Current through Register Vol. 24-06, March 15, 2024
(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 byproducts, 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,
82.01.060(2),
chapters
82.04,
82.08,
82.12 and
82.32 RCW. 10-06-069, §
458-20-136, filed 2/25/10, effective 3/28/10. Statutory Authority:
RCW
82.32.300. 00-11-096, § 458-20-136,
filed 5/17/00, effective 6/17/00; 88-21-014 (Order 88-7), § 458-20-136,
filed 10/7/88; 86-20-027 (Order 86-17), § 458-20-136, filed 9/23/86;
83-07-032 (Order ET 83-15), § 458-20-136, filed 3/15/83. Statutory
Authority:
RCW
82.01.060(2) and
82.32.300. 78-07-045 (Order ET
78-4), § 458-20-136, filed 6/27/78; Order ET 71-1, § 458-20-136,
filed 7/22/71; Order ET 70-3, § 458-20-136 (Rule 136), filed 5/29/70,
effective 7/1/70.