Current through Register Vol. 24-06, March 15, 2024
(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
over-reporting 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. 87-23-008 (Order 87-8), §
458-20-19301, filed 11/6/87.