Current through Register Vol. 24-06, March 15, 2024
(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
360-705-6705
(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
82.32.300,
82.01.060(2),
82.08.02565, and
82.12.02565. 08-14-024, §
458-20-13601, filed 6/20/08, effective 7/21/08. Statutory Authority:
RCW
82.32.300. 00-11-096, § 458-20-13601,
filed 5/17/00, effective 6/17/00.