Current through Register Vol. 24-06, March 15, 2024
(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 pharma ceutical
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
hydroelectric-ity. 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:
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(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
82.32.300 and
82.01.060(2).
10-21-044, § 458-20-24003, filed 10/13/10, effective 11/13/10; 10-07-136,
§ 458-20-24003, filed 3/23/10, effective 4/23/10; 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. 03-12-053, §
458-20-24003, filed 5/30/03, effective
6/30/03.