifying itself obtains a letter ruling from the department that specifically identifies an arrangement that constitutes unfair tax avoidance under this rule. In its letter ruling, the department approves the arrangement as presented and does not rule that the arrangement must be disregarded or the tax benefits denied. The taxpayer's arrangement does not materially differ at any point in time from the arrangement addressed in the letter ruling, and the taxpayer reports its tax liability in accordance with the letter ruling. The department will not disregard the arrangement or deny the resulting tax benefits for that taxpayer for any tax period, unless and until the letter ruling is expressly revoked.
Example 2. Assume the same facts as Example 1, but the letter ruling was sought by and issued to a person affiliated with the taxpayer as defined under subsection (1)(b)(iii) of this rule. If the arrangement was initiated and started to generate tax benefits prior to May 1, 2010, the department will not disregard the arrangement or deny the resulting tax benefits for that taxpayer for any tax period, unless and until the letter ruling is expressly revoked.
Example 3. Assume the same facts as Example 1, but the letter ruling was not sought by or issued to either the taxpayer or an affiliate. Assume that the arrangement or transaction is not addressed in any published guidance made available to the public by the department. The department must disregard the arrangement and deny the tax benefits received on or after January 1, 2006.
Example 4. The department conducts a field audit of a taxpayer for the period January 1, 2004, through December 31, 2008. The taxpayer has engaged in an arrangement that constitutes unfair tax avoidance under this rule. The arrangement was initiated January 1, 2004. The audit is completed prior to May 1, 2010. In specific written instructions, the audit expressly approves the arrangement. The taxpayer's arrangement does not materially differ at any point in time from the arrangement addressed in the audit instructions, and the taxpayer reports its tax liability in accordance with the those instructions. The department will not disregard the form of the arrangement or deny the tax benefits received for any tax period, unless and until the audit instructions are expressly revoked.
Example 5. Assume the same facts as Example 4, but the audit does not expressly approve the arrangement. Although the audit covers the same tax type as the benefits received under the arrangement, the arrangement is not specifically addressed in the audit's written reporting instructions. The taxpayer's arrangement does not differ at any point in time from the arrangement engaged in during the audit. Also assume that the arrangement or transaction is not addressed in any other published guidance made available by the department to the public.
• The department will not disregard the form of the arrangement or deny the tax benefits received through December 31, 2008, because the period is included in a completed field audit and is wholly included in the period prior to May 1, 2010.
• The department must disregard the form of the arrangement and deny tax benefits received after December 31, 2008, and prior to May 1, 2010, because the period is not included in a completed field audit.
(8) Unfair tax avoidance penalty.
(a) Penalty imposed. Except as otherwise stated in this rule, the department must assess a penalty of thirty-five percent on the amount of the tax benefit denied because of the disregard of an unfair tax avoidance arrangement or transaction.
(i) When the unfair tax avoidance penalty applies. The thirty-five percent assessment penalty applies to the tax benefits from engaging in unfair tax avoidance and received on or after May 1, 2010, and denied under this rule.
(ii) Penalty safe harbor. The department will not apply the tax avoidance penalty if the taxpayer discloses its participation in the tax avoidance arrangement or transaction to the department before the department provides notice of an investigation or audit of any kind or otherwise discovers the taxpayer's participation.
(iii) Disclosure requirements. The disclosure must be in writing, it must identify the taxpayer, and it must either request a ruling on the specific arrangement or transaction, or it must provide sufficient information to allow the department to reasonably determine whether the arrangement or transaction is unfair tax avoidance. Disclosure under this subsection applies only to the specific arrangement or transaction addressed in the disclosure. The disclosure no longer qualifies for the safe harbor upon any material change to the arrangement or transaction, including a change in participants.
(b) Discovery. The department discovers a taxpayer's participation in an unfair tax avoidance arrangement when the department obtains any evidence of the participation from any source.
(c) Notice. The department provides notice of an investigation or audit when it provides either oral or written notice to the taxpayer of the investigation or audit, regardless of whether the audit covers the same tax type (e.g., retail sales, use, business and occupation) as the tax benefit obtained from the unfair tax avoidance arrangement or transaction.
(d) Audits. Taxpayers subject to an investigation or audit that was open as of May 1, 2010, shall be deemed to have provided disclosure to the department that satisfies the requirements of (a)(ii) of this subsection with respect to any arrangement or transaction initiated prior to May 1, 2010, that results in a tax benefit of the same type (e.g., retail sales, use, business and occupation) as covered in the open investigation or audit. If the department fails to discover the taxpayer's participation in a tax avoidance arrangement or transaction during an investigation or audit closed after May 1, 2010, the taxpayer may still apply for the safe harbor for future periods by disclosure in accordance with the requirements of (a)(ii) of this subsection.
Example 6. On or after May 1, 2010, a taxpayer identifying itself requests a letter ruling on its participation in an arrangement that constitutes unfair tax avoidance under this rule. The taxpayer specifically requests that the department determine whether the arrangement is an identified transaction or unfair tax avoidance and provides all information requested by the department. As of the date the letter ruling request is received by the department, the department had not discovered the taxpayer's participation in the arrangement and had not notified the taxpayer of its intention to investigate or audit. If the department subsequently disregards the arrangement and denies the tax benefits, the department will not apply the thirty-five percent avoidance penalty to any denied tax benefit.
Example 7. Assume the same facts as in Example 6, but the taxpayer does not specifically request that the department determine whether the arrangement is an identified transaction or unfair tax avoidance. However, in the ruling request, the taxpayer provides sufficient information for the department to reasonably determine whether the arrangement is an identified transaction or unfair tax avoidance. If the department subsequently disregards the arrangement and denies the tax benefits, the department will not apply the thirty-five percent avoidance penalty to any denied tax benefit.
Example 8. Assume the same facts as Example 7, but the taxpayer only requests a ruling on specific elements related to the tax avoidance arrangement, not the arrangement as a whole. The ruling request therefore does not contain information sufficient for the department to reasonably determine whether the arrangement is an identified transaction or unfair tax avoidance. If the department subsequently disregards the arrangement and denies the tax benefits, the department must apply the thirty-five percent avoidance penalty to any denied tax benefit.
Example 9. A taxpayer engages in an arrangement or transaction from January 1, 2005, through December 31, 2010. Assume the arrangement constitutes an unfair tax avoidance arrangement under this rule. The taxpayer does not disclose the arrangement to the department in conformance with (a)(ii) of this subsection. If the department subsequently disregards the arrangement and denies the tax benefits, it must do so back to January 1, 2006, subject to the statute of limitations. The department must also apply the thirty-five percent avoidance penalty, but only to the portion of the assessment that results from tax benefits received on or after May 1, 2010, and denied under this rule.
Example 10. A construction contractor forms a joint venture with a developer. The venture was initiated, wound up its business, and was dissolved on April 1, 2010. Assume the joint venture constituted an unfair tax avoidance arrangement under this rule. Also assume that the venture has never been audited and did not report its tax liability in conformance with specific written instructions, or any other written authority that specifically identifies and clearly approves the arrangement. If the department subsequently disregards the arrangement and denies the tax benefits, it must do so back to January 1, 2006. The department will not assess the thirty-five percent avoidance penalty, however, because no tax benefits were received on or after May 1, 2010.
Example 11. Assume the same facts as Example 5, for tax benefits received on or after May 1, 2010, the department must disregard the form of the arrangement and deny the tax benefits received. In addition, the department must assess the thirty-five percent tax avoidance penalty unless the taxpayer discloses its participation in the arrangement in accordance with this rule.
For further information refer to WAC 458-20-28001, 458-20-28002, and 458-20-28003.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-09-004, § 458-20-280, filed 4/2/15, effective 5/3/15.]


PDF458-20-28001

Construction joint ventures and similar arrangements described in RCW 82.32.655 (3)(a).

(1) Preface. This rule includes a number of examples that identify a set of facts and then state a conclusion. The examples should be used only as a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority. An example that concludes an arrangement or transaction is not unfair tax avoidance under this rule does not mean that the arrangement or transaction is approved by the department under other authority.
The tax consequences of all situations must be determined after a review of all facts and circumstances. Additionally, each fact pattern in each example is self-contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. Examples concluding that sales tax applies to the transaction assume that no exclusions or exemptions apply, and the sale is sourced to Washington.
(2) Required elements.
(a) A construction joint venture or similar arrangement is a potential tax avoidance arrangement or transaction when it:
(i) Provides substantially guaranteed payments to the construction contractor for construction services rendered;
(ii) Does not provide the construction contractor with the right to share substantial profits in the venture; and
(iii) Does not require the construction contractor to bear significant risks of loss in the venture.
The construction joint venture is considered a sale of construction services and potential tax avoidance if (a)(i) through (iii) of this subsection elements exist and the arrangement is also determined to be unfair tax avoidance under WAC 458-20-280(3). If none of these elements exist, then it is not potential tax avoidance and cannot be unfair tax avoidance.
(b) Form of the arrangement. A joint venture or similar arrangement includes a joint venture, partnership, limited liability company, or any similar arrangement between a construction contractor and an owner or developer. This rule applies even if the arrangement includes additional participants. The term "construction contractor" includes any person providing construction services or services in respect to construction. The term "owner or developer" includes, without limitation, a landowner, a lessee of land, a project manager, or a construction manager. An arrangement that fails to meet all elements of a joint venture at common law may still be an arrangement that is considered a joint venture or similar arrangement under this subsection.
(c) Substantially guaranteed payments. A "substantially guaranteed payment" is a payment that is guaranteed, secured, or otherwise protected so as to be substantially guaranteed to occur. The determination is based on all relevant facts and circumstances including, without limitation, the terms of any operating agreement or other applicable instrument, common trade practice, and the course of dealing of the parties. The fact that a payment reduces the value of the payee's capital account is not determinative. Whether or not a payment is a guaranteed payment for purposes of Sec. 707(c) of the I.R.C. is not relevant.
(d) Substantial profits. A construction contractor is entitled to substantial profits only when it has a vested and unconditional right to receive income earned by the venture in the ordinary course of the venture's business to which the construction contractor's contributed property and/or services relate, after costs of the venture are paid in full or otherwise provided. If the receipt of income is guaranteed, secured, or otherwise protected so as to be substantially guaranteed to occur, it is a substantially guaranteed payment, not a right to share in substantial profits. For purposes of determining substantial profits, a right is unconditional even though dependent on venture profitability. To be "substantial," the right to profits must be substantial when compared to the right to guaranteed payments under the arrangement.
(e) Significant risks. A construction contractor bears significant risks when its right to substantial profits is not guaranteed, secured, or otherwise protected so as to be substantially guaranteed to occur. A significant risk of loss to the contractor is deemed to occur when at least one-half of the fair market value of contributed services is at risk.
(3) Examples.
Example 1. A construction contractor and a developer create a joint venture under which the developer contributes land, and the construction contractor contributes labor and materials. All contributions and distributions are reflected in adjustments to the value of the parties' capital accounts. The construction contractor's capital account contributions are valued at out-of-pocket cost of labor and materials plus 12% designated as overhead. The venture agreement provides that the venture will obtain a bank construction loan and will use the construction draws to periodically pay down the construction contractor's capital account. The terms of the construction loan require that construction loan proceeds be used to pay the construction contractor and remove applicable liens. Under this arrangement, payments to the construction contractor are substantially guaranteed to occur because the terms of the construction loan require payments to the construction contractor. Because this arrangement provides for substantially guaranteed payments, no substantial right to profits and the loan terms assure no risk of loss to the contractor, it is a potential tax avoidance arrangement or transaction under WAC 458-20-280(2). However, it is not unfair tax avoidance unless it is determined to be tax avoidance in accordance with WAC 458-20-280(3).
Example 2. Assume the same facts as in Example 1, but the value of the construction contractor's contributions of labor and materials are credited to its capital account at out-of-pocket cost plus 3% for overhead. Assume that all of the items credited to capital account are substantive credits. Under this arrangement, payments to the construction contractor are substantially guaranteed to occur because the terms of the construction loan require payments to the construction contractor. If the arrangement contains other provisions that also provide the contractor with the right to share substantial profits and require the contractor to bear significant risk of loss in the venture, then the arrangement is not an unfair tax avoidance arrangement or transaction.
Example 3. Assume the same facts as in Example 2, except that nothing in the loan documents or any other agreement require that payments be made to the construction contractor. If the arrangement also provides the contractor with the right to share substantial profits and requires the contractor to bear significant risks of loss in the venture, then the arrangement is not a tax avoidance arrangement or transaction.
Example 4. A construction contractor and a developer create a joint venture under which the developer contributes land and the construction contractor contributes labor and materials. All contributions and distributions are reflected in adjustments to the parties' capital accounts. The value of the construction contractor's capital account contributions include out-of-pocket costs of labor and materials plus 12% designated as overhead. If at any point, the value of the construction contractor's capital account exceeds a specified percentage of the total capital account balances of all members combined, and that percentage is not reduced within 30 days, the construction contractor has the right to require a buy-out by the venture (a "put option"). The purchase price of the put option is equal to the value of the unpaid balance of the construction contractor's capital account. The agreement requires the developer to guarantee the venture's payment obligation under the option. The construction contractor is also entitled up to 5% of the profits of the venture once the improved land is sold. In this example, payments to the construction contractor are substantially guaranteed as a result of the put option and the developer guarantee. In addition, the construction contractor is not entitled to substantial profits of the venture. Therefore, the arrangement is a potential tax avoidance arrangement or transaction under WAC 458-20-280 (2)(a). However, it is not unfair tax avoidance unless it is determined to be tax avoidance in accordance with WAC 458-20-280(3).
Example 5. Assume the same facts as Example 4, but the construction contractor is entitled to 50% of the profits of the venture. However, the developer has the power under the joint venture agreement to issue a call option and buy all of the construction contractor's interest in the venture at any time prior to the sale of the improved property. Under this example, the construction contractor is also not entitled to a substantial share of the profits of the venture because the construction contractor's right can be terminated by unilateral act of the developer. It does not matter whether the developer's call right is discretionary or is limited to a termination "for cause." Because the arrangement provided for guaranteed payments and does not provide the construction contractor with a vested and unconditional right to profits of the venture, the arrangement is a potential tax avoidance transaction. However, it is not unfair tax avoidance unless it is determined to be tax avoidance in accordance with WAC 458-20-280(3).
Example 6. Assume the same facts as Example 4, but the value of the construction contractor's capital account contributions includes only allowable cost of labor and materials plus 3% overhead. However, the purchase price of the put option is equal to the unpaid balance of the construction contractor's capital account plus 8% of the profits of the venture, determined as of the date the put option is exercised. The arrangement is still a potential tax avoidance arrangement. In this example, the price under the put option right is a guaranteed payment because it is guaranteed by the developer.
Example 7. A construction contractor and a developer create a joint venture to build a house, under which the developer contributes land and the construction contractor contributes labor and materials. All contributions and distributions are reflected in adjustments to the parties' capital accounts. Upon sale of the house, the venture will wind up its business, pay or provide for all debts of the venture, and distribute all funds in the following order: (i) A distribution to the construction contractor in an amount equal to the value of its capital account; (ii) a distribution to the developer equal to the value of the amount of its capital account; (iii) substantial profits as defined in subsection (2)(d) of this rule to the construction contractor; and (iv) all remaining funds to the developer. Assume the construction contractor's rights to receive the value of its capital account and the final profits distribution are vested and unconditional, but that neither of the payments are guaranteed, secured, or otherwise protected. In this example, the construction contractor is not entitled to any guaranteed payments. In addition, the construction contractor has a right to substantial profits that are at significant risk of loss. Because none of the elements identified in subsection (2)(a) of this rule above are present, this is not a potential tax avoidance transaction.
Example 8. A construction contractor and a developer create a joint venture under which the developer contributes land and the construction contractor contributes labor and materials. Assume the construction contractor is not entitled to any guaranteed payments. Upon sale of the house, the venture will wind up its business, pay or provide for all debts of the venture, and distribute all funds X% to the developer and Y% to the construction contractor. Assume that the construction contractor's right to receive this Y% of venture profits is vested and unconditional and that the construction contractor is not entitled to any guaranteed payments. Under this example, the construction contractor is entitled to a substantial share of profits earned by the venture in the ordinary course of its business to which the construction contractor's contributions relate. This arrangement is not a potential tax avoidance arrangement or transaction because no payments, including payment of the Y% profit, are guaranteed. Therefore, the right to profits is substantial and the construction contractor also bears significant risk in the venture.
Example 9. Assume the same facts as Example 8, but the developer and an affiliate of the construction contractor enter into a separate contract for project management services. The affiliate will provide all project management and similar services through the contract, under which payment for the services is substantially guaranteed. The arrangement is not potential tax avoidance under this subsection. The project management contract will be subject to tax according to the substance of the arrangement, assuming the affiliate is responsible for construction.
(4) Related guidance. Nothing in this rule affects the application of WAC 458-20-170 or other department-published guidance on differentiating between speculative builders and prime contractors. Therefore, an arrangement or transaction may be considered the sale of construction services under WAC 458-20-170 or other guidance, irrespective of whether the arrangement or transaction is potential or unfair tax avoidance under this rule.
(5) Reserved.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-09-004, § 458-20-28001, filed 4/2/15, effective 5/3/15.]


PDF458-20-28002

Disguised income arrangements described in RCW 82.32.655 (3)(b).

(1) Preface. This rule includes a number of examples that identify a set of facts and then state a conclusion. The examples should be used only as a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority. An example that concludes an arrangement or transaction is not unfair tax avoidance under this rule does not mean that the arrangement or transaction is approved by the department under other authority.
The tax consequences of all situations must be determined after a review of all facts and circumstances. Additionally, each fact pattern in each example is self-contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. Examples concluding that sales tax applies to the transaction assume that no exclusions or exemptions apply, and the sale is sourced to Washington.
(2) Redirecting income as a potential tax avoidance arrangement or transaction.
(a) Required elements. An arrangement that moves income is a potential tax avoidance arrangement or transaction only when all of the following elements are met:
(i) The business activities of the taxpayer or a person related to the taxpayer are of the type taxable in Washington and are integral to providing the property or services; and
(ii) The arrangement or transaction functions to move income to a person that is not taxable in Washington on that income; and
(iii) Income is received by a participant in the arrangement as consideration for property or services and that income is from a person not affiliated with the taxpayer.
Administrative services will not be considered integral to providing property or other services for purposes of this subsection.
The arrangement or transaction is unfair tax avoidance only if it meets all three of these elements and is also determined to be unfair tax avoidance under WAC 458-20-280(3).
(b) Definitions.
(i) "Affiliated" means under common control.
(ii) "Control" means the possession, directly or indirectly, of more than fifty percent of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract or otherwise. A person who has the power to cause the direction of management and policies includes:
(A) Persons related to the taxpayer; and
(B) Persons with whom the taxpayer acts in concert to direct the management or policies of the entity.
(iii) "Common control" means two or more entities controlled by the same person.
(iv) "Moving" or "moves" is any act or combination of acts that result in receipt of income by a person who is not taxable in Washington on that income, when the taxpayer or a related person receives substantially all the benefit of that income. Such acts may include without limitation: An assignment, transfer, lease, or license of income-producing assets; the sale of property or services at less than market value; and capital contributions and distributions from a capital account.
(3) Examples.
Example 1. A Washington company ("Parent") forms a wholly owned limited liability company in Nevada ("Subsidiary"). Subsidiary has one part-time employee in Nevada, rents shared office space and has the same corporate officers as Parent. Parent causes Subsidiary to enter into sales and service contracts with customers both within and without Washington for the sale of intangible personal property and consulting services. Subsidiary hires Parent to provide all services necessary to create and support the intangible personal property, and to provide the consulting services to Subsidiary's customers. Subsidiary pays Parent a nominal amount for these services. Subsidiary transfers its remaining profits to Parent through ownership distributions. Assume the income is not taxable to Subsidiary but would be taxable if received by Parent. This arrangement is potential tax avoidance because the arrangement ensures that income received from customers for the services performed by Parent, which income would otherwise be taxable in Washington, is received by Subsidiary, not Parent. However, it is only an unfair tax avoidance transaction if it is also determined to be tax avoidance under WAC 458-20-280(3).
Example 2. Assume the same facts as Example 1, but all customers of the Subsidiary (formerly customers of Parent) are affiliates of Parent. Assume the intangible personal property and consulting services that the customers purchase from Subsidiary are not integral to any property or services provided by the customers to nonaffiliated persons. This arrangement is not potential tax avoidance because the ultimate customers of the Subsidiary in this arrangement are affiliates, rather than persons not affiliated with the taxpayer.
Example 3. After May 31, 2010, a Washington company ("Parent") forms multiple separate wholly owned Nevada subsidiaries ("S-1," "S-2," "S-3," etc.). Parent, as agent of the Nevada subsidiaries, enters into contracts with customers for services to be provided both within and without Washington. Parent limits the number of agreements per subsidiary so that each subsidiary's annual gross income is less than $50,000. Each Subsidiary hires Parent to provide all services necessary for the Subsidiary to meet its contract obligations. Each Subsidiary pays Parent only a nominal amount for these services. Each subsidiary transfers its remaining profits to Parent through ownership distributions. This arrangement is a potential tax avoidance transaction because the arrangement ensures that income received from customers for the services performed by Parent (and otherwise taxable in Washington) is received by the subsidiaries. The arrangement further ensures that each subsidiary's gross income does not meet minimum nexus standards in Washington. However, it is only an unfair tax avoidance transaction if it is also determined to be tax avoidance under WAC 458-20-280(3).
Example 4. A Washington parent company forms a Nevada subsidiary and contributes income-producing assets to it in exchange for ownership interests. The Nevada subsidiary is adequately capitalized and uses its own employees to complete the activities necessary to sell property or services to customers. However, the parent company provides administrative services to the subsidiary at a below market cost. After paying all other costs, the Nevada subsidiary distributes its net income to the parent company. This is not a potential tax avoidance arrangement because the parent company's business activities are not integral to the subsidiary's ability to provide the property or services to its customers.
Example 5. A Washington parent company forms a Delaware subsidiary that is adequately capitalized and carries on substantial business activities using its own property or employees. Sales representatives employed by the Washington parent company call on potential customers and enter into product sales contracts on behalf of the Washington parent. The Washington parent then transfers those contracts to the subsidiary, and the subsidiary fulfills the orders and receives the income. After paying its costs, the Delaware subsidiary distributes its net income to parent. This arrangement is a potential tax avoidance arrangement because the Parent's sales representatives' activities are integral to the subsidiary's ability to provide the property or services to its customers. However, it is only an unfair tax avoidance transaction if it is also determined to be tax avoidance under WAC 458-20-280(3).
Example 6. A Washington manufacturer wholesales its products both within and without Washington. The Washington manufacturer forms an Idaho subsidiary company and transfers all of its wholesale contracts to it. The manufacturer causes the subsidiary to purchase and hold all raw materials necessary to manufacture the products. The subsidiary then hires the Washington manufacturer to act as a processor for hire. The subsidiary, as owner of the manufactured products, sells them under the transferred wholesale contracts. Assume the subsidiary has nexus with Washington. This arrangement is not a potential tax avoidance arrangement because it does not function to move income from the sale of goods or services from an entity taxable in Washington to a related entity that is not taxable in Washington on that income. The subsidiary is taxable on all sales in Washington in the same manner as was the manufacturer.
Example 7. Assume the same facts as Example 6, except Parent is not a processor for hire. The Washington manufacturer forms a Washington subsidiary company and transfers all of its sales contracts to it. The subsidiary purchases all of the products made by the manufacturer at a reasonable discount. The subsidiary then sells the products under the transferred contracts. This arrangement is not a potential tax avoidance arrangement because the subsidiary is taxable on all sales in Washington in the same manner as was the manufacturer. The arrangement does not function to move income from the sale of goods or services from an entity taxable in Washington to a related entity that is not taxable in Washington on that income.
Example 8. Assume the same facts as Example 7, but the subsidiary is an Oregon company with no nexus with Washington. Assume that the products are not warehoused in Washington, but are immediately shipped upon production and that the Oregon subsidiary has no other activities that create nexus with Washington. This arrangement is a potential tax avoidance arrangement because it functions to move income from the sale of the product from the manufacturer to the Oregon subsidiary. However, it is only an unfair tax avoidance transaction if it is also determined to be tax avoidance under WAC 458-20-280(3).
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-09-004, § 458-20-28002, filed 4/2/15, effective 5/3/15.]


PDF458-20-28003

Sales and use tax avoidance arrangements described in RCW 82.32.655 (3)(c).

(1) Preface. This rule includes a number of examples that identify a set of facts and then state a conclusion. The examples should be used only as a general guide. The department will evaluate each case on its particular facts and circumstances and apply both this rule and other statutory and common law authority. An example that concludes an arrangement or transaction is not unfair tax avoidance under this rule does not mean that the arrangement or transaction is approved by the department under other authority.
The tax consequences of all situations must be determined after a review of all facts and circumstances. Additionally, each fact pattern in each example is self-contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. Examples concluding that sales tax applies to the transaction assume that no exclusions or exemptions apply, and the sale is sourced to Washington.
(2) Property ownership by a controlled entity as a potential tax avoidance arrangement.
(a) Required elements. All three of the following elements must be met for property ownership by a controlled entity to be considered a potential tax avoidance arrangement:
(i) The taxpayer engages in a transaction in which the taxpayer, or a person(s) acting in concert with the taxpayer, vests title or any other ownership interest of tangible personal property in an entity;
(ii) The taxpayer exercises control over the entity in such a manner that the taxpayer effectively controls the tangible personal property; and
(iii) The tangible personal property is used by the taxpayer in Washington without payment of Washington retail sales tax or use tax on its full value.
The arrangement or transaction is unfair tax avoidance only if it meets all three of the elements in (a)(i) through (iii) of this subsection and is also determined to be unfair tax avoidance under WAC 458-20-280(3). If the arrangement or transaction is determined to be unfair tax avoidance, the department will determine and assess tax according to the actual substance of the arrangement or transaction which is presumed to be direct acquisition, ownership and use of the tangible personal property by the taxpayer.
(b) Definition of "entity." For purposes of this subsection, an "entity" is any taxable entity including, a trust, estate, corporation, limited liability company, partnership, joint venture or other business or financial structure with a legal or identifiable separate existence.
(c) Control of the entity. A taxpayer controls an entity when either:
(i) The taxpayer possesses, directly or indirectly, more than fifty percent of the voting power of the entity, or more than fifty percent of the power to direct or cause the direction of the management and policies of the entity, whether through ownership, power of revocation, by contract, or otherwise; or
(ii) A taxpayer exercises control over an entity in such a manner as to effectively retain control over the tangible personal property when the taxpayer has the power to direct or cause the direction of the use or disposition of the tangible personal property, including the power of direction and control held by a principal over an agent.
(d) Attribution. A taxpayer's total percentage of voting power or power to direct the management or policies of an entity, or of the tangible personal property also includes the voting or management authority held by, or for the benefit of:
(i) Persons related to the taxpayer as defined in WAC 458-20-280 (1)(b)(vi); and
(ii) Persons with whom the taxpayer acts in concert to obtain control over the tangible personal property or entity in excess of the share of control attaching to a person's ownership or beneficial interests in the entity.
(e) Presumption of control. Whether a person has effective control over tangible personal property is based on all facts and circumstances. A person is presumed to have effective control over the tangible personal property when the person has control over the entity that holds the property.
(f) Full value. "Full value" means the fair market value of the tangible personal property at the time it is first used in Washington.
(g) Safe harbor – No tax benefit. The department will not disregard title in or ownership by a controlled entity if the arrangement does not provide an exemption, deduction, or otherwise result in a reduction in taxes, under chapter 82.08 or 82.12 RCW that would not have been available if the taxpayer had been vested with title or ownership directly. Similarly, the department will not disregard title in or ownership by a controlled entity if deferred retail sales tax or use tax is paid on the full value of the tangible personal property when it is first used in Washington.
(h) Safe harbor – Bona fide merger or sale of a business.
The department will not disregard title in or ownership by a controlled entity when that arrangement arises out of or is related to the sale of stock or ownership interests in a substantive operating business, including as part of a statutory merger. For purposes of this subsection, "substantive operating business" means a business that is adequately capitalized and carries on substantial business activities using its own property or employees, other than the business of owning or leasing tangible personal property of the kind or nature as the tangible personal property at issue.
(i) Safe harbor – Certain leasing arrangements.
The department will not disregard the title in or ownership by a controlled entity when substantially all use of the property is under a lease, at a reasonable rental value or for a timesharing fee, by a substantive operating business for bona fide business purposes, or by a person who is not related to the taxpayer, or a combination of these, provided that retail sales tax is collected and remitted on the lease payments. Similarly, the department will not disregard bailment arrangements under which substantially all use of the property is by a substantive operating business for bona fide business purposes or by a person who is not related to the taxpayer. For purposes of this safe harbor:
(i) "Substantially all use" means at least ninety-five percent of the use of the property, determined by actual use, irrespective of location.
(ii) "Reasonable rental value" means the reasonable rental value for the use of the tangible personal property, determined as nearly as possible according to the value of such use at the places of use of similar property of a like quality and character.
(iii) "Substantive operating business" means a business that is adequately capitalized and carries on substantial business activities using its own property or employees.
(iv) "Bona fide business purpose." Use of tangible personal property serves a bona fide business purpose only when the use, in nature and quantity is ordinary and necessary for the business of the user. Use for entertainment purposes must be directly related or associated with substantial business activities of the user. A bona fide business purpose may include providing employee or director benefits when the business pays the lease, the employee or director is required to report the value of the benefit as compensation for state or federal tax purposes and the benefit is ordinary and reasonable in nature or quantity for the business. See RCW 82.04.360 for the taxability of director's compensation.
(v) For aircraft only: "Timesharing fee" for purposes of this safe harbor is the total sum of all expenses of a flight authorized or permitted under 14 C.F.R. Sec. 91.501 (d)(1) through (10).
(3) Examples.
Example A. A Washington resident taxpayer forms a wholly owned Montana limited liability company (MT, LLC). MT, LLC purchases a new motor home, takes delivery and registers the motor home in Montana. MT, LLC pays no retail sales tax or use tax on the purchase. The Washington resident uses the motor home in Washington under a bailment, paying use tax on the reasonable rental value of the motor home. This is a potential tax avoidance arrangement. The taxpayer has complete control over MT, LLC and effective control over the motor home. The taxpayer uses the motor home in Washington, but Washington retail sales or use tax has not been paid on its full value. No safe harbor applies. However, the arrangement is only unfair tax avoidance if it is also determined to be tax avoidance under WAC 458-20-280(3).
Example B. Assume the same facts as Example A, but MT, LLC is owned by a husband and wife, with each having a fifty percent ownership interest in the company. This is still a potential tax avoidance transaction because each spouse's ownership interest in MT, LLC is attributable to the other. Both spouses are deemed to have control over MT, LLC and effective control over the motor home.
Example C. Three Washington residents who are unrelated to each other form a Washington limited liability company. The company purchases an aircraft in Washington for the purpose of leasing to its members and does not pay retail sales tax on the purchase. Each member of the company has a one-third ownership interest and equal voting rights, equal rights to direct the management and policies of the company, and equal power to direct the use or disposition of the aircraft. All use of the aircraft by company members is in Washington, for recreational purposes, and at a fair market rate. The company collects retail sales tax on all lease payments. This is not necessarily a potential tax avoidance arrangement because none of the members of the company is in control of the company or of the aircraft. However, if the members act in concert to control use of the aircraft in excess of their share of ownership interest, a potential tax avoidance arrangement exists unless a safe harbor applies and it is also determined to be tax avoidance under WAC 458-20-280(3).
Example D. Assume the same facts as Example C, but the members of the company enter into a use agreement with respect to the aircraft under which one of the members, A, is entitled to use the aircraft at any time on a priority basis, while the remaining members are entitled to use the aircraft only if A is not using it. This is a potential tax avoidance arrangement because A acts in concert with the other members regarding the direction and control of the aircraft to obtain rights of use disproportionate with A's ownership or beneficial interests in the entity. Because A is working in concert with the other members of the company, ownership and control held by the other members are attributed to A. Therefore, A is deemed to have 100% of the control of the entity and the aircraft. However, the arrangement is only unfair tax avoidance if no safe harbor applies and it is also determined to be tax avoidance under WAC 458-20-280(3).
Example E. Corporation Y is a substantive operating business located in Washington. Corporation Y forms a Nevada LLC to hold an aircraft that is purchased out of state, but hangared in Washington. Individual I is the president of Corporation Y. Corporation Y leases the aircraft from the LLC. The Nevada LLC collects and remits retail sales tax on the lease payments. Corporation Y hires a third-party management company to provide a pilot and crew to fly Individual I to destinations within and without Washington for bona fide business purposes. In addition, Individual I occasionally subleases the aircraft from Corporation Y for I's personal use and Corporation Y collects a timesharing fee from Individual I, but this totals less than 5% of the total use of the aircraft. Assume the uses by Corporation Y and Individual I are the only use of the aircraft. This is not a potential tax avoidance arrangement because it meets the requirements of the safe harbor in subsection (2)(i) of this rule.
Example F. Assume the same facts as Example E, but assume the aircraft was purchased and delivered out of state, and that it is hangared in Oregon. The Nevada LLC does not collect retail sales tax on the lease payments, because the leases are sourced to Oregon. This is a potential tax avoidance arrangement because tax on the lease payments is not paid to Washington.
Example G. A parent company forms a subsidiary, "Y," to purchase and hold a yacht for lease to the parent company for use in Washington. All leases of the yacht are as bareboat charters at a fair market lease rate. The parent company uses the yacht to provide benefits to its directors, to entertain business clients, and for company celebrations. Assume no other use of the yacht, and that the directors report the value of yacht benefit as compensation for B&O and federal income tax purposes. This arrangement meets the safe harbor under subsection (2)(i) of this rule, provided that the described uses by the parent company are quantitatively ordinary and necessary for the business of the parent.
Example H. Assume the same facts as in Example G, but the company only provides the yacht benefit to one of its officers/directors. Assume the benefit allows the officer/director to use the yacht on a priority basis, and that the addition of the yacht benefit makes the officer's/director's compensation materially higher than similarly situated officers/directors within the industry. In the absence of other relevant facts, this arrangement does not meet the safe harbor under subsection (2)(i) of this rule, because it is not ordinary or necessary for a business to provide a single officer with such disparate treatment. However, it is only unfair tax avoidance if the arrangement is determined to be tax avoidance under WAC 458-20-280(3).
Example I. Assume the same facts as in Example G, and that the parent's annual gross income is $50,000. Assume that the total annual payments by the parent for its use of the yacht is $25,000. This arrangement does not meet the safe harbor under subsection (2)(i) of this rule, because it is not ordinary or necessary for a business to spend the equivalent of half of its annual gross income on the use of a yacht. However, it is only unfair tax avoidance if the arrangement is determined to be tax avoidance under WAC 458-20-280(3).
Example J. Company S owns tangible personal property purchased in a retail sale under which all retail sales taxes were paid. Washington resident, Company B, wants to purchase that property from Company S. Company B is a substantive operating business. Company S forms an LLC and transfers the property to it in exchange for all 100% of the ownership interests. Company S then sells 100% of the ownership interests in the LLC to Company B. Company B is now the parent company of the LLC. Company B uses the property in its Washington business activities under a bailment arrangement with the LLC without paying use tax. This is a potential tax avoidance arrangement because Company B, in concert with Company S, vests title of the property in an entity over which Company B obtains control, and then uses the property in Washington without paying retail sales or use tax. It does not meet any of the safe harbors under subsection (2)(g), (h), or (i) of this rule. However, it is only tax avoidance if the arrangement is also determined to be tax avoidance under WAC 458-20-280(3).
Example K. Assume the same facts as Example J, but Company B obtains use of the property through a fair market rate lease arrangement with the LLC. Assume all use of the property by Company B is for bona fide business purposes. This is not a potential tax avoidance arrangement because the arrangement qualifies for the safe harbor under subsection (2)(i) of this rule.
Example L. Assume the same facts as Example K, except that only 90% of the use of the property is by Company B under a fair market lease arrangement for bona fide business purposes. Assume that the other 10% of the use of the property is personal use by Individual I, who is the sole owner of Company B. This is potential tax avoidance because Individual I controls the property through control of Company B and uses the property in Washington without paying retail sales or use tax on the full value of the property. The arrangement does not qualify for any of the safe harbors in subsection (2)(g), (h), or (i) of this rule. However, the arrangement is only tax avoidance if it is determined to be tax avoidance under WAC 458-20-280(3).
Example M. Company O, an Oregon company, is wholly owned by an Oregon resident. Company O purchases an aircraft for lease to the Oregon resident. The Oregon resident uses the aircraft in Washington for personal purposes, for periods not in excess of 59 days. The aircraft lease is for less than fair market rate. This is a potential tax avoidance arrangement, but the department will not disregard the arrangement because no use tax is due on the Oregon resident's use of the tangible personal property in Washington pursuant to RCW 82.12.0251(1). This qualifies for the safe harbor under subsection (2)(g) of this rule.
Example N. A Washington Taxpayer owns a painting with a significant fair market value. Taxpayer is the sole beneficiary of a trust formed under the laws of the state of Oregon with an Oregon trustee. Under the terms of the trust, the trustee must obtain Taxpayer's authorization before disposing of any trust asset. Assume the trustee of the trust purchases a sculpture from an unrelated party and accepts delivery in Oregon. Taxpayer and the trust then enter into an agreement under which Taxpayer will purchase the trust's sculpture in exchange for cash and the painting held by Taxpayer. Taxpayer pays retail sales tax or use tax on the difference in value between the trade-in painting and the acquired sculpture. Taxpayer displays the sculpture in Washington. This arrangement is a potential tax avoidance arrangement. Taxpayer is the sole beneficiary of the trust and has control over the trust property. Taxpayer uses the trust to create a trade-in arrangement and obtain the use of property in Washington without paying sales or use tax on its full value. The arrangement does not meet any of the safe harbors under subsection (2)(g), (h) or (i) of this rule. However, it is only tax avoidance if the arrangement is also determined to be tax avoidance under WAC 458-20-280(3).
Example O. Company T owns tangible personal property and has paid sales or use tax on the full value of that property. Assume Company T is a substantive operating business as defined in subsection (2)(i)(iii) of this rule. Company A intends to acquire Company T through a merger transaction. Company A forms a wholly owned subsidiary, Newco and Company T is merged into Newco. The entity surviving the merger, Newco, now owns the tangible personal property formerly owned by A. After the merger is completed, Newco permits Company A to use the tangible personal property under a bailment arrangement. Company A does not pay sales or use tax on the value of the property it uses because Newco, as the successor to Company T, is a bailor that has paid sales or use tax on the property. This is not a tax avoidance arrangement because it qualifies for the safe harbor under subsection (2)(h) of this rule.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 15-09-004, § 458-20-28003, filed 4/2/15, effective 5/3/15.]


PDF458-20-281

Petroleum product tax.

(1) Introduction. Under chapter 82.23A RCW (hereinafter referred to as the "law"), a petroleum product tax is imposed upon the wholesale value of petroleum products in this state with specific credits and exemptions provided. The tax is an excise tax upon the privilege of first possessing petroleum products in this state. The tax is administered by the department of revenue.
(a) Chapter 82.23A RCW is administered exclusively under this rule. The application of the petroleum product tax with the exceptions noted below, is the same as the application of the hazardous substance tax explained in WAC 458-20-252 (1)(c).
(b) The petroleum product tax is imposed upon any possession of petroleum products in this state by any person who is not expressly exempt of the tax. However, it is the intent of the law that the economic burden of the tax should fall only upon the first such possession in this state just like the hazardous substance tax.
(2) Definitions. For purposes of this rule the following definitions will apply.
(a) "Tax" means the petroleum product tax imposed under chapter 82.23A RCW.
(b) "Petroleum product" means any plant condensate, lubricating oil, gasoline, aviation fuel, kerosene, diesel motor fuel, benzol, fuel oil, residual fuel oil, asphalt base, and every other product derived from the refining of crude oil, but the term does not include crude oil or liquefiable gases.
(c) "Possession" means control of a petroleum product located within this state and includes both actual and constructive possession.
(i) "Control" means the power to sell or use a petroleum product or to authorize the sale or use by another.
(ii) "Actual possession" occurs when the person with control has physical possession.
(iii) "Constructive possession" occurs when the person with control does not have physical possession.
(d) "Previously taxed petroleum product" means a petroleum product in respect to which the petroleum product tax has been paid and that has not been remanufactured or reprocessed in any manner (other than mere repackaging or recycling for beneficial reuse) since the tax was paid.
(e) "Wholesale value" is the tax measure or base. It means the fair market value determined by the wholesale selling price at the place of use of similar products of like quality and character.
(i) For purposes of determining the tax for petroleum products introduced at the rack, the wholesale value is determined when the petroleum product is removed at the rack unless the removal is to a properly licensed petroleum products exporter for direct delivery to a destination outside of the state. For all other cases, the wholesale value is determined upon the first nonbulk possession in the state.
(ii) In cases where no sale has occurred, wholesale value means the fair market wholesale value, determined as nearly as possible according to the wholesale selling price at the place of use of similar substances of like quality and character. In such cases, the wholesale value shall be the "value of the products" as determined under the alternate methods set forth in WAC 458-20-112.
(f) "Selling price" has the same meaning as provided in WAC 458-20-252 (2)(h).
(g) "State," for purposes of the credit provisions of the petroleum product tax, means:
(i) A state of the United States other than Washington, or any political subdivision of such other state;
(ii) The District of Columbia;
(iii) Any foreign country or political subdivision thereof; and
(iv) Territories and possessions of the United States.
(h) "Rack" means a mechanism for delivering petroleum products from a refinery or terminal into a truck, trailer, railcar, or other means of nonbulk transfer. For purposes of this definition:
(i) "Nonbulk transfer" means a transfer of a petroleum product that does not meet the definition of "bulk transfer" in (h)(ii) of this subsection;
(ii) "Bulk transfer" means a transfer of a petroleum product by pipeline or vessel; and
(iii) "Terminal" means a petroleum product storage and distribution facility that has been assigned a terminal control number by the internal revenue service, is supplied by pipeline or vessel, and from which certain petroleum products are removed at a rack.
(3) Tax rate and measure. The tax is imposed upon the privilege of possession of a petroleum product in this state.
(a) The tax rate is thirty one-hundredths of one percent (.003).
(b) The tax measure or base is the wholesale value of the petroleum product, as defined in this rule.
(c) The tax will apply for first possessions of any petroleum products in all periods after its effective date unless the department notifies taxpayers in writing of the department's determination that the pollution liability reinsurance program trust account contains a sufficient balance to cause a moratorium on the tax application. The department will again notify taxpayers in writing if and when the account balance requires reapplication of the tax.
(4) Exemptions. The following are expressly exempt from the tax:
(a) Any successive possessions of any previously taxed petroleum products are exempt in precisely the manner as the same exemption for the hazardous substance tax. (Additional information is provided in WAC 458-20-252 (4)(a).) If the tax is paid by any person other than the first person having taxable possession of a petroleum product, the amount of tax paid shall constitute a debt owed by the first person having taxable possession to the person who paid the tax.
(b) Any possession of a petroleum product by a natural person for use of a personal or domestic nature rather than a business nature is exempt in precisely the manner as the same exemption for the hazardous substance tax. (Additional information is provided in WAC 458-20-252 (4)(b).)
(c) Any possessions of the following substances are tax exempt:
(i) Natural gas, or petroleum coke;
(ii) Liquid fuel or fuel gas used in processing petroleum;
(iii) Petroleum products that are exported for use or sale outside this state as fuel.
(iv) The exemption for possessions of petroleum products for export sale or use as fuel may be taken by any person within the chain of distribution of such products in this state. To perfect its entitlement to this exemption the person possessing such product(s) must take from its buyer or transferee of the product(s) a written certification in substantially the following form:
Certificate of Tax Exempt Export Petroleum Products
I hereby certify that the petroleum products specified herein, purchased by or transferred to the undersigned, from (seller or transferor), are for export for use or sale outside Washington state as fuel. I will become liable for and pay any petroleum product tax due upon all or any part of such products that are not so exported outside Washington state. This certificate is given with full knowledge of, and subject to the legally prescribed penalties for fraud and tax evasion.
Registration No.
. . . .
(If applicable)
Type of Business
. . . .
Registered Name
(If different)
. . . .
Authorized Signature
. . . .
Title
. . . .
Identity of Petroleum Product
. . . .
(Kind and amount by volume)
Date: . . . .
 
 
(v) Each successive possessor of such petroleum products must, in turn, take a certification in this form from any other person to whom such petroleum products are sold or transferred in this state. Failure to take and keep such certifications as part of its permanent records will incur petroleum product tax liability by such sellers or transferors of petroleum products.
(vi) Persons in possession of such petroleum products who themselves export or cause the exportation of such products to persons outside this state for further sale or use as fuel must keep the proofs of actual exportation required by WAC 458-20-193C, parts A or B. Carriers who will purchase fuel in this state to be taken out-of-state in the fuel tanks of any ship, airplane, truck, or other carrier vehicle will provide their fuel suppliers with this certification. Then such carriers will directly report and pay the tax only upon the portion of such fuel actually consumed by them in this state. (With respect to fuel brought into this state in fuel tanks and partially consumed here, information regarding the credit provisions is provided in WAC 458-20-252 (5)(b).)
(vii) Blanket export exemption certificates may never be accepted in connection with petroleum products exchanged under exchange agreements.
(d) Any possession of petroleum products packaged for sale to ultimate consumers. This exemption is limited to petroleum products that are prepared and packaged for sale at usual and ordinary retail outlets. Examples are containerized motor oil, lubricants, and aerosol solvents.
(5) Credits. There are two distinct kinds of tax credits against liability which are available under the law.
(a) A credit may be taken in the amount of the petroleum product tax upon the value of fuel which is carried from this state in the fuel tank of any airplane, ship, truck, or other vehicle. The credit is applied in precisely the same manner as the hazardous substance tax in WAC 458-20-252 (5)(b).
The same form of certification as used for the fuel-in-tanks hazardous substance tax credit in WAC 458-20-252 (5)(b)(vi) may be used.
(b) A credit may be taken against the tax owed in this state in the amount of any other state's petroleum product tax that has been paid by the same person measured by the wholesale value of the same petroleum product tax.
(i) In order for this credit to apply, the other state's tax must be significantly similar to Washington's tax in all its various respects. The taxable incident must be on the act or privilege of possessing petroleum products and the tax must be of a kind that is not generally imposed on other activities or privileges; the tax purpose must be to fund pollution liability insurance; and the tax measure must be stated in terms of the wholesale value of the petroleum products, without deductions for costs of doing business, such that the other state's tax does not constitute an income tax or added value tax.
(ii) The credit is applied in precisely the same manner as the state credit for hazardous substance tax in WAC 458-20-252 (5)(c). The amount of the credit shall not exceed the petroleum product tax liability with respect to that petroleum product.
(6) General administration and tax reporting. The general administrative and tax reporting provisions for the hazardous substance tax contained in WAC 458-20-252 (8) through (14) apply as well for the petroleum product tax of this rule in precisely the same manner except the references to "hazardous substance(s)" or "substance(s)" should be replaced with the words, "petroleum products."
(7) Expiration date. The petroleum product tax expires July 1, 2030.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 24-12-029, § 458-20-281, filed 5/28/24, effective 6/28/24; WSR 17-01-155, § 458-20-281, filed 12/21/16, effective 1/21/17.]


PDF458-20-282

Marketplace tax collection and reporting.

(1) Introduction. This rule explains the reporting responsibilities of a marketplace facilitator required to collect sales and use tax on behalf of marketplace sellers making retail sales through the facilitator's marketplace. See Substitute Senate Bill 5581 (2019). This rule presumes the marketplace facilitator has substantial nexus with Washington to incur a sales or use tax collection obligation.
(2) Other rules. In addition to this rule, readers may want to refer to the following rules for additional information:
• WAC 458-20-103 Gift certificates—Sale deemed to occur and retail sales tax collected at time of redemption.
• WAC 458-20-108 Selling price—Credit card service fees, foreign currency, discounts, patronage dividends.
• WAC 458-20-145 Local sales and use tax.
• WAC 458-20-193 Interstate sales of tangible personal property.
• WAC 458-20-193C Imports and exports—Sales of goods from or to persons in foreign countries.
• WAC 458-20-221 Collection of use tax by retailers and selling agents.
(3) Rule examples. This rule includes examples that identify a set of facts and then state a conclusion. These examples are only a general guide. The department will evaluate each case on its particular facts and circumstances.
(4) Organization of rule. This rule is divided into six parts:
• Part I – Definitions.
• Part II – Defining a Marketplace Facilitator.
• Part III – Tax Collection Responsibilities.
• Part IV – Liability Relief.
• Part V – Providing Sales Information to Marketplace Sellers.
• Part VI – Marketplace Audits.
Part I – Definitions
The definitions in this part are provided in RCW 82.08.010 and apply throughout this rule unless the context clearly requires otherwise.
(101)(a) "Affiliated person" means a person that, with respect to another person:
(i) Has an ownership interest of more than five percent, whether direct or indirect, in the other person; or
(ii) Is related to the other person because a third person, or group of third persons who are affiliated persons with respect to each other, holds an ownership interest of more than five percent, whether direct or indirect, in the related persons.
(b) For purposes of this subsection:
(i) "Ownership interest" means the possession of equity in the capital, the stock, or the profits of the other person; and
(ii) An indirect ownership interest in a person is an ownership interest in an entity that has an ownership interest in the person or in an entity that has an indirect ownership interest in the person.
(102) "Consumer" has the same meaning as provided in chapters 82.04, 82.08, and 82.12 RCW.
(103) "Marketplace" means a physical or electronic place including, but not limited to, a store, a booth, an internet website, a catalog or a dedicated sales software application, where tangible personal property, digital codes and digital products, or services are offered for sale.
(104)(a) "Marketplace facilitator" means a person that:
(i) Contracts with sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the seller's products through a marketplace owned or operated by the person (collectively "facilitates sales for consideration");
(ii) Engages directly or indirectly, through one or more affiliated persons, in transmitting or otherwise communicating the offer or acceptance between the buyer and seller (collectively "transmits offer or acceptance"). For purposes of this subsection, mere advertising does not constitute transmitting or otherwise communicating the offer or acceptance between the buyer and seller; and
(iii) Engages directly or indirectly, through one or more affiliated persons, in any of the following activities with respect to the seller's products:
(A) Payment processing services;
(B) Fulfillment or storage services;
(C) Listing products for sale;
(D) Setting prices;
(E) Branding sales as those of the marketplace facilitator;
(F) Taking orders; or
(G) Providing customer service or accepting or assisting with returns or exchanges (collectively "specified activities").
(b)(i) "Marketplace facilitator" does not include:
(A) A person who provides internet advertising services, including listing products for sale, so long as the person does not also transmit offer or acceptance and engage in any specified activities; or
(B) A person with respect to the provision of travel agency services or the operation of a marketplace or that portion of a marketplace that enables consumers to purchase transient lodging accommodations in a hotel or other commercial transient lodging facility.
(ii) The exclusion in (b) of this subsection does not apply to a marketplace or that portion of a marketplace that facilitates the retail sale of transient lodging accommodations in homes, apartments, cabins, or other residential dwelling units.
(iii) For purposes of (b) of this subsection, the following definitions apply:
(A) "Hotel" has the same meaning as in RCW 19.48.010.
(B) "Travel agency services" means arranging or booking, for a commission, fee or other consideration, vacation or travel packages, rental car or other travel reservations or accommodations, tickets for domestic or foreign travel by air, rail, ship, bus, or other medium of transportation, or hotel or other lodging accommodations.
(105) "Marketplace seller" means a seller that makes retail sales through any marketplaces operated by a marketplace facilitator, regardless of whether the seller is required to be registered with the department as provided in RCW 82.32.030.
(106) "Person" means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, political subdivision of the state of Washington, corporation, limited liability company, association, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise and the United States or any instrumentality thereof.
(107) "Product" has the same meaning as provided in RCW 82.32.023.
(108) "Purchaser" means any consumer who purchases or leases a product sourced to this state under RCW 82.32.730.
(109) "Retail sale" and "sale" have the same meaning as provided in chapter 82.04 RCW.
(110) "Seller" has the same meaning as provided in RCW 82.08.010.
Part II – Defining A Marketplace Facilitator
(201)(a) Who is a marketplace facilitator? A marketplace facilitator is a person who facilitates sales for consideration of a marketplace seller's products through a marketplace, transmits offer or acceptance between the buyer and seller, and engages in at least one of the specified activities listed in subsection (104)(a)(iii) of this rule. A person must meet all three parts of the definition to be a marketplace facilitator. Generally, a person is facilitating a sale when the sale is conducted through the person's marketplace.
(b) Who is not a marketplace facilitator?
(i) Advertisers. Persons that merely advertise goods for sale, including listing products for sale in the advertisement, and do not handle transactions do not meet the definition of a marketplace facilitator, as long as those persons do not meet the other requirements of the marketplace facilitator definition. Additionally, mere advertising does not constitute transmitting or otherwise communicating the offer or acceptance between the buyer and seller for the purposes of subsection (104)(a)(ii) of this rule of the marketplace facilitator definition.
(ii) Travel agents and hotel marketplaces. A person operating a marketplace is not considered a marketplace facilitator for any portion of its marketplace that provides travel agency services or enables consumers to purchase transient lodging accommodations in a hotel or other commercial transient lodging facility. This exclusion does not apply to any portion of a marketplace that facilitates the retail sale of transient lodging accommodations in homes, apartments, cabins, or other residential dwelling units.
(c) Responsibilities depend on role in transaction. A person can be a retailer for some transactions and a marketplace facilitator for some transactions, but it can only be one of these designations in any particular transaction. A person's specific reporting responsibilities as a retailer or marketplace facilitator depends on its particular role in the transaction.
Example 1. Intergalactic Fulfillment Portal (IFP) lists products sold by third parties at retail on its website. IFP communicates the offer and acceptance between the seller and buyer for the sale of these third-party products. IFP completes the sales transactions on its website, processes the payments, and is paid a percentage of the sales price. IFP is a marketplace facilitator, as it meets all three parts of the marketplace facilitator definition (facilitates sales for consideration, transmits offer or acceptance, and engages in at least one specified activity--processing payments).
Example 2. Same facts as Example 1, except IFP uses a third party to process the payments. IFP still meets the definition of a marketplace facilitator, as it still meets all three parts of the marketplace facilitator definition (facilitates sales for consideration, transmits the offer or acceptance, and engages in a specified activity--listing products for sale). A person does not need to process payments to meet the definition of a marketplace facilitator, as any one of the specified activities listed in subsection (104)(a)(iii) of this rule is sufficient.
Example 3. Taste of Andromeda (TOA) is a business that contracts with various restaurants to allow them to prepare and sell food (all of which is subject to retail sales tax) in the business's food court. Customers order and collect their food from the restaurants, but TOA, not the third-party restaurants, completes the sale and accepts payment for the prepared food. TOA gives the third-party restaurants the remaining proceeds of the sale net of the amount TOA retains for itself. TOA meets the definition of a marketplace facilitator, as it meets all three parts of the marketplace facilitator definition (facilitates sales for consideration, transmits offer or acceptance, and engages in a specified activity--processing payments).
Example 4. First Alpha Centauri Technology (FACT) performs the payment processing for an online marketplace. Neither FACT nor any of FACT's affiliates performs any other function related to the operation or sale of products on the marketplace. FACT does not meet the definition of a marketplace facilitator, as it only satisfies one of the three parts of the marketplace facilitator definition, in this case engaging in a specified activity. FACT does not meet the other two parts of the marketplace facilitator definition (it is neither facilitating sales for consideration, nor is it transmitting offer or acceptance).
Example 5. Neptunian Connection (NC) is a business that lists products sold by third parties on its website. NC does not facilitate the sale of these products for consideration. When purchasers want to purchase a listed product, NC transfers the purchaser to the third-party seller's website to complete the sale. NC has no involvement in the sales transaction. NC does not meet the definition of a marketplace facilitator (NC neither gets paid to facilitate a sale for consideration on a marketplace, nor transmits offer or acceptance).
Example 6. Antares Travel Solutions (ATS) owns and operates a marketplace for used teleporters and gets paid for facilitating sales of used teleporters by third-party sellers. ATS facilitates sales for consideration, but neither transmits offers or acceptances, nor engages in a specified activity. However, ATS owns 19% of the capital stock of the Scorpius-Centaurus Association (SCA). SCA owns 11% of the capital stock of Mahtab Affiliated Technologies (MAT), which transmits the offers and acceptances on the ATS marketplace, and processes payments for the ATS marketplace. Since ATS has an indirect ownership interest in MAT, MAT is an affiliated person with respect to ATS. As a result, ATS meets all three parts of the definition of a marketplace facilitator (facilitates sales for consideration, transmits offers or acceptances indirectly through an affiliated person, and engages in a specified activity indirectly through affiliated person--payment processing services).
Example 7. Triangulum Transient Geological Excursions (TTGE) operates a marketplace specializing in transient lodging for individuals interested in geology. TTGE's marketplace facilitates the retail sale of transient lodging accommodations in residential cabins offering views of volcanoes. TTGE's marketplace also allows for the sale of transient lodging located in a hotel next to a tectonic fault. TTGE is a marketplace facilitator for the sales of transient lodging located in the residential cabins, but is not a marketplace facilitator for the sales of the transient lodging located in the hotel. TTGE does not need to report its sales of the transient lodging located in the hotel.
Part III – Tax Collection Responsibilities
(301) What must be collected and remitted?
(a) Requirement to collect and remit sales or use tax. A marketplace facilitator must collect and remit sales or use tax on all taxable retail sales sourced to Washington on behalf of any marketplace seller making retail sales through the marketplace facilitator's marketplace.
(i) Determining the correct combined state and local sale of use tax rate. The marketplace facilitator must determine the correct combined state and local sales or use tax rate to charge for sales sourced to Washington. The state tax rate is established in RCW 82.08.020. For information on determining the applicable local tax rate, see WAC 458-20-145.
(ii) Relief for marketplace seller. Except as otherwise provided in subsection (401)(b) of this rule, a marketplace seller is not required to collect or remit sales or use tax on taxable retail sales through a marketplace facilitator's marketplace if the marketplace seller has obtained documentation from the marketplace facilitator indicating that the marketplace facilitator is registered with the department and will collect all applicable taxes due under chapters 82.08 and 82.12 RCW on all taxable retail sales made on behalf of the marketplace seller through the facilitator's marketplace. The required documentation must be in writing, but may be transmitted electronically. The required documentation may be included in agreements between the marketplace seller and the marketplace facilitator or in information distributed or accessible to marketplace sellers through the facilitator's marketplace. Marketplace sellers should retain this documentation with their own tax records. The documentation must clearly state the marketplace facilitator's intention to collect sales or use tax on behalf of the marketplace seller, along with the department-issued tax account ID number that the marketplace facilitator will use to report and remit the sales or use tax collected on behalf of the marketplace seller. If the marketplace seller does not obtain documentation from the marketplace facilitator, then it may be held liable for any uncollected sales tax on sales through that facilitator's marketplace.
(b) Requirement to collect and remit other taxes and fees.
(i)(A) Taxes and fees authorized in chapter 82.08 RCW. In addition to collecting and remitting sales or use tax, a marketplace facilitator must also collect and remit all other applicable taxes and fees authorized in chapter 82.08 RCW on all retail sales sourced to Washington on behalf of any marketplace seller making retail sales through the marketplace facilitator's marketplace.
(B) Taxes and fees in chapter 82.08 RCW. Applicable taxes and fees in chapter 82.08 RCW may include, but are not limited to:
(I) Motor vehicle sales tax (see RCW 82.08.020(2)).
(II) Spirits taxes (see RCW 82.08.150).
(ii)(A) Other applicable taxes and fees. Beginning January 1, 2020, a marketplace facilitator must also collect and remit all other applicable taxes and fees on all retail sales sourced to Washington on behalf of any marketplace seller making retail sales through the marketplace facilitator's marketplace. For the purposes of this subsection, "taxes and fees" means any monetary exaction, regardless of its label, imposed on a buyer and that the seller is required to collect and pay over to the department.
(B) Examples of taxes and fees. Other applicable taxes and fees may include, but are not limited to:
(I) Lodging taxes and charges (see WAC 458-20-166).
(II) Solid fuel burning device fee (see RCW 70A.15.3620).
(III) Tire fees (see RCW 70A.205.405, 46.37.427, and WAC 458-20-272).
(302) Exemptions.
(a) Verification. In cases where a marketplace facilitator seeks to determine whether an exemption applies to a particular retail sale, the marketplace facilitator may request required documentation from the marketplace seller or purchaser to determine whether the exemption applies. This subsection does not obligate a marketplace facilitator to accept a purchaser's claim of an exempt sale.
(b) Documentation. The marketplace facilitator must retain any documentation from the marketplace seller or purchaser needed to verify any exemption claimed. See RCW 82.08.050. Exemption certificates provided by purchasers may designate either the name of the marketplace facilitator or the marketplace seller in the field referring to the seller in order to ensure there is a properly completed exemption certificate.
(c) Common exemptions. Applicable exemptions may include, but are not limited to:
(i) Sales of food and food ingredients (see RCW 82.08.0293 and 82.12.0293 and WAC 458-20-244).
(ii) Sales of prescription drugs and prosthetic devices (see RCW 82.08.0281 and WAC 458-20-18801).
(iii) Sales to an Indian tribal member in Indian country (see WAC 458-20-192).
(iv) Sales to the United States government (see WAC 458-20-190).
(d) Sales for resale. If a marketplace facilitator chooses to make a sale for resale, it must also accept and retain any documentation from the purchaser needed to verify that a sale is for resale rather than for end use by the purchaser (see RCW 82.04.060 and WAC 458-20-102).
(303) Tax return reporting.
(a) Remitting tax. A marketplace facilitator may report the sales or use tax, along with any other applicable taxes and fees, collected on behalf of marketplace sellers separately from the sales or use tax collected on its own sales into Washington under a separate tax reporting account or separate legal entity account. Alternatively, a marketplace facilitator may report all such taxes on the same tax reporting account as it reports its own direct sales.
(b) Business and occupation tax. Generally, marketplace facilitators do not owe retailing business and occupation (B&O) tax on retail sales facilitated on its marketplace, but do owe retailing B&O tax on products they sell in their own name (see RCW 82.04.480). A marketplace facilitator may be subject to B&O tax under the service and other activities classification on the gross income from any commission, fee, or other compensation earned from facilitating a sale. See WAC 458-20-19401 and 458-20-19402 for more information on when such B&O tax is due.
Part IV – Liability Relief
(401) Incorrect information provided by marketplace seller.
(a) Marketplace facilitator relief. A marketplace facilitator is relieved of liability for failure to collect the correct amount of sales or use tax, with respect to sales on behalf of marketplace sellers, to the extent that the marketplace facilitator can show to the department's satisfaction that the error was due to incorrect information given to the marketplace facilitator by the marketplace seller, unless the marketplace facilitator and the marketplace seller are affiliated persons. To qualify for the liability relief under this subsection, a marketplace facilitator must have received erroneous information from a marketplace seller that prevented the marketplace facilitator from properly determining the correct tax amount owed. A marketplace facilitator does not qualify for the liability relief under this subsection when a marketplace seller provided information that was correct, but was incomplete or insufficient to make the proper taxability determination.
(b) Marketplace seller liability. Where the marketplace facilitator is relieved of liability under (a) of this subsection, the marketplace seller is solely liable for the amount of uncollected tax due.
(402) Percentage of tax due.
(a) Conditions for relief. Subject to the limits detailed below in (b) and (c) of this subsection, and subsection (403) of this rule, a marketplace facilitator is relieved of liability for the failure to collect sales and use tax on taxable retail sales to the extent that the marketplace facilitator can show to the department's satisfaction that:
(i) The taxable retail sale was made through the marketplace facilitator's marketplace;
(ii) The taxable retail sale was made solely as the agent of a marketplace seller, and the marketplace facilitator and the marketplace seller are not affiliated persons; and
(iii) The failure to collect sales or use tax was not due to an error in sourcing the sale under RCW 82.32.730.
(b) Limitations on relief. Liability relief for a marketplace facilitator under (a) of this subsection is limited as follows:
(i) For calendar year 2018, the liability relief may not exceed ten percent of the total tax due under chapters 82.08 and 82.12 RCW on taxable retail sales by the marketplace facilitator and collected on behalf of a marketplace seller and sourced to this state under RCW 82.32.730 during the same calendar year.
(ii) For calendar year 2019, the liability relief may not exceed five percent of the total tax due under chapters 82.08 and 82.12 RCW on taxable retail sales by the marketplace facilitator and collected on behalf of a marketplace seller and sourced to this state under RCW 82.32.730 during the same calendar year.
(c) Situations when relief is not available. The liability relief identified in this subsection is not available for retail sales that a marketplace facilitator determined were subject to sales or use tax but chose not to collect the tax, or where the marketplace facilitator otherwise acts fraudulently to avoid collecting tax. Liability relief is also not available when the failure to collect sales or use tax was contrary to specific written instructions provided by the department.
(d) Marketplace seller relief. Where the marketplace facilitator is relieved of liability under (a) of this subsection, the marketplace seller is also relieved of liability for the amount of uncollected tax due.
(e) How to claim the relief. The liability relief provided in (a) of this subsection may be claimed when the department determines that additional sales or use tax is due for a particular calendar year on sales meeting the criteria of (a)(i) through (iii) of this subsection. Upon such a determination by the department, the marketplace facilitator may claim relief from liability on such additional tax, subject to the limitations in (b) and (c) of this subsection, and subsection (403) of this rule. Any amounts remaining after application of these limitations are due in full by the taxpayer and subject to any applicable penalty and interest as provided in chapter 82.32 RCW.
(f) When is a sale facilitated? For purposes of this subsection, a retail sale is deemed to be facilitated by a marketplace facilitator when the marketplace facilitator either:
(i) Accepts the order for the product;
(ii) Communicates to the marketplace seller the buyer's offer to purchase the product;
(iii) Accepts the buyer's payment for the product; or
(iv) Delivers or arranges for delivery of the product.
(403) Loss of liability relief. A marketplace facilitator that does not provide the reports required under subsection (501) of this rule is not eligible for the liability relief provided under subsections (401) and (402) of this rule.
Part V – Providing Sales Information to Marketplace Sellers
(501) Facilitated Washington sales.
(a) Monthly access. Beginning July 1, 2019, a marketplace facilitator must provide each of its marketplace sellers with access, through a written report or other means, to gross sales information for all Washington sales facilitated on behalf of the marketplace seller during the immediately preceding month. Marketplace facilitators must provide such written report or access within fifteen calendar days following the end of each month. The report must include all information required by the marketplace seller to fulfill its tax reporting obligations with the department, including any delivery charges, fees, or other charges on sales facilitated by the marketplace facilitator.
(b) Reasonable method of estimating sales. If a marketplace seller does not receive the gross sales information for all Washington sales through a marketplace facilitator, the marketplace seller may determine its business and occupation tax liability under chapter 82.04 RCW based on a reasonable method of estimating Washington sales as may be required or approved by the department.
(c) What are Washington sales? For purposes of this subsection, "Washington sales" means any sale sourced to this state under RCW 82.32.730, regardless of whether the sale is a retail sale or wholesale sale.
(502) Loss of liability relief. A marketplace facilitator that does not comply with subsection (501)(a) of this rule is not eligible for the sales tax liability relief provided in subsections (401) and (402) of this rule.
Part VI – Marketplace Audits
(601) Marketplace audit. A marketplace facilitator is subject to audit in order to ensure tax is properly reported and remitted on all sales occurring on the marketplace, including sales facilitated on behalf of marketplace sellers.
(602) Additional documentation.
(a) Verifying tax collection and exemptions. A marketplace facilitator may be required to provide documentation for all sales occurring on its marketplace to verify that the marketplace facilitator:
(i) Remitted all tax charged to customers, charged the correct amount of tax on all taxable retail transactions, and properly sourced all taxable retail sales pursuant to RCW 82.32.730; and
(ii) Properly granted exemptions, if applicable, verified the type of exemption granted, and retained the appropriate supporting documentation to substantiate the exemption as required under RCW 82.32.070 and subsection (302) of this rule.
(b) Electronic format. The marketplace facilitator must provide this information electronically, in agreed upon format, at the department's request.
(c) Frequency. The department may request this information on a more frequent or periodic basis to supplement its routine audit effort.
(603) Information from marketplace sellers. The marketplace facilitator may request additional information from a marketplace seller making sales on its marketplace in order to comply with these audit requirements.
[Statutory Authority: RCW 82.32.300, 82.01.060(2), 82.08.0531, 82.08.010, 82.08.052, 82.02.250, 82.02.260 and 82.32.762. WSR 21-12-084, § 458-20-282, filed 6/1/21, effective 7/2/21.]


PDF458-20-285

Working families tax credit.

This rule provides information on the working families tax credit (WFTC). The WFTC is a credit in the form of a refund of retail sales and use tax provided to eligible low-income persons (referred to as "refund" in this rule). Starting February 1, 2023, applicants may apply to the department to receive a refund of sales or use tax paid during the period for which they are claiming the refund. The refund amount is based upon the applicant's income (including the applicant spouse's income, if the applicant is filing married filing jointly on their federal income tax return) and the number of qualifying children the applicant (and the applicant's spouse, if applicable) have.
To qualify for a refund, applicants must meet the eligibility requirements provided in RCW 82.08.0206 and complete a WFTC application in the form and manner provided by the department.
This rule is organized into four parts. Each part addresses a question or topic relevant to the application for and administration of the WFTC program as follows:
1. Part 1: Eligibility Requirements
2. Part 2: Application Process
3. Part 3: Refund Amount
4. Part 4: General Administration and Review
Examples included in this rule identify a number of facts and then state a general conclusion; they should be used only as a general guide. The tax consequences of all situations must be determined after a review of all the facts and circumstances.
References in this rule to "I," "my," "you," "your," "we," or "our" are intended to refer to the individual applying for the WFTC (i.e., the applicant). For additional information, please visit the department's website at WorkingFamiliesCredit.wa.gov or call the department at 360-763-7300.
Part 1: Eligibility Requirements
(1) Am I eligible to receive a WFTC refund? To be eligible for a refund under the WFTC, you must be an "eligible low-income person." An "eligible low-income person" is an "individual" who meets all of the requirements in (a) through (e) of this subsection. An "individual" means any natural person who files a federal income tax return under the single, head of household, qualifying surviving spouse, or married filing separately (although you must be "unmarried" per Answer 1A of this rule for tax year 2022) filing statuses. The term "individual" also means an individual natural person and that individual's spouse if they file a federal joint income tax return with the married filing jointly status. Accordingly, if you file a federal income tax return with your spouse under the married filing jointly filing status, you and your spouse are each considered to be a single "individual" for the purposes of WFTC eligibility with the exception of determining residency.
(a) Valid SSN or ITIN: You (and your spouse if you are filing married filing jointly on your federal income tax return) must have a valid Social Security number (SSN) or individual taxpayer identification number (ITIN);
(b) Properly file a federal income tax return: You (and your spouse if you are filing married filing jointly) must properly file a federal income tax return for the tax year for which the refund is being claimed;
(c) EITC eligible: You must generally be eligible for the federal Earned Income Tax Credit (EITC), including meeting the federal income thresholds with the following exceptions:
(i) You, your spouse (if you are filing married filing jointly on your federal income tax return), and/or your qualifying children may have a valid ITIN instead of a SSN, which is not permitted under federal EITC eligibility requirements; and
(ii) For tax years 2023 and beyond, if you file your federal income tax return under the "married filing separately" status, you are no longer required to fulfill the conditions of Internal Revenue Code section 32 (d)(2)(B) to qualify for a WFTC refund and you are no longer required to provide the additional documentation as described in Answer 1A of this rule.
(d) Residency: The applicant on the WFTC application (which may be either you or your spouse, if you are filing married filing jointly on your federal income tax return) must be a resident of Washington for at least 183 days during the tax year for which the refund is being claimed; and
(e) Sales or use tax paid: You (and/or your spouse if you are filing married filing jointly on your federal income tax return) paid Washington sales or use tax on taxable purchases you made during the tax year for which the refund is being claimed.
Question 1A: What if I am still married to my spouse, but we are separated, and I file a separate federal income tax return. Am I still eligible for the WFTC?
Answer 1A: For applicants claiming a WFTC refund for the tax year 2023 and beyond: If you file your federal income tax return under the "married filing separately" status, you are eligible to claim the WFTC refund. You do not need to fulfill the conditions under Internal Revenue Code section 32 (d)(2)(B) to qualify for a WFTC refund or provide additional documentation.
For applicants claiming a WFTC refund for the 2022 tax year: If you are still married to your spouse, but you do not file a federal income tax return under the married filing jointly status and you are considered "unmarried" per Internal Revenue Code section 32(d), then you may still be eligible for the federal EITC, and this in turn would make you an individual eligible for a WFTC refund.
If you are filing "married filing separately" on your federal income tax return, then the department will require you to provide additional information to confirm your "unmarried" status. "Unmarried," as used in Internal Revenue Code section 32(d) requires the following:
(a) You are married, but you did not file a federal income tax return under the married filing jointly status.
(b) You lived with your qualifying child for more than half of the year. You may demonstrate this by providing:
(i) School records that match your place of residence;
(ii) Rental application or lease with child/children listed;
(iii) Landlord statement regarding child/children;
(iv) Public benefits verification letters or statements;
(v) Community-based organization letters of recommendation, or vouchers; or
(vi) Any other records that establish that your qualifying child lived with you for more than half of the year.
(c) You must be able to show either:
(i) You did not have the same principal place of abode as your spouse during the last six months of the tax year; or
(ii) You have a decree, instrument, or agreement (other than a divorce decree) described in IRC 121 (d)(3)(C) (e.g., a written separation agreement, alimony, or spousal maintenance decree, etc.) with your spouse concerning marital separation and you and your spouse are not members of the same household by the end of the tax year.
Question 1B: I am still legally married and I meet the "unmarried" requirements in Answer 1A. If my spouse is not eligible for a WFTC refund, does that disqualify me from receiving the WFTC refund?
Answer 1B: No. If you are filing a separate federal income tax return from your spouse, you will not be disqualified from receiving the WFTC refund solely because your spouse does not meet the WFTC requirements as you are considered to be a separate individual from your spouse. If you are filing your federal income tax return under the "married filing separately" status for the 2023 tax year and beyond, the department will not require documentation to establish your "unmarried" status or that you meet the "unmarried" requirements as indicated in Answer 1A. If you are filing your federal income tax return under the "married filing separately" status for the 2022 tax year, the department will require additional documentation to establish your "unmarried" status as indicated in Answer 1A.
The following subsections (2) through (6) of this rule describe these eligibility requirements in subsection (1)(a) through (e) of this rule.
(2) Valid SSN or ITIN - Unlike the EITC, to be eligible for the WFTC you must have either a valid Social Security number (SSN) or a valid individual taxpayer identification number (ITIN).
Question 2A: What is a valid SSN?
Answer 2A: An SSN is a number issued by the Social Security Administration to identify and record an individual's wages or self-employment earnings. Your SSN must be valid for employment and issued before the due date of the federal income tax return you plan to claim the federal EITC (including extensions). A Social Security number on a Social Security card that provides, "Valid for work with DHS authorization," will be accepted as a valid SSN.
However, if your Social Security card has the words, "Not valid for employment," your SSN is not valid.
Question 2B: What is a valid ITIN?
Answer 2B: An ITIN is a tax processing number issued by the Internal Revenue Service (IRS). A valid ITIN for WFTC eligibility purposes is one that is not expired or revoked.
(a) Generally. An ITIN must be applied for and renewed periodically pursuant to federal requirements.
(b) WFTC application requirements – Notify department. If you, your spouse, or any of your qualifying children do not have a valid ITIN and are waiting for an ITIN or an ITIN renewal from the IRS, you must notify the department that you have applied for and are waiting to receive an ITIN or an ITIN renewal from the IRS when you submit your WFTC application.
(c) WFTC application requirements – Application submission. If the department does not receive documentation confirming that you, your spouse, or your qualifying children have received a valid ITIN by or before the December 31st application deadline, then your application may be denied. The department will consider a new or renewed ITIN to be valid as of its issuance date, even if the department receives notification of issuance after the December 31st application deadline.
(d) ITIN issuance date. The department will use the IRS issuance date for processing the WFTC application, but the department will not complete processing of the WFTC application until the ITIN application has been fully processed and is either issued or renewed by the IRS. If your ITIN status is pending, you must still provide your complete WFTC application to the department before the December 31st application deadline. A valid ITIN must have an issuance date prior to the December 31st application deadline.
(i) For new ITINs, the IRS back-dates the issuance date of the ITIN to the date the Form W-7 application was received by the IRS.
(ii) For renewed ITINs, the IRS back-dates the issuance date of the ITIN to the original issuance date of that ITIN.
(3) Properly file a federal income tax return - To be eligible for the WFTC, you (and your spouse, if filing married filing jointly on your federal income tax return) must properly file a federal income tax return for the tax year for which you are claiming the refund.
Question 3A: What does it mean to "properly file" a federal income tax return?
Answer 3A: The federal income tax return you and your spouse (if you are filing married filing jointly on your federal income tax return) file must fulfill the statutory and regulatory requirements for the federal government to process your return. For example, if you wish to claim the WFTC refund for the 2022 tax period, you must properly file your 2022 federal tax return and include all information required on the return for the federal government to be able to process it.
Question 3B: Do I have to claim the EITC to be eligible for the WFTC refund?
Answer 3B: No. You are not required to claim or to actually receive the federal EITC to be eligible to receive the WFTC refund.
(4) Federal Earned Income Tax Credit eligible - You must first be eligible for the federal EITC, except as stated in this rule, in order to be eligible for the WFTC refund. This includes meeting the federal income thresholds for your federal adjusted gross income (AGI). If your AGI is at or above the federal income threshold, you are not eligible for the EITC. The department will calculate the WFTC refund based on the earned income you reported on your properly filed federal income tax return. For more information on how the WFTC refund is determined, see Part 3 of this rule.
Question 4A: What does earned income mean?
Answer 4A: "Earned income" means earned income as defined by the Internal Revenue Code (IRC or Title 26 U.S.C.) section 32. RCW 82.08.0206 (2)(b).
Question 4B: Is "combat pay" considered earned income for purposes of the WFTC refund?
Answer 4B: IRC section 32 allows those who have combat pay to elect whether to include their combat pay as earned income for the purposes of calculating their federal EITC amount. Regardless of whether you elect to include your combat pay as earned income for federal purposes, you can make a separate election of whether to include your combat pay as earned income for WFTC refund calculation purposes.
Question 4C: What are the federal income thresholds?
Answer 4C: The federal income thresholds are income limits the federal government applies to determine eligibility for the EITC. The federal income thresholds for the federal EITC generally change on an annual basis. These thresholds vary depending on your filing status and how many qualifying children you have. Eligibility for the federal EITC is based on your AGI. If your AGI is equal to or more than the federal income threshold, then you are not eligible for the federal EITC and, as such, you are not eligible for the WFTC. The department will use the federal income thresholds applicable for the tax period for which the refund is being claimed. For more information about these federal income thresholds, please see Part 3 of this rule.
Question 4D: Not all members of my family have a valid SSN, but I am otherwise eligible for the federal EITC. Am I still eligible for the WFTC?
Answer 4D: Yes, unlike the federal EITC, the WFTC does not require that all claimed individuals must have a valid SSN to be eligible. To be eligible for the WFTC, you, your spouse (if you are married and filing married filing jointly on your federal income tax return), and your qualifying children (if applicable), must have either a valid SSN or a valid ITIN.
Question 4E: Are there any other federal EITC requirements that could potentially disqualify me from receiving the WFTC?
Answer 4E: Yes. To be eligible for the federal EITC, you cannot file Form 2555, Foreign Earned Income and your investment income (income you receive from interest, dividends, capital gains, royalties, rental income, or other passive activities) cannot exceed $10,300 (based on 2022 figures, adjusted by the federal government for inflation in later years). Additionally, nonresident aliens are ineligible to receive the federal EITC, even if they have a valid SSN. If you are not eligible to receive the federal EITC for these reasons, then you are not eligible to receive the WFTC.
Question 4F: What if I am prohibited from claiming the federal EITC? Can I still qualify to receive the WFTC refund?
Answer 4F: If the federal government has prohibited you from claiming the EITC due to reckless or intentional disregard or due to fraud and you are currently within the disallowance period during which you are not allowed to claim the federal EITC, then you are not eligible to receive the WFTC refund.
(5) Residency - To be eligible for the WFTC, you must be a resident of Washington. The term resident means that you were physically present and resided in Washington for at least 183 days during the year for which you are claiming the refund.
Question 5A: What does it mean to be "physically present" and "reside" in Washington?
Answer 5A: To be "physically present" means that you are in or located within the state of Washington. To "reside" in Washington means that you have your home or residence in the state. Individuals who commute to Washington (e.g., for work) do not "reside" in Washington.
Example 1:
Facts: Doug lives in an apartment in Tacoma, Washington. Doug is located in Washington for 300 days during calendar year 2022. Doug is placed on a job assignment in Utah for the remaining 65 days of the same year.
Conclusion: Doug was "physically present" and "resided" in Washington for at least 183 days in 2022. Doug meets the definition of a resident of Washington for the 2022 calendar year and would be eligible for a WFTC refund during the year if all other statutory requirements are met.
Example 2:
Facts: Sally lives in Oregon but works in Washington. Sally drives to her work in Washington every morning and drives back to her home in Oregon every evening. She does this for 300 days during the 2022 calendar year.
Conclusion: While Sally might be "physically present" in Washington for at least 183 days, she did not "reside" in Washington because she resided in Oregon and simply commuted to Washington. Sally does not meet the definition of a resident of Washington for the 2022 calendar year and, accordingly, would not be eligible for a WFTC refund.
Question 5B: What if I am in Washington for at least 183 days for work or for school without commuting back to my state of residence, do I meet the WFTC residency requirement?
Answer 5B: Yes. An individual who is physically present in Washington for at least 183 days and does not commute back to their state of residence will generally be considered to "reside" in Washington and is a Washington resident for WFTC residency purposes.
Question 5C: What if I work or attend school out-of-state and was not physically present in Washington for at least 183 days, can I still qualify if I consider Washington to be my home?
Answer 5C: No. Even if you consider Washington to be your home and your state of residence, you must still be physically present in Washington for at least 183 days to meet the WFTC residency requirement.
Question 5D: What if my spouse is not a Washington resident but I am and we file under the married filing jointly status on our federal income tax return, are we eligible for the WFTC refund?
Answer 5D: Yes. If you and your spouse are filing married filing jointly on your federal income tax return and your spouse does not meet the definition of a Washington resident, you may both still qualify to receive a joint refund so long as the applicant on the WFTC application meets the definition of a Washington resident.
Question 5E: What if I am experiencing homelessness, can I still qualify for the WFTC refund?
Answer 5E: Yes. The term "reside" does not require that an individual have a physical dwelling in Washington, just that Washington is the place they reside for at least 183 days. Individuals or their families who are experiencing homelessness may demonstrate that they "reside" in Washington by providing proof of their residency via a letter from a community-based organization, shelter, public benefits caseworker, or from any other organizations or programs that interact with the individual or their family that states the following:
(a) They know and can identify the individual;
(b) The individual has resided in a particular area in Washington (which the organization or shelter must describe); and
(c)(i) The individual has resided in this area at least 183 days during the period for which the credit is being claimed; or
(ii) Alternatively, if the individual or their family are experiencing homelessness and move frequently as a result, the individual has resided within a general geographic area or areas (i.e., town, city, county, etc.) within the state of Washington for at least 183 days during the period for which the refund is being claimed.
Question 5F: What if I am not a United States citizen or what if I am in the United States on a visa, can I still qualify as a Washington resident for WFTC purposes?
Answer 5F: Yes, if you can demonstrate you resided in Washington and were physically present in Washington for at least 183 days during the year for which you are claiming the credit. Generally, an individual's citizenship or visa status is not considered for WFTC residency purposes.
Question 5G: What if the department has questions and needs additional documentation?
Answer 5G: If you are asked to confirm your status as a Washington resident, you must provide the department with documentation that demonstrates that you were physically present and resided in Washington for at least 183 days during the year for which you are claiming the refund.
(a) Documents that may help you to demonstrate you are a Washington resident include, but are not limited to, the following:
(i) Washington driver's license;
(ii) Washington ID card;
(iii) Utility bills;
(iv) Landlord statements;
(v) Rental agreement or lease;
(vi) Mortgage statements;
(vii) Public benefits verification letters from state or federal agencies or case worker statements;
(viii) Community-based organization letters or statements; or
(ix) School records.
(b) If you are unable to provide documentation that demonstrates your Washington resident status, you will need to contact the department to determine if there are other methods by which you can demonstrate you meet the residency requirement, which the department may allow at its discretion.
(6) Sales or use tax paid - The department will generally presume that if you and/or your spouse (if you are filing married filing jointly on your federal income tax return) lived in the state of Washington for at least 183 days, that you paid Washington sales or use tax on the taxable purchases you made during that period. You will need to attest to this fact on the WFTC application under penalty of perjury.
Part 2: Application Process
(7) How do I file a WFTC application with the department? To receive a refund, you must file an application with the department. The department will accept either a paper or electronic application. The department will begin accepting WFTC applications on February 1st of each year or, if the 1st falls on a Saturday, Sunday, or legal holiday, the next business day. RCW 1.12.070(3).
The WFTC application, along with the required attachments, must be received by the department no later than December 31st in the calendar year following the tax year for which you file your federal income tax return. If December 31st falls on a Saturday or Sunday, then the application will be due the next business day. For example, if you are requesting a WFTC refund based on your 2022 tax year information, the WFTC application, along with all required attachments, are due on or before January 2, 2024. This is because December 31, 2023 falls on a Sunday and January 1, 2024 is a holiday, so the WFTC application deadline would fall on the next business day which is January 2, 2024. RCW 1.16.050.
(a) If you are submitting your application electronically: To be considered timely, your WFTC application, along with all required attachments, must be received by the department on or before December 31st.
(b) If you are submitting your application by mail: To be considered timely, your WFTC application, along with all required attachments, must be sent by United States mail and postmarked on or before the December 31st deadline.
(c) For more information on how to file an application, refer to the department's website at WorkingFamiliesCredit.wa.gov.
(8) What additional items do I need to include for the department to process my WFTC application? In addition to the WFTC application, you must also attach a copy of your filed federal income tax return to your WFTC application. The attached copy of your federal income tax return must be complete, meaning that it must include all applicable schedules filed with the federal government for the period for which you are claiming the WFTC refund. For example, if you are claiming a WFTC refund for the 2022 tax year, you must submit a full and complete copy of your 2022 federal income tax return that you filed with the federal government.
Question 8A: What happens if I do not provide my complete federal income tax return with my WFTC application?
Answer 8A: Your application will not be considered "complete" and the department will not be able to process your WFTC refund.
Question 8B: What does it mean to have a "complete" WFTC application?
Answer 8B: To process your WFTC refund, you must provide a "complete" WFTC application to the department on or before the filing deadline, which includes the following items:
(a) A filled-out and signed WFTC application (your spouse must also sign the WFTC application if you are filing married filing jointly on your federal income tax return); and
(b) A copy of your complete federal income tax return that was filed with the federal government.
(9) What if I did not file my WFTC application by December 31st, is it too late to file? No, it is not too late. If you do not apply to receive the refund before the December 31st deadline, then you may still apply to receive the refund up to three years after the calendar year in which your federal income tax return was originally due, without regard to any federal extensions. For example, if you wish to request a WFTC refund based on your 2022 tax year information, the department will accept your 2022 WFTC application through December 31, 2026 (because your 2022 federal income tax return is due in 2023).
However, the department, for good cause, may extend the due date for filing your WFTC application.
Part 3: Refund amount
(10) How much of a refund can I receive? WFTC refunds will be paid to individuals who file a timely completed application and who meet the eligibility requirements. The refund amount you can receive is based on your income, your spouse's income (if you are filing married filing jointly on your federal income tax return), and how many qualifying children you have.
Question 10A: What is the maximum refund amount that I can receive?
Answer 10A: The maximum refund amount depends on how many qualifying children you have, but only your first three qualifying children are considered for payment purposes. The maximum refund amounts are as follows, subject to the annual adjustments described in 10K of this rule:
(a) If you have no qualifying children, your maximum refund amount is $300;
(b) If you have one qualifying child, your maximum refund amount is $600;
(c) If you have two qualifying children, your maximum refund amount is $900; and
(d) If you have three or more qualifying children, your maximum refund amount is $1,200.
The maximum refund amount will be reduced in cases where your income is greater than what is referred to in this rule as the "reduced federal income threshold." See answer 10D for more information on this reduction.
Question 10B: What is the minimum refund amount that I can receive?
Answer 10B: So long as you meet all eligibility requirements and you are entitled to receive more than zero cents under the WFTC, you will receive a minimum refund of $50. RCW 82.08.0206 (3)(c).
Question 10C: What information does the department use to calculate my WFTC refund?
Answer 10C: The department calculates your WFTC refund based on your earned income as reported on your properly filed federal income tax return for the period for which you are claiming the refund.
Question 10D: What is the reduced federal income threshold and how does it affect my WFTC refund amount?
Answer 10D: To be eligible for the WFTC refund, you must generally be eligible for the federal EITC, including satisfying the federal income thresholds for that program. In determining the amount of the WFTC refund, however the department must first calculate the reduced federal income threshold. The department determines the reduced federal income thresholds as provided in RCW 82.08.0206 (3)(b). If your income exceeds the reduced federal income threshold, but is still below the federal income thresholds, your maximum refund will be decreased, but not below $50, as follows (the below figures reflect the 2022 tax year adjustments to the original statutory amounts):
(a) If you have no qualifying children, then the department will reduce the federal income threshold by $2,500 for the prior federal tax year. Then, for every additional dollar of income you have over the reduced federal income threshold, the department will reduce the amount of refund received by $0.12 (i.e., the WFTC remittance reduction).
(b) If you have one qualifying child, then the department will reduce the federal income threshold by $5,000 for the prior federal tax year. Then, for every additional dollar of income you have over the reduced federal income threshold, the department will reduce the amount of refund by $0.12.
(c) If you have two qualifying children, then the department will reduce the federal income threshold by $5,000 for the prior federal tax year. Then, for every additional dollar of income you have over the reduced federal income threshold, the department will reduce the amount of refund by $0.18.
(d) If you have three or more qualifying children, then the department will reduce the federal income threshold by $5,000 for the prior federal tax year. Then, for every additional dollar of income you have over the reduced federal income threshold, the department will reduce the amount of refund by $0.24.
The department will adjust the WFTC refund reduction amounts on an annual basis beginning in 2023 to align the WFTC program with the federal EITC program.
Question 10E: How does the department calculate my WFTC refund?
Answer 10E: Below is an example of how the WFTC refund is calculated based on the federal income threshold amounts for the 2022 tax year.
Table A
For Those Filing as Single, Head of Household, Surviving Spouse, or Married Filing Separately*
Number of Qualifying Children
Federal Income Thresholds
Federal Income Threshold Reduction Amount
Reduced Federal Income Threshold
0
$16,480
$2,500
$13,980
1
$43,492
$5,000
$38,492
2
$49,399
$5,000
$44,399
3 or more
$53,057
$5,000
$48,057
*Those filing married filing separately for the 2022 tax year must meet the "unmarried" requirement as outlined in Answer 1A to qualify.
Table B
For Those Filing as Married Filing Jointly
Number of Qualifying Children
Federal Income Thresholds
Federal Income Threshold Reduction Amount
Reduced Federal Income Threshold
0
$22,610
$2,500
$20,110
1
$49,622
$5,000
$44,622
2
$55,529
$5,000
$50,529
3 or more
$59,187
$5,000
$54,187
Example 3:
Facts: John and Mary are married and filed their 2022 federal income tax return as married filing jointly. John and Mary have one qualifying child. On their federal income tax return, John and Mary's combined earned income was $44,700 and they meet all of the requirements in subsection (1)(a) through (e) of this rule to qualify for the WFTC refund.
Conclusion: The applicable federal income threshold for a couple that is married filing jointly with one qualifying child is $49,622. See Table B. This amount must be reduced by $5,000 (the federal income threshold reduction amount), which results in a reduced federal income threshold amount of $44,622. See Table B. John and Mary's earned income for WFTC purposes is $78 higher than the reduced federal income threshold ($44,700 - $44,622 = $78). The department must reduce the couple's maximum refund by $0.12 for every dollar above the $44,622 reduced federal income threshold (or 12 percent for each dollar).
Because they have one qualifying child, the maximum refund amount that John and Mary could receive is $600. Because their earned income is $78 above the reduced federal income threshold, their refund will be reduced by $9.36 ($78 x $0.12 = $9.36). John and Mary's WFTC refund amount is $590.64, which will be rounded to $591.
Question 10F: What is a "qualifying child" for WFTC purposes?
Answer 10F: To be eligible under the WFTC, a "qualifying child" must meet the federal tax requirements under Internal Revenue Code section 32. The only exception to this is that children who do not meet the valid SSN requirements for federal EITC purposes will still be considered "qualifying children" for WFTC purposes so long as they have a valid ITIN and meet all other federal requirements.
Question 10G: How do I determine whether a person is a "qualifying child"?
Answer 10G: A qualifying child must meet the following requirements per IRC section 32:
(a) The child must be:
(i) Your child or grandchild; or
(ii) Your brother, sister, stepbrother, stepsister, or any descendent of such relative;
(b) The child must have shared the same principal place of abode with you in the United States for more than one-half of the tax year;
(c) The child has not filed a joint tax return with their spouse;
(d) The child must be younger than you (and your spouse, if you are filing married filing jointly on your federal income tax return) and:
(i) Is not yet 19 years old at the end of the year for which you are claiming the refund; or
(ii) Is a student who is not yet 24 years old at the end of the year for which you are claiming the refund; or
(iii) Permanently and totally disabled during the tax year, regardless of age.
Question 10H: For circumstances where several people could potentially claim the same qualifying child, how does the department decide who can claim the qualifying child for WFTC purposes?
Answer 10H: If there is a question of who may claim the child, the department will determine who can claim based on the following hierarchy of rules:
(a) If only one person is the child's legal parent ("parent"): The parent may claim the child;
(b) If both parents file a joint tax return with each other: They may claim the child;
(c) If both parents claim the child on separate tax returns: The parent with whom the child lived with the longest during the year may claim the child;
(d) If the child lived with each parent for the same amount of time: The parent with the higher AGI for the year may claim the child;
(e) If neither parent can claim the child: The person who had the highest AGI for the year may claim the child; and
(f) If a parent can claim the child but does not: The person who had the highest AGI for the year may claim the child, but only if that person's AGI is greater than the AGI of any of the child's parents who can claim the child.
Example 4:
Facts: Tina and her five-year-old son, Anthony, live with Tina's parents (Anthony's grandparents), Jordan and Alex. Both Tina and Jordan and Alex provide more than half of their own support and cannot be claimed as dependents by anyone else. Tina's federal AGI is $16,000 while Jordan and Alex's federal AGI is $15,000. Tina and Jordan and Alex otherwise qualify for the federal EITC and fulfill all other WFTC eligibility requirements. Anthony meets the requirements of a qualifying child with respect to Tina, and Jordan and Alex and no one else is able to claim Anthony as a qualifying child.
Conclusion: In this situation, there is a question of whether Tina or Jordan and Alex may claim Anthony as a qualifying child for WFTC purposes. In applying the rules above, Tina would be the one eligible to claim Anthony as a qualifying child for WFTC purposes for 2022 as she is Anthony's legal parent and her federal AGI is greater than Jordan and Alex's.
Example 5:
Facts: Lucas is 25 years old and lives in the same home with his mother, Betty, and his eight-year-old niece, Tabatha, for all of 2022. Tabatha's parents do not live in the same principal place of abode as Lucas, Betty, and Tabatha. Lucas and Betty each provide more than half of their own support and cannot be claimed as dependents by anyone else. In completing their 2022 federal income tax returns, Lucas's federal AGI is $15,000 and Betty's federal AGI is $9,300. Tabatha's parents file married filing jointly on their federal income tax return and their federal AGI is $9,000. Lucas and his mother otherwise qualify for the federal EITC and fulfill all other WFTC eligibility requirements. There are no other persons who would be able to claim Tabatha as a qualifying child.
Conclusion: Lucas is eligible to claim the WFTC with his niece as his qualifying child. Tabatha's parents are not eligible to claim Tabatha as a qualifying child as she did not share the same principal place of abode with them for at least 183 days during 2022. Lucas and Betty both otherwise meet the relationship, age, residency, and joint return requirements to treat Tabatha as a qualifying child, but because Lucas's federal AGI is higher, he would be able to claim Tabatha as a qualifying child for WFTC purposes.
Question 10I: What if I am the noncustodial parent of my child? Can I still receive the WFTC refund if my spouse does not claim our child?
Answer 10I: You may still qualify to receive the WFTC if you meet the requirements for an individual without children, but you cannot claim the child as a qualifying child on your WFTC application. A custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent. While it may be possible for you to claim the child as your qualifying child for other federal tax benefits, the child must still live with you for more than half the year to be considered a qualifying child for federal EITC purposes. As you are the noncustodial parent, and therefore the child did not live with you for the required period of time during the year, you cannot claim this child for federal EITC purposes and, as such, you cannot claim this child for WFTC purposes.
Question 10J: What if my qualifying child lives with my spouse outside of Washington? If I am a Washington resident, can I claim my qualifying child for WFTC purposes?
Answer 10J: Yes, but only if you and your spouse are filing married filing jointly on your federal income tax return and you or your spouse are considered to be a Washington resident for the year for which you are claiming the refund. The child claimed must also meet all WFTC requirements for a qualifying child. The department may request additional information from you and your spouse to confirm that these requirements have been met.
Question 10K: Will the WFTC refunds be adjusted for inflation?
Answer 10K: Yes, the refund amounts will be adjusted for inflation each year beginning January 1, 2024, based on changes to the consumer price index that are published by November 15th of the previous year for the most recent 12-month period. "Consumer price index" means, for any 12-month period, the average consumer price index for the Seattle, Washington area for urban wage earners and clerical workers, all items, compiled by the Bureau of Labor Statistics, United States Department of Labor. RCW 82.08.0206 (3)(d) and (e).
Refund amounts that are adjusted due to inflation must be rounded to the nearest $5.
(11) What if I made a mistake? If you realize that you have made a mistake on your WFTC application, then you must correct the mistake by updating or amending your WFTC application.
Question 11A: When do I need to amend my WFTC application?
Answer 11A: You must amend your WFTC application when you realize the information submitted on your application is not accurate. This allows the department to make sure that it has accurate records and that it can process your refund without additional delay. If you have questions about amending your application, please contact the department for additional information by calling 360-763-7300 or go to the department's website at WorkingFamiliesCredit.wa.gov.
Question 11B: What if the Internal Revenue Service (IRS) makes changes to my federal income tax return? Do I need to amend my WFTC application?
Answer 11B: Yes, if the IRS makes changes to your federal income tax return, then the amount of refund that you are eligible to receive may be different than what the department provided to you. Accordingly, you will need to amend your WFTC application. If the department finds that the IRS has made changes to the federal income tax return that would increase or decrease the amount of the WFTC refund you are entitled to receive, then the department may make changes to your WFTC refund amount. This may mean that you will receive an additional payment or you will be required to pay back some of the refund that you received. If you know that the IRS has made changes to your federal tax return, you should alert the department of these changes as soon as possible by amending your WFTC application.
Question 11C: How long do I have to amend my WFTC application?
Answer 11C: If you timely filed your WFTC application, along with all required attachments, you may amend your application at any point within the statutory nonclaim period provided in RCW 82.32.060. The statutory nonclaim period is four years beginning with the calendar year for which the refund is being claimed. For example, if an applicant wishes to amend their 2022 WFTC application, they may do so at any point during the indicated years below:
Year 1
Year 2
Year 3
Year 4
Year 5
2022 - Sales/use tax paid
2023 - Applicant files WFTC application for 2022
 
 
2026 - Final year to submit amended application
 
 
 
 
 
 
 
 
 
 
 
Period you may amend your WFTC application
Question 11D: If I should have received a larger WFTC refund than I got, can I still receive the additional amount?
Answer 11D: Yes, if you notify the department that you should have been paid a larger refund than you received, or if the department finds that you should have been paid a larger refund than you received, then the department will pay the additional amount; however, the department may only do so if it discovers or is notified of the error before the end of the four-year statutory nonclaim period. The department encourages you to submit an amended application as soon as possible before the time limit runs out. Interest is not paid on any additional WFTC amounts that you are entitled to receive. See RCW 82.08.0206(10).
Part 4: General Administration and Review
(12) How is the WFTC program administered? The department is responsible for administering the WFTC program. The department administers the application process described in Part 2 of this rule, by providing refunds to applicants who meet the eligibility requirements in Part 1 of this rule. As part of this administration, the department has the authority to review all WFTC applications and determine the amount the applicant is legally entitled to receive. If the department determines that a refund was overpaid, it may issue an assessment within four years after the close of the calendar year for which the WFTC refund is being claimed. For example, if you file your 2022 WFTC application on December 1, 2023, the department has until the end of 2026 to issue an assessment for the overpaid refund amount. If the department finds that you have received less than you were legally entitled to receive, then the department must adjust your WFTC refund amount and pay you the additional refund owed to you.
(13) What if I disagree with the department's decision? If you disagree with the department's decision concerning your WFTC refund amount or assessment of WFTC overpayment, you may seek administrative review of that decision. To have this decision reviewed, you must seek an informal review under WAC 458-20-100. Additional information and details regarding the process in WAC 458-20-100 is available on the department's website at https://dor.wa.gov/file-pay-taxes/reviews-and-appeals.
Question 13A: For what types of issues may I seek informal review?
Answer 13A: You may seek administrative review of the following actions taken by the department regarding the WFTC:
(a) You received an assessment for overpayment of the WFTC refund amounts;
(b) The department denied all or part of your request for a WFTC refund;
(c) You received a letter ruling from the department.
You may find additional details regarding letter rulings on the department's website at WorkingFamiliesCredit.wa.gov.
Question 13B: How do I request an informal review?
Answer 13B: All informal review requests must be submitted in writing to the department within 30 days of the date the department issues a decision on one of the actions listed under Answer 13A. Information about how to seek review, including filing your petition, is available on the department's website.
Question 13C: What is the informal review process?
Answer 13C: WFTC reviews are subject to small claims review as described in WAC 458-20-100 as the amount at issue is below $25,000. This process provides petitioners with a simplified review that includes an abbreviated written determination, which becomes the final action of the department. If you do not want your case heard as a small claims review, you may request a longer, more in-depth mainstream review with the department. Once the petition for informal review is received, the department will acknowledge receipt with a letter. You will have the opportunity to provide additional records and explain your position in an informal hearing. After the department has reviewed your claim, a tax review officer assigned to your case will issue a final agency determination. A determination concerning the review of an assessment or refund denial may be appealed to the board of tax appeals. A determination concerning the review of a letter ruling is not subject to further appeal beyond the department. Additional information on further appeal rights may be found at https://dor.wa.gov/file-pay-taxes/reviews-and-appeals/rule-100-further-appeal-rights.
(14) What if I owe money to the department? If you receive a WFTC refund amount that is larger than you were entitled to receive, the department may issue an assessment for the overpaid amount.
Question 14A: Do the WFTC overpayments accrue interest?
Answer 14A: Yes. However, interest will not begin to accrue on the amount assessed for the first six months from the date the department issued the assessment. After this initial six-month period, interest will accrue on the amount due and owing at the rates specified under RCW 82.32.050 until the total amount due has been paid in full.
Question 14B: Can the department assess penalties on WFTC overpayments?
Answer 14B: Yes. If overpayment due is not paid in full by the date due, or the department issues a warrant for the collection of amounts due under this subsection, the department may assess applicable penalties under RCW 82.32.090; however, these penalties are not due until six months after the date the assessment has been issued. The department will take appropriate steps to work with you to establish a payment plan or other means to resolve the liability.
If the department finds, by clear, cogent, and convincing evidence, that an individual knowingly submitted, caused to be submitted, or consented to the submission of, a fraudulent WFTC claim for refund, the department must assess a penalty of 50 percent of the overpaid amount in addition to any other applicable penalties.
Below is an example of how interest and penalties may be assessed if you received a larger WFTC refund than you were entitled to receive and are required to pay the overpayment back. This example is to only demonstrate when interest and penalties may be first assessed and is not reflective of all potential assessment situations or circumstances:
January 1st
WFTC overpayment amount is assessed and issued. The issued notice requires full payment of the WFTC overpayment amount that is due and owing on or before June 30th.
January 1st through June 30th
Six-month period in which no penalties are assessed and interest does not accrue.
June 30th
Due date of WFTC overpayment amount per notice issued January 1st.
July 1st
If the WFTC overpayment amount is not fully paid, the department assesses a 15 percent penalty on the WFTC overpayment amount that is still due and owing. Interest begins to accrue on the WFTC overpayment amount that is still due and owing.
July 15th
If the WFTC overpayment amount is not fully paid, the department may issue a warrant for any WFTC overpayment amount that is still due and owing. If a warrant is issued, the department will also assess an additional 10 percent warrant penalty to the WFTC overpayment amount that is still due and owing. Interest continues to accrue until the WFTC overpayment amount is fully paid.
July 31st
If the WFTC overpayment amount is not fully paid, the department may assess an additional 10 percent penalty on the WFTC overpayment amount that is still due and owing for a total of 25 percent penalty (excluding warrant penalty if warrant is issued). Interest continues to accrue until the WFTC overpayment amount is fully paid.
[Statutory Authority: RCW 82.08.0206, 82.32.300, and 82.01.060. WSR 24-01-107, § 458-20-285, filed 12/18/23, effective 1/18/24. Statutory Authority: RCW 82.08.0206 and 84.32.300. WSR 22-23-137, § 458-20-285, filed 11/21/22, effective 12/22/22.]


PDF458-20-290

Workforce education investment surcharge—Select advanced computing businesses.

(1) Introduction. This rule provides information about the taxability of and surcharge for select advanced computing businesses as described in RCW 82.04.299.
(2) Examples. This rule includes examples that identify a number of facts and then state a conclusion. These examples should only be used as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(3) Definitions. The following definitions apply throughout this rule:
(a) "Advanced computing" means designing or developing computer software or computer hardware, whether directly or contracting with another person, including:
(i) Modifications to computer software or computer hardware;
(ii) Cloud computing services; or
(iii) Operating as a marketplace facilitator as defined by RCW 82.08.0531, an online search engine, or an online social networking platform.
(b) "Advanced computing business" means a business that derives income, including income from affiliates, from engaging in advanced computing.
(c) "Affiliate" and "affiliated" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person.
(d) "Affiliated group" means a group of two or more persons that are affiliated with each other.
(e) "Cloud computing services" means on-demand delivery of computing resources, such as networks, servers, storage, applications, and services, over the internet.
(f) "Control" means the possession, directly or indirectly, of more than 50 percent of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise.
(g) "Select advanced computing business" means a person who is a member of an affiliated group with at least one member of the affiliated group engaging in the business of advanced computing, and the affiliated group had worldwide gross revenue of more than $25,000,000,000 during the immediately preceding calendar year. A select advanced computing business does not include any of the following:
(i) A person primarily engaged within this state in the provision of commercial mobile service, as that term is defined in 47 U.S.C. Sec. 332 (d)(1);
(ii) A person primarily engaged in this state in the operation and provision of access to transmission facilities and infrastructure that the person owns or leases for the transmission of voice, data, text, sound, and video using wired telecommunications networks; or
(iii) A person primarily engaged in business as a "financial institution" as defined in RCW 82.04.29004, as that section existed on January 1, 2020.
For purposes of (g) of this subsection, "primarily" is determined based on the gross income of the business, as defined in RCW 82.04.080.
(h) "Taxable income of the business" means the gross income of the business, as defined in RCW 82.04.080, to which the tax rate in RCW 82.04.290(2) is applied to determine the business's tax liability under that B&O tax classification. In other words, it is the business's income taxable under the service and other activities B&O tax classification.
(i) "Worldwide gross revenue" means the annual sum of all sources of revenues, worldwide, prior to any subtractions, for all members of an affiliated group.
(4) Select advanced computing businesses - Taxability.
(a) Service and other activities B&O tax. A select advanced computing business is subject to the service and other activities B&O tax rate of 1.5 percent as required in RCW 82.04.290 (2)(a)(ii).
(b) Workforce education investment surcharge. Beginning with business activities occurring on or after April 1, 2020, a workforce education investment surcharge (surcharge) is imposed on select advanced computing businesses. This surcharge is in addition to the B&O taxes described in (a) of this subsection, plus any additional taxes that are due and payable to the department.
(i) Surcharge amount. For each select advanced computing business, the surcharge is equal to the taxable income of the business, multiplied by a rate of 1.22 percent. The combined annual surcharge paid by all members of an affiliated group may not exceed $9,000,000.
(ii) Surcharge reporting. A select advanced computing business must report and pay the surcharge to the department on a quarterly basis, regardless of the tax reporting frequencies of the members in the select advanced computing business under RCW 82.32.045. The return and amount payable are due by the last day of the month immediately following the end of the quarter. This reporting requirement continues even if the combined annual surcharge paid by all members of an affiliated group reaches the $9,000,000 annual maximum amount described in (b)(i) of this subsection.
(iii) Surcharge payment agreement. Members of an affiliated group of select advanced computing businesses may enter into an agreement with the department for facilitating the payment of the surcharge for all members of the group.
(iv) Disclosure obligations. The department may require persons believed to be engaging in advanced computing, or affiliated with a person believed to be engaging in advanced computing, to disclose whether they are a member of an affiliated group, and if so, to identify all other members of the affiliated group subject to the surcharge.
(v) Penalties. If the department establishes by clear, cogent, and convincing evidence, that one or more members of an affiliated group, with the intent to evade the surcharge, failed to fully comply with the department's disclosure request, as described in (b)(iv) of this subsection, that person, or those persons collectively, will be assessed a penalty equal to 50 percent of the amount of the total surcharge payable by all members of that affiliated group for the calendar year during which the person or persons failed to comply. This penalty is in lieu of, and not in addition to, the evasion penalty under RCW 82.32.090(7). However, additional penalties may still apply including, but not limited to, the penalty for late payment of tax due on a return. See RCW 82.32.090(1).
(vi) Hospital and provider clinic and affiliated organizations exemption. The surcharge described in (b) of this subsection does not apply to:
(A) A hospital as defined in RCW 70.41.020, including any hospital that comes within the scope of chapter 71.12 RCW if the hospital is also licensed under chapter 70.41 RCW; or
(B) A provider clinic offering primary care, multispecialty and surgical services, including behavioral health services, and any affiliate of the provider clinic if the affiliate is an organization that offers health care services or provides administrative support for a provider clinic, or is an independent practice association or accountable care organization. For purposes of (b)(vi)(B) of this subsection, "health care services" means services offered by health care providers relating to the prevention, cure, or treatment of illness, injury, or disease, and "primary care" means wellness and prevention services and the diagnosis and treatment of health conditions.
The exemptions under (b)(vi)(A) and (B) of this subsection do not apply to amounts received by any member of an affiliated group other than the businesses described in (b)(vi)(A) and (B) of this subsection.
(c) Example 1. Entity X, Entity Y, and Entity Z, an affiliated group, cumulatively had worldwide gross revenue of over $25,000,000,000 in 2021. Entity X and Entity Y are engaged in advanced computing, and Entity Z is engaged in real estate and leases commercial property to Entity X and Entity Y. All three entities are registered with the department and file and pay taxes on a monthly basis. For the first quarter of 2022, the entities reported the following amounts as taxable income of the business, respectively: Entity X: $800,000; Entity Y: $100,000; and Entity Z: $1,200,000.
The first step is to determine whether the taxable income of the business (the amount subject to tax under the service and other activities B&O tax classification) for each entity is subject to the 1.22 percent surcharge. Because Entities X, Y, and Z are all members of an affiliated group that had more than $25,000,000,000 of worldwide gross revenue during the preceding calendar year (2021 in this example), and Entity X and Entity Y are engaged in the business of advanced computing, all three entities are considered a "select advanced computing business." Therefore, the taxable income of the business for each entity is subject to the 1.22 percent surcharge as follows:
Entity X: $800,000 * 1.22% = $9,760
Entity Y: $100,000 * 1.22% = $1,220
Entity Z: $1,200,000 * 1.22% = $14,640
The total surcharge owed by this affiliated group of select advanced computing businesses for the first quarter of 2022 is $25,620. This amount is due no later than April 30, 2022, and each entity must report and pay its respective amount to the department.
The next step is to determine the service and other activities B&O tax rate in RCW 82.04.290(2) to apply to the taxable income reported by each entity. Because the three entities are subject to the 1.22 percent surcharge, the taxable income reported under RCW 82.04.290(2) by each entity will be subject to the B&O tax rate of 1.5 percent as required in RCW 82.04.290 (2)(a)(ii):
Entity X: $800,000 (*) 1.5% (=) $12,000
Entity Y: $100,000 (*) 1.5% (=) $1,500
Entity Z: $1,200,000 (*) 1.5% (=) $18,000
Each entity will continue to file and pay any taxes due on a monthly basis.
(d) Example 2. Using the same facts as Example 1, beginning July 1, 2022, if Entity Z was operating a qualifying hospital or provider clinic, as described in (b)(vi)(A) and (B) of this subsection, it would be exempt from the surcharge. However, Entity X and Entity Y would still be subject to the surcharge because neither is a business described in (b)(vi)(A) or (B) of this subsection.
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). WSR 22-23-021, § 458-20-290, filed 11/4/22, effective 12/5/22.]


PDF458-20-300

Capital gains excise tax—Overview and administration.

(1) Introduction and overview. Beginning January 1, 2022, Washington law imposes an excise tax on individuals with sales or exchanges of long-term capital assets (capital gains excise tax). See RCW 82.87.040. This rule provides information regarding the administration of the capital gains excise tax and is divided into six subsections as follows: Introduction and overview; returns; extensions; payment of tax; penalties and interest; and general administration.
(a) Imposition. The capital gains excise tax is imposed on the sale or exchange of long-term capital assets. The capital gains excise tax is not imposed on any sale or exchange occurring prior to January 1, 2022. A "long-term capital asset" is a capital asset that is held for more than one year. A "capital asset" has the same meaning as provided by section 1221 of the federal Internal Revenue Code and includes any other property if the sale or exchange of the property results in a gain that is treated as a long-term capital gain under section 1231 or any other provision of the federal Internal Revenue Code.
(b) Who is taxable? Only individual natural persons (referred to in this rule as "taxpayer," "you," or "your") are subject to the capital gains excise tax.
(c) What is the tax rate? The tax rate is seven percent. The tax is calculated by multiplying a taxpayer's Washington capital gains by the seven percent tax rate.
(d) Washington capital gains. Washington capital gains is your federal net long-term capital gain with certain adjustments made under RCW 82.87.020 (1)(a) through (e) and further modified by the deductions in RCW 82.87.060. The adjustments are primarily aimed at removing capital gains and losses allocated to places outside of Washington from your Washington capital gains figure.
(i) "Federal net long-term capital gain" means the net long-term capital gain reportable for federal income tax purposes, determined as if Title 26 U.S.C. Secs. 55 through 59 and 1400Z-1 and 1400Z-2 of the federal Internal Revenue Code did not exist. Title 26 U.S.C. Secs. 55 through 59 relate to the alternative minimum tax and Title 26 U.S.C. Secs. 1400Z-1 and 1400Z-2 relate to opportunity zones.
(ii) The deductions in RCW 82.87.060 are as follows:
(A) A standard deduction. If you are married or a state-registered domestic partner, the total combined standard deduction for both you and your spouse or domestic partner is $250,000, regardless of whether you and your spouse or domestic partner file a joint or separate return. In all other cases, the standard deduction is $250,000 per individual natural person. The $250,000 deduction amount may be adjusted for inflation every December, beginning in December 2023. See RCW 82.87.150 for additional information.
(B) Amounts that the state is prohibited from taxing under the Constitution of this state or the Constitution or laws of the United States.
(C) Adjusted capital gain derived from the sale or transfer of your interest in a qualified family-owned small business pursuant to RCW 82.87.070.
(D) Charitable donations deductible under RCW 82.87.080. The charitable donation deduction cannot exceed $100,000. The $100,000 deduction cap may be adjusted for inflation every December, beginning in December 2023. See RCW 82.87.150 for additional information.
(e) Exemptions. Certain sales or exchanges, such as sales of real estate, are exempt from the capital gains excise tax. See RCW 82.87.050 for additional information.
(f) Examples. This rule contains examples. These examples identify a number of facts and then state a conclusion. They are provided only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Returns.
(a) Filing obligation and due date. Only taxpayers owing Washington's capital gains excise tax in a taxable year are required to file a capital gains excise tax return with the department.
(i) If you are required to file a capital gains excise tax return, you must file the return with the department on or before the date your federal income tax return is required to be filed for the same taxable year.
(ii) If you owe capital gains excise tax, you are required to file a capital gains excise tax return whether or not you filed a federal income tax return.
(iii) If you did not file a federal income tax return, the due date for your capital gains excise tax return is the date your federal income tax return would have been due.
Example 1 - Return due date
Facts: The due date for Michael's federal income tax return is April 18, 2023. Michael has a Washington capital gains excise tax liability.
Result: The capital gains excise tax return due date is April 18, 2023, which is the date Michael's federal income tax return is due. Michael must file his capital gains excise tax return on or before April 18, 2023, or the return will be late and penalties will apply.
(b) Separate and joint filers, single filers. If you are required to file a capital gains excise tax return, your federal income tax filing status may affect how you must file your capital gains excise tax return as follows:
(i) Spouses filing jointly. Spouses who file a joint federal income tax return for the taxable year must file a joint capital gains excise tax return for the same taxable year. Accordingly, if you are married and file a joint federal income tax return with your spouse, you must file a joint capital gains excise tax return with your spouse.
(ii) Spouses filing separately. If a spouse files a separate federal income tax return for the taxable year, each spouse that owes capital gains excise tax must file a separate capital gains excise tax return for the same taxable year. Accordingly, if you are married and file a separate federal income tax return from your spouse, you must file a separate capital gains excise tax return.
(iii) State-registered domestic partners. State-registered domestic partners may file a joint capital gains excise tax return even if they filed separate federal income tax returns for the taxable year. Accordingly, if you are a state-registered domestic partner and file a separate federal income tax return from your partner, you and your partner may file either a joint capital gains excise tax return or separate capital gains excise tax returns.
(iv) Single filers. Any individual that is not married and is not a state-registered domestic partner must file their capital gains excise tax return as a single individual.
(c) Required documentation with the capital gains excise tax return. All taxpayers required to file a capital gains excise tax return for a taxable year must submit, along with the capital gains excise tax return form, all of the following:
(i) A copy of the complete, filed federal individual income tax return, including all supporting schedules and documentation filed with the Internal Revenue Service (IRS), for the taxable year.
(ii) For any claim for exemption under RCW 82.87.050(2), which may exempt the sale or exchange of an interest in a privately held entity directly owning real estate, documentation that substantiates the following:
(A) The fair market value and basis of the real estate held directly by the privately held entity;
(B) The percentage of the ownership interest sold or exchanged in the privately held entity that owns the real estate; and
(C) The methodology established by the privately held entity for allocating gains or losses from the sale of real estate among the owners, partners, or shareholders of the entity.
(d) Incomplete returns. A capital gains excise tax return is considered complete only if the return is filed in accordance with the filing requirements described in RCW 82.87.110 and subsection (2) of this rule. If a complete capital gains excise tax return is not filed on or before the due date for the capital gains excise tax return, the return will be late and the late filing penalty may apply. See subsection (5) of this rule for more information.
Example 2 - Incomplete return
Facts: Jane filed her federal income tax return on April 18, 2023. Jane owes capital gains excise tax and is required to file a capital gains excise tax return. She filed the return on April 18, 2023, but did not provide the department with a copy of her federal income tax return until April 30, 2023.
Result: Jane was required to file a complete return by April 18, 2023. Jane did not file a complete return on April 18, 2023, because she failed to include a copy of her federal individual income tax return along with the capital gains excise tax return. Jane's return is late. See subsection (5) of this rule for additional information on the late filing penalty.
(e) Electronic filing. All taxpayers must electronically file their capital gains excise tax returns and all required documentation identified in subsection (2)(c) of this rule. Electronic filings must be submitted to the department via the "My DOR" portal at secure.dor.wa.gov. The department may waive the electronic filing requirement for good cause as provided in RCW 82.32.080. See RCW 82.32.080 and WAC 458-20-22802 for additional information regarding electronic filing and the good cause waiver.
(f) Amended returns.
(i) Amended return required. If you or the IRS make any changes to your federal income tax return for any reason, and the changes affect the reported capital gains or the capital gains excise tax liability, you must file an amended capital gains excise tax return reflecting all changes made to the federal income tax return. You must also file an amended capital gains excise tax return if the original capital gains excise tax return needs to be corrected for errors identified after the due date for the original capital gains excise tax return, including, for example, situations where the statute of limitations for assessment of federal tax for a particular tax year is closed but the Washington nonclaim period remains open.
(ii) Assessments and penalties. The amendment of a capital gains excise tax return is not subject to a specific deadline. However, if the department finds that your failure to file an amended capital gains excise tax return shows evasion or misrepresentation of a material fact, the department can make assessments or corrections of assessments outside of the usual nonclaim period and impose penalties and interest at any time. See subsection (6) of this rule for more information.
(iii) Filing and payment requirements for amended returns. The documentation requirements described in subsection (2) of this rule apply to amended returns. This means, for instance, a copy of the complete, filed amended federal individual income tax return and all supporting amended schedules and documentation must be filed along with the amended return. If an amended capital gains excise tax return is filed and there is no amendment made to the federal tax return, other documentation supporting the changes must be submitted with the amended capital gains excise tax return. You must file your amended capital gains excise tax return electronically and electronically pay any additional tax due unless granted a waiver from the electronic filing/payment requirements by the department.
(3) Extensions.
(a) Extension period; timely payment still required. If a taxpayer obtains an extension of time for filing the federal income tax return for the taxable year and provides the department proof of the extension, the capital gains excise tax return is considered due on or before the extended due date for the federal income tax return. However, an extension for filing the capital gains excise tax return does not extend the due date for paying the capital gains excise tax.
(b) Extension filing; certification. You must submit an extension request electronically with the department on or before the original due date via the My DOR portal at secure.dor.wa.gov. During the submission process, you will certify that federal Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return or Form 2350, Application for Extension of Time to File U.S. Income Tax Return, was properly filed for the tax year. You must attach a copy of the properly filed federal Form 4868 or Form 2350 when filing the capital gains excise tax return.
(4) Payment of tax.
(a) Due date. If you owe the capital gains excise tax, you must remit the tax to the department on or before the date your federal income tax return is required to be filed without regard to any extension granted to you for the filing of your federal income tax return. The extension of time for filing the federal income tax return or capital gains excise tax return does not extend the due date for paying your capital gains excise tax. If you pay your capital gains excise tax late, the late payment penalty and interest may apply. See subsection (5) of this rule for more information.
Example 3 - Late payment - No federal extension
Facts: Jeannette filed her federal income tax return on April 18, 2023. Jeannette files a capital gains excise tax return on April 18, 2023. She later remits her capital gains excise tax to the department on April 20, 2023.
Result: Jeannette was required to pay the capital gains excise tax on April 18, 2023, when her federal income tax return was due. Jeannette paid the capital gains excise tax late and is subject to penalties and interest.
Example 4 - Late payment - Federal income tax return extension
Facts: Gil requested a federal income tax return extension on April 12, 2023, and received an automatic extension of time to file his federal tax return to October 16, 2023. Gil properly submits an extension request certification to the department before April 18, 2023, the original due date for the federal tax return and capital gains excise tax return. Gil files a capital gains excise tax return and pays his capital gains excise tax on October 13, 2023.
Result: Gil paid his capital gains excise tax late and is subject to penalties and interest with respect to the late payment. While Gil extended the date for filing the capital gains excise tax return, the due date for the payment of the capital gains excise tax remained April 18, 2023.
(b) Electronic payment. Capital gains excise tax must be paid by electronic funds transfer or other form of department authorized electronic payment, such as by credit card. The department may waive the electronic payment requirement for good cause. See RCW 82.32.080 and WAC 458-20-22802 for additional information regarding electronic payment requirements and the good cause waiver.
(c) Joint and several liability. The capital gains excise tax liability of each spouse or state-registered domestic partner filing a capital gains excise tax return is joint and several unless one of the spouses is relieved of liability for federal tax purposes as provided under section 6015 of the federal Internal Revenue Code or the department determines that the domestic partner would qualify for relief under the same parameters provided in section 6015.
(5) Penalties and interest
(a) Late filing penalty. If you do not file a complete capital gains excise tax return by the due date, the department will assess a late filing penalty in the amount of five percent of the tax due for the taxable year covered by the return for each month or portion of a month that the return remains unfiled. See RCW 82.87.110. The total late filing penalty may not exceed 25 percent of the tax due for the taxable year covered by the late return.
(b) Late payment penalty. If you do not remit your capital gains excise tax on or before the due date for payment of the capital gains excise tax, you are subject to the late payment penalty. If payment is not received by the department by the due date, the department will assess a penalty of nine percent of the amount of the tax due; if the tax is not received on or before the last day of the month following the due date, the department will assess a total penalty of 19 percent of the amount of the tax due; and if the tax is not received on or before the last day of the second month following the due date, the department will assess a total penalty of 29 percent of the amount of the tax due. See RCW 82.32.090(1) and WAC 458-20-228 for more information regarding late payment penalties.
(c) Other penalties.
(i) Other penalties imposed under chapter 82.32 RCW may apply. These penalties include the penalties for substantial underpayment of tax, disregard of specific written instructions, and intent to evade tax. See RCW 82.32.090 and WAC 458-20-228 for additional information.
(ii) Any taxpayer who knowingly attempts to evade payment of the capital gains excise tax is guilty of a class C felony as provided in chapter 9A.20 RCW. Any taxpayer who knowingly fails to pay tax, make returns, keep records, or supply information required under the capital gains excise tax, is guilty of a gross misdemeanor as provided in chapter 9A.20 RCW. RCW 82.87.140.
(d) Amended returns. The penalties described in this subsection may apply to amended capital gains excise tax returns, except the department will not assess late return or late payment penalties on increased amounts of tax due as a result of the amendment if the original capital gains excise tax return and tax due were timely filed and paid.
(e) Penalty waivers.
(i) The department will waive the late filing penalty only if the department determines either of the following:
(A) The taxpayer's failure to timely file the return was due to circumstances beyond their control; or
(B) The taxpayer has not been delinquent in filing any capital gains excise tax returns due during the preceding five calendar years.
(ii) The department will waive the late payment (RCW 82.32.090(1)) and substantial underpayment penalties (RCW 82.32.090(2)) if the department determines that the taxpayer's failure to timely pay was due to circumstances beyond their control. See RCW 82.32.105 and WAC 458-20-228 for additional information regarding waivers due to circumstances beyond the taxpayer's control.
(f) Interest.
(i) If you do not pay your capital gains excise tax by the due date described in subsection (4) of this rule, you will be assessed interest on the unpaid amounts. See RCW 82.32.050 and WAC 458-20-228 for additional information on interest assessed on underpayments and interest waivers.
(ii) If you have paid more tax than is properly due, you will receive interest for your overpayment. See RCW 82.32.060 and WAC 458-20-229 for information on interest on tax overpayments.
(6) General administration
(a) Application of chapter 82.32 RCW. The department administers the capital gains excise tax in accordance with chapter 82.32 RCW except as otherwise provided by law and to the extent not inconsistent with chapter 82.87 RCW.
(b) Preserving accurate and complete records. You have the burden of proving any claimed deductions, exemptions, and credits. Washington law requires you to keep accurate and complete records and timely respond to communications from the department. You must preserve records that substantiate the amounts of all deductions, exemptions, or credits claimed, as well as any documentation that substantiates your allocation of capital gains and losses. Claims for exemptions, deductions, and credits from the capital gains excise tax may require additional documents to be submitted to the department at the department's request. See RCW 82.32.070 and WAC 458-20-254 for additional information on recordkeeping requirements.
(c) Refunds. If you discover that you have overpaid taxes, penalties, or interest, you may file an amended capital gains excise tax return or apply for a refund or credit. The provisions under WAC 458-20-229 apply to refunds of overpaid capital gains excise tax.
(d) Informal administrative reviews. If you disagree with the department's assessment of tax, penalties, or interest; a department letter ruling; or the department's denial of a refund, you may seek an informal review of that action by submitting a petition for review with the department's administrative review and hearings division. The petition must be filed within 30 days of the department action. See WAC 458-20-100 for additional information.
(e) Nonclaim period. The nonclaim period provided under RCW 82.32.050 and 82.32.060 for deficient tax or penalty payments and excess payment of tax, penalty, or interest, respectively, apply to the capital gains excise tax. However, there is no limitation for the period in which an assessment or correction of an assessment can be made upon a showing of evasion or of misrepresentation of a material fact. See RCW 82.32.050 and WAC 458-20-230.
[Statutory Authority: RCW 82.01.060 and 82.32.300. WSR 23-16-001, § 458-20-300, filed 7/19/23, effective 8/19/23; WSR 23-02-025, § 458-20-300, filed 12/28/22, effective 1/28/23.]


PDF458-20-301

Capital gains excise tax—Definitions, deductions, exemptions, and allocation of gains and losses.

(1) Introduction. Beginning January 1, 2022, Washington law imposes an excise tax on individuals who sell or exchange long-term capital assets. See chapter 82.87 RCW (capital gains excise tax). This rule provides interpretive guidance related to the tax, including definitions of terms and explanations regarding the treatment of specific transactions. This rule contains examples that identify a number of facts, and then it states a conclusion. The examples are provided only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.
(2) Definitions and terms, and related information.
(a) Adjusted capital gain. Adjusted capital gain means federal net long-term capital gain:
(i) Plus, any amount of long-term capital loss from a sale or exchange that is exempt from the capital gains excise tax, to the extent such loss was included in calculating federal net long-term capital gain;
(ii) Plus, any amount of long-term capital loss from a sale or exchange that is not allocated to Washington under RCW 82.87.100, to the extent such loss was included in calculating federal net long-term capital gain;
(iii) Plus, any amount of loss carryforward from a sale or exchange that is not allocated to Washington under RCW 82.87.100, to the extent such loss was included in calculating federal net long-term capital gain;
(iv) Less, any amount of long-term capital gain from a sale or exchange that is not allocated to Washington under RCW 82.87.100, to the extent such gain was included in calculating federal net long-term capital gain;
(v) Less, any amount of long-term capital gain from a sale or exchange that is exempt under chapter 82.87 RCW, to the extent such gain was included in calculating federal net long-term capital gain. See RCW 82.87.020; and
(vi) Plus, any amount of capital loss carryforward from a sale or exchange that occurred before January 1, 2022, to the extent such loss was included in calculating federal net long-term capital gain, and less any long-term capital gain from an installment sale that occurred before January 1, 2022, to the extent such gain was included in calculating federal net long-term capital gain. See subsection (3)(a) of this rule for additional information regarding the two adjustments described in this paragraph.
(b) Another taxing jurisdiction. Another taxing jurisdiction means a state of the United States other than the state of Washington, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or any foreign country or political subdivision of a foreign country. See RCW 82.87.100. The United States is not "another taxing jurisdiction."
(c) Domicile. In general, domicile means a permanent place of abode, coupled with the intent to make the abode one's home. It is the place that you intend to return to even if you visit or temporarily reside elsewhere. Thus, actual presence in a location at any given time is not necessarily determinative of a person's domicile. An individual can have only one domicile at a time. A Washington domiciliary who intends to move at a future date is still considered domiciled in Washington. See subsection (6)(c) of this rule for more details.
(d) Family. Family means the same as "member of the family" in RCW 83.100.046. See RCW 82.87.070.
(e) Federal net long-term capital gain. Federal net long-term capital gain means the net long-term capital gain reportable for federal income tax purposes determined as if I.R.C. §§ 55 through 59, 1400Z-1, and 1400Z-2 did not exist. See RCW 82.87.020. This information is reported on Schedule D of the U.S. Individual Income Tax Return.
(f) Grantor trust. A grantor trust is any trust in which the grantor or another person is treated as the owner of any portion of the trust for federal income tax purposes under I.R.C. §§ 671–679. "Grantor trust" also includes any nongrantor trust where the grantor's transfer of assets to the trust is treated as an incomplete gift under I.R.C. § 2511 and accompanying regulations, to the extent that grantor's transfer of assets to the trust is treated as an incomplete gift. The grantor of a nongrantor trust must include any long-term capital gain or loss from the sale or exchange of a capital asset attributable to the grantor's gift to the trust, to the extent such gift is incomplete, in the calculation of that individual's adjusted capital gain, if such gain or loss is allocated to this state under RCW 82.87.100.
(g) Intangible personal property. Intangible personal property means all personal property other than tangible personal property. For example, software is intangible personal property.
(h) Internal Revenue Code/I.R.C. Internal Revenue Code or I.R.C. means Title 26 U.S.C., i.e., the United States Internal Revenue Code of 1986, as amended, as of July 25, 2021, or as of such subsequent date as noted in this rule. See RCW 82.87.020.
(i) Long-term capital asset. Long-term capital asset means a capital asset held for more than one year. See RCW 82.87.020.
(j) Materially participated. Materially participated means an individual was involved in the operation of a business on a basis that is regular, continuous, and substantial. Materially participated generally has the same meaning as the term "material participation," as defined in I.R.C. § 469 and related treasury regulations, to the extent not inconsistent with the qualified family-owned small business deduction provided in RCW 82.87.070.
(k) Nongrantor trust. A nongrantor trust is any trust other than a grantor trust.
(l) Permanent place of abode; place of abode. A place of abode means a fixed dwelling or home maintained by an individual for occupancy. Permanency of a place of abode is determined by whether the place of abode serves more than a temporary purpose. Occupancy of the dwelling or home, ownership status, nature, characteristics, use, names, or labels of a dwelling are considered, but are not conclusive as to determining the permanency of a place of abode. For example, a rental apartment that an individual lives in for the tax year is indicative of a permanent place of abode, while a camp or vacation home that is suitable and in fact used only for vacations is not indicative of a permanent place of abode.
(m) Principally directed or managed within the state of Washington. Principally directed or managed within the state of Washington means that an organization's activities are primarily directed, controlled, and coordinated in Washington. An office location in Washington alone does not establish that the organization is principally directed or managed in Washington. For example, a Washington location is insufficient for this purpose if the organization's activities are not primarily directed, controlled, and coordinated from the Washington location. Organizations may submit an affidavit to the department attesting that the organization is principally directed or managed in Washington. The affidavit is available at the department website, dor.wa.gov.
(n) Qualified organization. A qualified organization means an organization that is eligible to receive a charitable contribution as defined in I.R.C. § 170(c), and is principally directed or managed within the state of Washington. See RCW 82.87.080.
(o) Qualifying interest. Qualifying interest means an interest in a business that meets one of the following characteristics:
(i) An interest as a proprietor in a business carried on as a sole proprietorship;
(ii) An interest in a business if at least 50 percent of the business is owned, directly or indirectly, by any combination of the taxpayer or members of the taxpayer's family, or both; or
(iii) An interest in a business if at least 30 percent of the business is owned, directly or indirectly, by any combination of the taxpayer or members of the taxpayer's family, or both, and:
(A) At least 70 percent of the business is owned, directly or indirectly, by members of two families; or
(B) At least 90 percent of the business is owned, directly or indirectly, by members of three families.
(p) Real estate. Real estate means land and fixtures affixed to land, and also includes used mobile homes, used park model trailers, used floating homes, and improvements constructed upon leased land. See RCW 82.87.020.
(q) Resident.
(i) Resident generally includes any individual who is domiciled in Washington during the taxable year. However, the term does not include a Washington domiciliary if the domiciliary:
(A) Did not maintain a permanent place of abode in Washington at any time during the entire taxable year;
(B) Maintained a permanent place of abode outside of Washington during the entire taxable year; and
(C) Spent in the aggregate not more than 30 days of the taxable year in Washington. See RCW 82.87.020.
(ii) Resident also includes any individual not domiciled in Washington during the taxable year if the individual maintained a place of abode in Washington at any time during the taxable year and was physically present in Washington for more than 183 days during the taxable year. See RCW 82.87.020. A day, for purposes of this definition, means a calendar day or any portion of a calendar day.
(r) Tangible personal property. Tangible personal property means personal property that can be seen, weighed, measured, felt, or touched, but does not include steam, electricity, or electrical energy.
(s) Taxpayer. Taxpayer means an individual, i.e., a natural person, subject to the capital gains excise tax. In this rule, the taxpayer is also referred to as "you" and "your."
(t) Washington capital gains. Washington capital gains means an individual's adjusted capital gain, as modified in RCW 82.87.060, for each return filed under this chapter. See RCW 82.87.020 and subsection (5) of this rule for information on the deductions provided in RCW 82.87.060.
(3) Tax imposed.
(a) The measure of tax; adjustments to federal net long-term capital gain. The capital gains excise tax is imposed on the sale or exchange of long-term capital assets. The measure of the capital gains excise tax is Washington capital gains. Generally, Washington capital gains begins with the taxpayer's reportable federal net long-term capital gain, and this amount is then adjusted by certain statutory additions and subtractions to reach adjusted capital gain. For example, these adjustments remove exempt transactions or those not allocated to Washington from the taxable measure. Statutory deductions further modify adjusted capital gain to reach the taxpayer's Washington capital gains figure.
If your Washington capital gains are less than zero for a taxable year, no tax is due under this section, and you are not allowed to carryover this amount for use in the calculation of your adjusted capital gain for any other taxable year.
To the extent that a loss carryforward is included in the calculation of your federal net long-term capital gain and that loss carryforward is directly attributable to losses from sales or exchanges allocated to this state under RCW 82.87.100, the loss carryforward is included in the calculation of your adjusted capital gain. However, you may not include any losses carried back for federal income tax purposes in the calculation of your adjusted capital gain for any taxable year. See RCW 82.87.040.
(i) The effective date of the tax. The capital gains excise tax is imposed on the sale or exchange of capital assets on and after January 1, 2022. Sales or exchanges occurring before the January 1, 2022, effective date of the tax, are not part of the taxable measure of the capital gains excise tax. There are at least two situations affected by this timing issue:
(A) Loss carryforwards prior to 2022. Although the measure of the capital gains excise tax is federal net long-term capital gain, you must add back any loss carryforwards from sales or exchanges of long-term capital assets that occurred prior to January 1, 2022, in calculating adjusted capital gain to the extent such loss was included in calculating federal net long-term capital gain because any pre-2022 loss arose from a sale or exchange prior to the effective date of the capital gains excise tax. See subsection (2)(a) of this rule for the definition of adjusted capital gain.
(B) Installment sales. Long-term capital gain recognized from an installment sale, as defined in I.R.C. § 453, is not subject to capital gains excise tax if the sale occurred before January 1, 2022, even if some installment payments occur on or after January 1, 2022. You should remove any gain recognized from installment sales that occurred prior to January 1, 2022, in calculating adjusted capital gain to the extent such gain was included in calculating federal net long-term capital gain. See subsection (2)(a) of this rule for the definition of adjusted capital gain. If the installment sale occurred on or after January 1, 2022, you must include the long-term capital gain in the measure of the Washington capital gains excise tax in the same manner as the gain is reportable for federal tax purposes.
(ii) Sale or exchange of long-term capital assets. The imposition of the capital gains excise tax is conditioned on the sale or exchange of a long-term capital asset. In other words, if you sell or exchange a capital asset resulting in a long-term capital gain or loss, that gain or loss is included in calculating your adjusted capital gain. Alternatively, if you have a long-term capital gain or loss that did not arise from a sale or exchange, then that gain or loss is not included in calculating your adjusted capital gain.
Example 1: Gifts.
Facts: In 2024, Jane received an old baseball card worth $30,000 from her brother, Jim, as a gift. Jim has no reportable federal net long-term capital gain from this transaction or from any other source.
Result: Because the transaction results in no federal long-term capital gain, Jim has no capital gains excise tax liability from the gift.
Example 2: Expatriation.
Facts: In 2024, Zander properly had federal net long-term capital gain in the amount of $500,000. A portion, $100,000, is long-term capital gain recognized under I.R.C. § 877A(a) because Zander is expatriating.
Result: Long-term capital gain is recognized under I.R.C. § 877A(a) as a result of a deemed sale. Because $100,000 of Zander's gain is not the result of a sale or exchange of a capital asset, that portion is not included in Zander's measure of Washington capital gains. He should subtract $100,000 from his federal net long-term capital gain when calculating his Washington capital gains.
Example 3: Maturity of bonds.
Facts: In 2024, Zora had federal net long-term capital gain in the amount of $500,000. A portion, $100,000, is long-term capital gain recognized under I.R.C. § 1271 upon the retirement of bonds Zora had purchased at discount.
Result: Upon the retirement of the bonds, Zora receives cash and no longer holds the capital assets (i.e., the bonds). These circumstances indicate the transaction is an exchange for purposes of the capital gains excise tax, and Zora should include the long-term capital gain recognized from the bonds in her Washington capital gains amount.
Example 4: Excess partnership distribution.
Facts: In 2024, Zane had federal net long-term capital gain in the amount of $500,000. A portion, $100,000, is long-term capital gain recognized under I.R.C. § 731 because the partnership in which Zane is a partner distributed cash to him in an amount that exceeded Zane's basis in the partnership.
Result: The long-term capital gain that Zane recognizes from the excess distribution is not due to a sale or exchange of a capital asset. Therefore, Zane should subtract $100,000 from his federal net long-term capital gain when calculating his Washington capital gains.
Example 5: Section 1256 contracts.
Facts: In 2023, Mavis, a Washington domiciliary, recognized both gains and losses from various Section 1256 contracts, as defined in I.R.C. § 1256. Mavis recognized a $300 gain from the sale of an 18-month futures contract that she held for one year and three months, a $400 loss from the sale of a three-month nonequity option contract that she held for one month, and a $100 gain from a 24-month foreign currency contract that she continues to hold, but was deemed sold at the end of the year for federal tax purposes. Under I.R.C. § 1256, 60 percent of the gain or loss from Section 1256 contracts is treated as long-term capital gain or loss, and 40 percent is treated as short-term capital gain or loss. For federal tax purposes, Mavis had $0 in net capital gain from these contracts for 2023.
Result: Although Mavis had $0 in federal net long-term capital gain from the Section 1256 contracts in 2023, only long-term capital gains and losses from Section 1256 contracts that were held for more than one year and were sold are included in calculating an individual's Washington capital gains excise tax. Here, Mavis sold or exchanged only one contract that she held for more than one year, the 18-month contract. Therefore, Mavis should calculate her Washington capital gains from her Section 1256 contracts by including only the $180 in long-term capital gain she recognized from her sale of the 18-month futures contract. The $240 long-term capital loss she recognized for federal tax purposes on the three-month contract and the $60 long-term capital gain she recognized on the 24-month contract are not part of her Washington capital gains.
(iii) Other examples on the measure of tax.
Example 6: Capital gain invested in qualified opportunity fund.
Facts: In 2023, Joseph, a Washington domiciliary, sold stock he had held for two years for $2,000,000. His basis in the stock was $700,000. He invests in the same year, $1,300,000 in a qualified opportunity fund, as defined in I.R.C. § 1400Z-2, and elects to defer federal taxation of the gain from the sale of his stock as permitted under I.R.C. § 1400Z-2. Joseph sells no other capital assets in 2023. As a result of the deferral, Joseph recognizes in 2023 $0 net long-term capital gain for federal tax purposes. 
Result: An individual's Washington capital gains is based on their federal net long-term capital gain, which is defined as the net long-term capital gain reportable for federal income tax purposes determined as if Title 26 U.S.C. Secs. 55 through 59, 1400Z-1, and 1400Z-2 of the Internal Revenue Code did not exist. Because the definition of federal net long-term capital gain excludes Section 1400Z-2 of the Internal Revenue Code, Joseph must include the $1,300,000 in long-term capital gain from his 2023 sale of stock in calculating his 2023 Washington capital gains.
Example 7: Sale of qualified opportunity fund.
Facts: Same facts as Example 6, and Joseph sells his investment in the qualified opportunity fund in 2025 for $1,700,000. Under the basis and gain recognition rules in I.R.C. § 1400Z-2, Joseph must recognize $1,300,000 in long-term capital gain on the sale of his interest in the qualified opportunity fund for federal tax purposes.
Result: The definition of federal net long-term capital gain for purposes of the Washington capital gains excise tax excludes Section 1400Z-2 of the Internal Revenue Code. Therefore, Joseph should ignore I.R.C. § 1400Z-2 when calculating the gain from the sale of his qualified opportunity fund investment for purposes of the Washington capital gains excise tax, and, in this case, calculate his gain or loss by applying I.R.C. §§ 1001, 1011, and 1012.
Example 8: Section 1244 stock loss.
Facts: In 2023, David, who is domiciled in Washington, sold stock he had held for several years. Some of the stock sold by David was Section 1244 stock, as defined under I.R.C. § 1244(c). The sale of the Section 1244 stock resulted in a $50,000 loss, which David properly reported on his 2023 tax return as an ordinary loss. David's other stock sales in 2023 resulted in a net long-term capital gain of $1,300,000 and a net short-term capital loss of $20,000. David had no other capital gains or losses.
Result: Neither the $50,000 ordinary loss nor the $20,000 short-term capital loss David reported on his 2023 federal tax return are included in his federal net long-term capital gain. As a result, neither loss amount is included in calculating David's Washington capital gains. David's 2023 Washington capital gains amount is his federal net long-term capital gain, $1,300,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 9: Section 1061 applicable partnership interests.
Facts: Marcy owns interests in partnerships that are "applicable partnership interests" under I.R.C § 1061. Marcy is a Washington domiciliary. In 2023, she reports on her federal tax return $1,000,000 in capital gain passed through from her partnerships, all from the sale of intangible long-term capital assets. A portion of this capital gain, $200,000, is recharacterized as short-term capital gain under I.R.C. § 1061. She reports the remainder, $800,000, as long-term capital gain. Marcy has no other capital gain or losses in 2023.   
Result: The $200,000 in capital gain that is recharacterized as short-term capital gain under I.R.C. § 1061 is not part of Marcy's net long-term capital gain reportable for federal income tax purposes. Therefore, Marcy's 2023 Washington capital gains amount is $800,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 10: Loss carried forward from a prior year.
Facts: In 2023, John incurs a $1,003,000 long-term capital loss from a sale of stock while John was domiciled in Washington. John does not have any capital gains against which he can apply the loss. Under I.R.C. § 1211, $3,000 of the loss is applied against ordinary income that John earned in 2023. Therefore, $1,000,000 of the loss is carried forward to 2024 under I.R.C. § 1212. In 2024, John incurs a $4,000,000 long-term capital gain from sales of stock while John continues to be domiciled in Washington. On John's federal return, John applies the $1,000,000 loss from 2023 and reports a federal net long-term capital gain of $3,000,000 for 2024.
Result: To calculate John's 2024 Washington capital gains, the starting point is John's federal net long-term capital gain of $3,000,000. None of the adjustments in RCW 82.87.020(1) apply in determining John's adjusted capital gain. Therefore, John's 2024 Washington capital gains amount is $3,000,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 11: Out-of-state loss carried forward from a prior year.
Facts: Same facts as Example 10, except John incurs a net $1,003,000 long-term capital loss from a sale of stock while John was domiciled in Oregon, and John becomes domiciled in Washington in 2024.
Result: To calculate John's 2024 Washington capital gains, the starting point is John's federal net long-term capital gain of $3,000,000. RCW 82.87.020 (1)(c) instructs that the $1,000,000 loss carryforward must be added back to the $3,000,000 federal net long-term capital gain amount because all $1,000,000 of the loss was from a sale or exchange that was not allocated to Washington. Therefore, John's 2024 Washington capital gains amount is $4,000,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 12: Short-term capital losses.
Facts: In 2023, Jason, a Washington domiciliary, realizes a $403,000 short-term capital loss from sales of securities, and a $325,000 net long-term capital gain from a sale of investment property. That year, he also earns $125,000 in other income. For federal tax purposes, $3,000 of the short-term capital loss is applied against Jason's other income and $325,000 of the short-term capital loss is applied against Jason's long-term capital gain. The remaining $75,000 net short-term capital loss is carried forward to 2024.
Result: Jason's 2023 Washington capital gains amount is his federal net long-term capital gain, $325,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 13: Short-term loss carried forward.
Facts: Same facts as Example 12, and in 2024, Jason realizes long-term capital gain totaling $1,000,000, and short-term capital gain totaling $200,000, all from sales of securities. For federal tax purposes, the $75,000 short-term capital loss carried forward from 2023 is applied against Jason's 2024 $200,000 net short-term capital gain.
Result: Jason's 2024 Washington capital gains amount is $1,000,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
(b) Beneficial ownership; pass-through entities. The capital gains excise tax applies to the sale or exchange of long-term capital assets owned by individuals. Ownership includes both legal and beneficial ownership. An individual is considered to be a beneficial owner of long-term capital assets held by any pass-through or disregarded entity in which the individual holds an ownership interest, to the extent of the individual's ownership interest in the entity as reported for federal income tax purposes. See RCW 82.87.040. Accordingly, you must include both gains from the sale or exchange of capital assets of which you are the legal owner and gains passed through to you from the sale or exchange of capital assets of which you are a beneficial owner. Examples of pass-through entities for federal tax purposes include partnerships, limited liability companies, S corporations, and grantor trusts. See RCW 82.87.040. The department does not consider estates, or trusts other than grantor trusts, to be pass-through entities. However, beneficiaries of estates and nongrantor trusts may nevertheless be subject to capital gains excise tax on distributions of capital gains received from estates and nongrantor trusts.
Example 14: Mutual fund.
Facts: Jane is domiciled in Washington and an investor in a mutual fund. A mutual fund is formed as a regulated investment company, a type of pass-through entity for federal income tax purposes. In 2024, the fund earns long-term capital gain from the sale of capital assets held by the fund. Some of the capital gain is distributed to the fund's shareholders, and some of the gain is retained in the fund and reported as undistributed capital gain.
Result: Jane is liable for capital gains excise tax on her Washington capital gains arising from the sale of the fund's long-term capital assets to the extent of her ownership interest in the fund as reported for federal income tax purposes, including her share of the fund's undistributed capital gain, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 15: S corporation.
Facts: Jack is domiciled in Washington. He is a 50 percent shareholder of an S corporation. The S corporation is a long-time shareholder of a C corporation. The S corporation sells the C corporation shares, resulting in long-term capital gain, 50 percent of which is passed through to Jack for federal income tax purposes.
Result: Jack is a beneficial owner of the S corporation's assets. Jack must include his 50 percent share of the long-term capital gain arising from the S corporation's sale of stock in calculating his Washington capital gains.
Example 16: Tiered partnership – Limited liability company.
Facts: Juan is domiciled in Washington. Juan is a 50 percent owner of a partnership. The partnership is a 50 percent owner of an LLC. The LLC sells an intangible asset that it has owned for two years, which results in long-term capital gain. As the owner of the partnership, 25 percent of the long-term capital gain from the LLC's sale of the intangible asset is passed through to Juan for federal income tax purposes.
Result: Because Juan is an owner of a pass-through entity, the partnership, and the partnership is an owner of another pass-through entity, the LLC, Juan is a beneficial owner of the LLC's assets. Therefore, Juan must include in calculating his Washington capital gains, the long-term capital gain passed through to him arising from the LLC's sale of the intangible asset.
(4) Exemptions. You may treat certain types of sales or exchanges as exempt from the capital gains excise tax. See RCW 82.87.050. These exemptions are subject to the following guidelines.
(a) Real estate. Generally, long-term capital gains from sales or exchanges of real estate are not subject to capital gains excise tax. This exemption applies to all real estate transferred by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property and are filed as a public record with the counties where real property is located.
Example 17: Sale of real estate by an individual.
Facts: Pamela is a Washington domiciliary and owns investment real property in Western Washington. In 2025, a real estate developer offers to buy the real property. Pamela accepts the developer's offer and completes the sale the same year. The sale results in a $10,000,000 long-term capital gain, which Pamela reports for federal income tax purposes. Pamela's only other transaction in 2025 involving long-term capital assets is a sale of some stock that resulted in $300,000 in long-term capital gain. Her total federal net long-term capital gain in 2025 is $10,300,000.
Result: Pamela is exempt from Washington capital gains excise tax on the $10,000,000 long-term capital gain arising from the sale of the real property. In calculating adjusted capital gain for 2025, Pamela should subtract the $10,000,000 from her federal net long-term capital gain as an amount of long-term capital gain from a sale or exchange that is exempt under chapter 82.87 RCW. Pamela's 2025 Washington capital gains equals $300,000, subject to the exemptions and deductions discussed in subsections (4) and (5) of this rule.
Example 18: Sale of real estate by pass-through entity.
Facts: Paul and Pierre each own 50 percent of Invesco LLC. Invesco owns 100 percent of two other LLCs, PropertyOne LLC and PropertyTwo LLC. PropertyOne's only asset is investment real property located in Eastern Washington. In 2024, PropertyOne sells the investment property, resulting in $6,000,000 of long-term capital gain. For federal tax purposes, Paul and Pierre each recognize $3,000,000 in long-term capital gain from their distributive shares of the capital gain passed-through from PropertyOne.
Result: PropertyOne's sale of the investment property is exempt from capital gains excise tax. In calculating their Washington capital gains, Paul and Pierre should each subtract the $3,000,000 from their federal net long-term capital gain as an amount of long-term capital gain from a sale or exchange that is exempt under chapter 82.87 RCW.
(b) Sales of entities owning real estate. The sale of an interest in a privately held entity is exempt from the capital gains excise tax to the extent the long-term gain or loss from the sale is directly attributable to real estate owned directly by the entity.
(i) A "privately held entity" for this purpose means an entity that is not traded through public means. For example, a privately held entity does not include a corporation traded on a public exchange.
(ii) "Owned directly" means the privately held entity in which the individual has an interest legally owns (holds legal title to) the real estate.
(iii) The value of this exemption is equal to the fair market value of the real estate owned directly by the privately held entity less its basis at the time that the sale or exchange of the individual's interest occurs, multiplied by the percentage of the ownership interest in the entity that is sold or exchanged by the individual. The following are not considered in the calculation of the exemption amount:
(A) Any amount that I.R.C. § 751 treats as an amount realized from the sale or exchange of property other than a capital asset; and
(B) Real estate not owned directly by the entity in which an individual is selling or exchanging the individual's interest.
(iv) The fair market value of real estate may be established by a fair market value appraisal issued by a state-licensed real estate appraiser or an allocation of assets by the seller and the buyer made consistent with the principles required for an allocation under I.R.C. § 1060, as amended, and related treasury regulations. However, the department is not bound by the parties' agreement as to the allocation of assets, allocation of consideration, or fair market value, if such allocations or fair market value do not reflect the fair market value of the real estate. The assessed value of the real estate for property tax purposes may also be used to determine the fair market value of the real estate if the assessed value is current as of the date of the sale or exchange of the ownership interest in the entity owning the real estate and the department determines that this method is reasonable under the circumstances. In no case may the exemption value under (b) of this subsection exceed the individual's long-term capital gain from the sale or exchange of the interest in the entity for which the individual is claiming this exemption.
Example 19: Sale of private entity directly and indirectly owning real estate.
Facts: Ken, who is domiciled in Washington, owns 100 percent of Holding Company LLC. Holding Company LLC owns three assets: A 100 percent interest in First Avenue Tower LLC, a 100 percent interest in Second Avenue Tower LLC., and 100 percent of Third Avenue Tower, a commercial building. All of the entities are privately held entities. First Avenue Tower LLC owns one asset: First Avenue Tower, a commercial building with a fair market value of $4,000,000, and a basis of $1,000,000. Second Avenue Tower LLC also owns only one asset, a commercial building called Second Avenue Tower. Second Avenue Tower has a fair market value of $8,000,000, and a basis of $5,000,000. Third Avenue Tower has a fair market value of $5,000,000, and a basis of $2,000,000.
Real estate
FMV
Basis
First Avenue Tower
$4,000,000
$1,000,000
Second Avenue Tower
$8,000,000
$5,000,000
Third Avenue Tower
$5,000,000
$2,000,000
Ken sells his entire interest in Holding Company LLC for $17,000,000. His gain from the sale is a $9,000,000 long-term capital gain.
Result: A portion of the $9,000,000 gain Ken recognizes from the sale of Holding Company LLC may qualify for exemption. Ken's long-term capital gain from the sale of his Holding Company LLC interest is ineligible for the exemption with respect to First Avenue Tower and Second Avenue Tower because Holding Company LLC does not directly own those properties. However, Holding Company LLC owns Third Avenue Tower directly. Therefore, $3,000,000 of Ken's gain from the sale of Holding Company LLC is exempt. This amount is the difference between the fair market value of Third Avenue Tower and the basis of that property.
Example 20: Sale of private entity directly and indirectly owning real estate.
Facts: Same general facts as Example 19, except Holding Company LLC liquidates First Avenue Tower LLC prior to Ken's sale of Holding Company LLC. As a result of the liquidation, at the time of Ken's sale of his Holding Company interest, Holding Company LLC directly owns the commercial building previously held by First Avenue Tower LLC, as well as Third Avenue Tower.
Result: A portion of the $9,000,000 gain Ken recognizes from the sale of Holding Company LLC may qualify for exemption. Specifically, the value of the exemption equals $6,000,000, which is the $4,000,000 fair market value of First Avenue Tower minus its $1,000,000 basis, plus the $5,000,000 fair market value of Third Avenue Tower minus its $2,000,000 basis, multiplied by Ken's 100 percent ownership interest in Holding Company LLC.
Example 21: Sale of private entity directly owning a partial interest in real estate.
Facts: Mitch is a Washington domiciliary who owns 100 percent of Mitch Holdings LLC. Mitch Holdings LLC owns one asset, a 40 percent interest in an investment property. Mitch recently decided to divest from the property and did so by selling his entire interest in Mitch Holdings LLC to another person. The assessed value of the investment property is $2,300,000.
Result: Mitch Holdings LLC is a privately held entity. Mitch's sale of Mitch Holdings LLC is exempt from the capital gains excise tax to the extent the long-term gain or loss from the sale is directly attributable to real estate owned directly by Mitch Holdings LLC, in this case, the investment property. The value of the exemption for Mitch is equal to the fair market value of Mitch Holdings LLC's interest in the investment property, less its basis. Mitch should obtain an appraisal to determine the fair market value of Mitch Holdings LLC's interest in the property. See RCW 82.87.050. While the assessed value of real estate may be used in some circumstances to determine fair market value, use of assessed value, or a percentage of the assessed value, is not a reasonable method for determining the fair market value of a partial interest in real estate.
Example 22: Sale of private entity owning real estate; exemption limitation.
Facts: Jesse, a Washington domiciliary, owns 100 percent of Property Co., an LLC. Property Co. owns three assets: A 100 percent interest in Property One LLC, a 100 percent interest in Property Two LLC, and a piece of real estate, Property 3. Property One LLC's only asset is real estate, Property 1, which has a fair market value of $5,000,000, and a basis of $2,000,000. Property Two LLC's only asset is a piece of depressed real estate, Property 2, which has a fair market value of $2,000,000, and a basis of $10,000,000. Property 3 has a fair market value of $12,000,000, and a basis of $5,000,000.
 
FMV
Basis
Property 1
$5,000,000
$2,000,000
Property 2
$2,000,000
$10,000,000
Property 3
$12,000,000
$5,000,000
Jesse sells her entire interest in Property Co. for $19,000,000. Jesse's basis in Property Co. is $17,000,000. The sale results in a $2,000,000 long-term capital gain for Jesse.
Result: The value of this exemption is equal to the fair market value of the real estate owned directly by the privately held entity, less its basis. However, the exemption value may not exceed the individual's long-term capital gain or loss from the sale or exchange of the interest in the entity. Here, Property 3 is the only real estate owned directly by Property Co. Its fair market value minus its basis is $7,000,000. However, Jesse's gain from the sale of Property Co. is only $2,000,000. Therefore, the value of the exemption from Jesse's sale of Property Co. is limited to $2,000,000.
(c) Retirement accounts. Sales or exchanges of assets held under retirement savings accounts or retirement savings vehicles that are exempt from federal income tax are also generally exempt from capital gains excise tax. Exempt retirement accounts include the following:
(i) Retirement savings accounts under I.R.C. § 401(k);
(ii) Tax-sheltered annuities or custodial accounts described in I.R.C. § 403(b);
(iii) Deferred compensation plans under I.R.C. § 457(b);
(iv) Individual retirement accounts or individual retirement annuities described in I.R.C. § 408;
(v) Roth individual retirement accounts described in I.R.C. § 408A;
(vi) Employee defined contribution programs, employee defined benefit plans; and
(vii) Retirement savings vehicles or accounts similar to those described above, such as exempt foreign retirement accounts.
(d) Assets subject to condemnation. Sales or exchange of assets pursuant to, or under imminent threat of condemnation proceedings by the United States, the state or any of its political subdivisions, or a municipal corporation, are exempt from capital gains excise tax.
(e) Certain livestock. Sales or exchanges of cattle, horses, or breeding livestock are exempt if, for the taxable year of the sale or exchange, more than 50 percent of the taxpayer's gross income for the taxable year, including from the sale or exchange of capital assets, is from farming or ranching.
(f) Depreciable property. Sales or exchanges of property that is depreciable under I.R.C. § 167(a)(1) or that qualifies for expensing under I.R.C. § 179 is exempt from capital gains excise tax. Intangibles amortizable under I.R.C. § 197 do not qualify for this exemption.
Example 23: Nondepreciable intangible property.
Facts: Bob, a Washington domiciliary, sells in 2023 all his assets in a Burger Bob franchise store that he acquired in 2018. The sale results in long-term capital gain. A portion of the long-term capital gain was attributable to Bob's sale of goodwill in the store. Bob claims an exemption from capital gains excise tax on the portion of the long-term capital gain that is attributable to goodwill.
Result: Bob's long-term capital gain from the sale of the goodwill is not exempt from capital gains excise tax because goodwill is an intangible amortizable under I.R.C. § 197 rather than property depreciable under I.R.C. § 167(a)(1) or property that qualifies for expensing under § 179.
(g) Timber and timberland. Sales of timber as defined in RCW 82.87.050, and timberland, as well as capital gains received as dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber and timberland, are exempt from capital gains excise tax. Cutting or disposal of timber qualifying for capital gains treatment under I.R.C. § 631(a) or (b) is also considered a sale or exchange that is exempt from capital gains excise tax.
(h) Commercial fishing privileges. Sales or exchanges of commercial fishing privileges, as defined in RCW 82.87.050, are exempt from capital gains excise tax.
(i) Goodwill in an auto dealership. Sales or exchanges of goodwill received from the sale of an auto dealership licensed under chapter 46.70 RCW whose activities are subject to chapter 46.96 RCW are exempt from capital gains excise tax. However, long-term capital gain from sales or exchanges of goodwill in other types of businesses are not exempt from capital gains excise tax.
(5) Deductions. To obtain your Washington capital gains, you may deduct certain amounts from the measure of your adjusted capital gain, subject to the following guidelines. RCW 82.87.060.
(a) Standard deduction.
(i) Individuals other than spouses or state-registered domestic partners are entitled to deduct $250,000 from their Washington capital gains.
(ii) Spouses and state-registered domestic partners are limited to a total standard deduction of $250,000, regardless of whether they file joint or separate returns. In the case of spouses or domestic partners filing separate returns, the deduction may be split in whatever manner the spouses or partners choose, so long as the total claimed deduction does not exceed $250,000.
(b) Charitable donation deduction. A taxpayer may take a deduction from their Washington capital gains for certain charitable donations to one or more qualified organizations during a tax year. See subsection (2) of this rule for "qualified organization" definition.
(i) Deduction amount; limitation. The charitable donation deduction equals the difference between the taxpayer's total qualifying donations minus $250,000. The maximum charitable donation deduction in a year is $100,000 per tax return, regardless of the taxpayer's filing status. Thus, in the case of one joint tax return, the maximum charitable donation deduction is $100,000 although the return is filed by two individuals.
(ii) Donor-advised funds; indirect donations through intermediaries. Generally, a donor-advised fund is a separately identified account that is maintained and operated by a nonprofit organization, and each account is composed of donations that are made by individual donors. Although the nonprofit organization has legal control over it, individual donors maintain advisory privileges with respect to the distribution of funds and management of the account's assets. If you donate to a donor-advised fund or a similar intermediary charitable vehicle, that intermediary, or in case of a donor advised fund, the organization that owns or controls the fund, must qualify as a qualified organization under RCW 82.87.080. The organization to which you make the donation, and not the organization where the donation ends up, determines whether you donated to a qualified organization.
Example 24: Qualifying charitable donations by a couple.
Facts: Chris and Hannah are a married couple. They file a joint return for federal tax purposes, and therefore also file a joint capital gains excise tax return. See RCW 82.87.120. However, they maintain some separate funds consisting of separate property (rather than community property). In 2024, each spouse made charitable donations to qualified organizations using their separate funds. Chris made donations totaling $290,000, and Hannah made donations totaling $400,000.
Result: The maximum charitable donation deduction in a year is $100,000 per tax return. Thus, the total charitable donation deduction the couple can take on their joint capital gains excise tax return is $100,000, even though the sum of the spouses' donations exceeded $250,000 by more than $100,000.
Example 25: Nonqualifying charitable donation.
Facts: Jimmy donates $350,000 to the Global Wildlife Fund (GWF) every year. GWF is an international nonprofit organization that aims to conserve endangered species. Its global headquarters is in Sweden. GWF has a U.S. headquarters in Washington, D.C., and has no presence in Washington state. Jimmy claims a $100,000 charitable donation deduction on his capital gains excise tax return.
Result: The facts indicate that GWF is not principally directed or managed within Washington state. Therefore, Jimmy is not eligible for the charitable donation deduction for his donation to GWF, because GWF is not a qualified organization under RCW 82.87.080.
(c) Qualified family-owned small business deduction. You may deduct the amount of adjusted capital gain derived in the taxable year from your sale or transfer of a qualified family-owned small business, subject to all the following requirements. RCW 82.87.070.
(i) The sale or transfer must be a sale of substantially all the business's assets or a transfer of substantially all of your interest in the business. A transfer of substantially all the business's assets, means a sale of at least 90 percent of the business's real property and tangible and intangible personal property, measured by fair market value. A sale of substantially all of your interest in the business, means a transfer of at least 90 percent of your interest in the business.
(ii) You must have held a qualifying interest in the qualified family-owned small business for at least five years immediately preceding the sale or transfer. A mere change in form of the business, i.e., where no change in beneficial ownership of the business has occurred, including no change in the proportion of beneficial ownership in the business, does not interrupt this required holding period.
(iii) You, or your family, or both, must have materially participated in operating the business for at least five of the 10 years immediately preceding the sale or transfer, unless the sale or transfer was to a member of your family. A mere change in form of the business, i.e., where no change in beneficial ownership of the business has occurred, including no change in the proportion of beneficial ownership in the business, does not interrupt this required participation period.
(iv) The business's worldwide gross revenue cannot have exceeded $10,000,000 in the 12-month period immediately preceding the sale or transfer.
(6) Allocation of long-term capital gains and losses. Allocation is the method for determining which long-term capital gains and losses to include in computing a taxpayer's Washington capital gains.
(a) Tangible personal property. You must allocate to Washington long-term capital gain or loss from a sale of tangible personal property in two situations:
(i) The tangible personal property was located in Washington at the time of the sale or exchange, i.e., the tangible personal property was physically present in Washington at the time the sale or exchange occurred; or
(ii) The tangible personal property was not located in Washington at the time of the sale or exchange, but the transaction had each of the following characteristics:
(A) The property was located in Washington at any time during the year in which the sale or exchange occurred or in the immediately preceding year;
(B) The taxpayer was a Washington resident at the time the sale or exchange occurred; and
(C) The taxpayer was not subject to the payment of an income or excise tax legally imposed on the long-term capital gain by another taxing jurisdiction. If the sale generated a loss, this element is met if the loss is not included in the taxpayer's income or excise tax base in another taxing jurisdiction. RCW 82.87.100.
Example 26: Allocation of gain from tangible personal property.
Facts: Michael is domiciled in Washington. His home is in Seattle, and he resides there year-round. In October 2024, Michael decides to sell a coin collection he inherited two years ago. In December, Michael brings the coins to Nevada, which does not have an income tax and does not impose excise taxes on occasional sales. While in Nevada, Michael sells the coin collection and the sale results in a $100,000 long-term capital gain.
Result: Michael's $100,000 long-term capital gain from the sale is allocated to Washington for purposes of the capital gains excise tax. Although he sold the coins in Nevada, they were located in Washington during the year in which the sale occurred, Michael was a Washington resident at the time the sale occurred, and Michael was not subject to an income or excise tax on the sale of the coins in another taxing jurisdiction.
(b) Intangible personal property. You must allocate to Washington long-term capital gain or loss from a sale or exchange of intangible personal property if you were domiciled in Washington at the time the sale or exchange occurred. RCW 82.87.100.
(c) Determinations of domicile.
(i) Determination of intent, burden of proof. An intention to make a place of abode one's domicile is determined by facts and circumstances on a case-by-case basis. The department will review the factors and some may be given more weight than others depending on the facts and circumstances. The following is a nonexclusive list of factors the department will consider in evaluating an individual's domicile:
• Length of time spent in a location;
• Expressed intent;
• Place of business, profession, or employment;
• Location of bank accounts;
• Residence and address for federal income and state tax purposes;
• Sites of personal and real property owned by the individual;
• State of motor vehicle and other personal property registration;
• State of motor vehicle driver's license;
• Location of schools attended by children;
• State of voter registration;
• Location of professional or business licenses;
• Payment of in-state tuition;
• Location from where financial transactions originate;
• Claiming of residence in a state for purposes of obtaining a hunting or fishing license, eligibility to hold public office, eligibility for obtaining a property tax benefit (such as a homestead exemption), or for judicial actions;
• Mailing address.
Individuals may submit to the department a request for a ruling on where the department considers individuals to be domiciled for purposes of this tax.
(ii) Continuation and change of domicile. Your domicile, once established, is presumed to continue. Therefore, if you have been domiciled in Washington, you will have the burden of proving your domicile has changed to a location outside of Washington. To establish a new domicile, you must be physically present at the new place of intended domicile and have an intention to make that new place your permanent home. This means that, for instance, selling your former home or acquiring a new one is not conclusive in establishing domicile.
(iii) Domicile of spouses, state-registered domestic partners, children. The department will presume that the domicile of spouses or state-registered domestic partners are the same. The department will also presume that a child's domicile is the same as the domicile of the child's parents until the child is no longer dependent and establishes his or her own separate domicile. If the parents have separate domiciles, the department will presume that the domicile of the child is the domicile of the parent with whom the child spends more time in the tax year.
(iv) Exceptions. Federal law may apply to service members in determination of domicile. Generally, under Title 50 U.S.C. § 571 (residence for tax purposes under the Servicemembers' Civil Relief Act), a member of the armed forces does not acquire a new domicile solely because that individual was stationed elsewhere during a period of active duty.
(d) Credit for taxes paid to other taxing jurisdictions. Taxpayers may be entitled to a credit against capital gains excise tax equal to the amount of any legally imposed income or excise tax paid by the taxpayer to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction. See RCW 82.87.100. In no case may the credit under this subsection (c) exceed the individual's capital gains excise tax liability on the capital assets for the tax year in which the individual claims this credit. Entitlement to this credit requires the following:
(i) Another taxing jurisdiction legally imposed an income or excise tax on capital gain included in the taxpayer's Washington capital gains;
(ii) The taxpayer in fact paid the tax imposed by the other taxing jurisdiction before the taxpayer filed their Washington capital gains excise tax return on which the credit is claimed; and
(iii) The gain taxed by the other jurisdiction arose from the sale or exchange of a capital asset within the other taxing jurisdiction. For this purpose, the department will presume that long-term capital gain from sales or exchanges of intangible personal property are within the other taxing jurisdiction if the other taxing jurisdiction legally imposed tax on the long-term capital gain derived from the sale or exchange of the intangible personal property.
Example 27: Allocation of gain from intangible property and credit for other taxes paid.
Facts: Julie is a Washington domiciliary and owns a second home in New York. During 2025, she resided in New York for eight months and in Washington the other four months. Julie is a casual investor. In 2025, Julie sold her investment in cryptocurrency to online buyers. The sale generated long-term capital gain for Julie. Under New York law, Julie is treated as a statutory resident even though she was domiciled in Washington. As a statutory resident, Julie is required to remit to New York income tax on the income she earned from the sale of the cryptocurrency. Julie pays the New York tax and files a Washington capital gains excise tax return, claiming a credit for the income tax paid to New York on the sale of the cryptocurrency.
Result: Because Julie was domiciled in Washington at the time the sale or exchange occurred, the gain from her sale is allocated to Washington. However, because New York legally imposed income tax on Julie's sale of cryptocurrency and Julie remitted income tax on the sale to New York, Julie is entitled to a credit against Washington capital gains excise tax equal to the New York tax Julie paid on the transaction.
(e) Allocation and sourcing of gains or losses from pass-through entities. The allocation method for gains and losses is the same whether you owned the property directly or indirectly through a pass-through or disregarded entity.
Example 28: Allocation of passed through gain from intangible property.
Facts: Jack is domiciled in Washington. He is a 50 percent shareholder of Invest Corp., an S corporation. Invest Corp. is a long-time shareholder of Fictional Co. In 2025, Invest Corp. sells its Fictional Co. shares, resulting in long-term capital gain, 50 percent of which is passed through to Jack for federal income tax purposes.
Result: The long-term capital gain from the sale of the Fictional Co. stock is allocated to Washington because the stock is intangible personal property and the taxpayer, Jack, was domiciled in Washington at the time the sale occurred.
[Statutory Authority: RCW 82.32.300 and 82.01.060. WSR 24-14-084, § 458-20-301, filed 6/28/24, effective 7/29/24.]