04.15.2010
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Updates
On April 12, 2010 the Washington State Legislature resolved the budget impasse and adopted a $794 million tax package that the governor is expected to sign. The tax bill, 2ESSB 6143, contains a number of major changes to Washington’s tax system. Because of the broad array of changes, the bill will likely affect virtually every company doing business in Washington. Many companies will also be impacted by other tax bills passed during the regular session. Below is an index and summary of key provisions.
TAX AVOIDANCE
Department to Disregard Certain “Tax Avoidance” Transactions
BUSINESS & OCCUPATION (“B&O”) TAX
Economic Nexus Replaces Physical Presence for Service and Royalty Income
New Single-Factor, Receipts-Based Apportionment Formula
Temporary Increase to Service B&O Tax Rate
Corporate Directors Now Subject to Tax on Compensation
Partial Repeal of Exemption for Certain Amounts Received by Property Managers
Repeal of Direct Seller B&O Exemption
New Requirements for Meat, Fruit and Vegetable Processing Classifications
SALES TAX
Corporate Officers Strictly Liable for Unpaid Sales Tax
Limiting the Bad Debt Deduction
New Sales Tax on Bottled Water and Candy
Nonresidents May Use Streamlined Exemption Certificate
Temporary Repeal of Sales Tax Exemption for Livestock Nutrient Equipment
Insurance Coverage of Sales Tax on Durable Medical Equipment
INCENTIVES
New Uniform Annual Surveys and Reports
New Sales Tax Exemption for Rural Computer Data Centers
Tax Incentives for Aluminum Smelters Extended
Changes to the Rural County Investment Incentive Program
Certain Community Centers Exempt from Property Tax
Changes to the Cost Recovery Incentives for Community Solar Programs
MISCELLANEOUS
Taxation of Digital Products Clarified
Definition of “Use” With Respect to Brokered Natural Gas Amended
Additional Protections to Taxpayer Confidentiality
OTHER REVENUE SOURCES
Increase in Cigarette Tax and Tobacco Products Tax
TAX AVOIDANCE
Department to Disregard Certain “Tax Avoidance” Transactions
The new legislation requires the Department of Revenue (the "Department") to disregard three expressly identified tax avoidance transactions or arrangements: (1) those that are, in form, a joint venture or similar arrangement between a construction contractor and the owner or developer that, in substance, provide substantially guaranteed payments for the purchase of construction services, (2) those through which a taxpayer avoids B&O tax by disguising income from third parties that would be taxable in Washington if they had not moved that income to another entity that was not taxable in Washington, or (3) those that avoid sales or use tax on property located in Washington that was transferred to or acquired by another entity, but the transferor effectively retains control over the property. 2ESSB 6143, §201.
In determining whether the Department must disregard a transaction or arrangement, the Department may consider:
- Whether an arrangement or transaction changes the economic positions of the parties, apart from its tax effects;
- Whether substantial nontax reasons exist for the arrangement or transaction;
- Whether the arrangement or transaction is a reasonable means of accomplishing the nontax purpose;
- The entities’ contributions to the work that generates income;
- The location where the work is performed; and
- Other “relevant” factors.
It is noteworthy that past versions of the bill instructed the Department to consider judicial doctrines, as opposed to the statutory provisions listed above. By choosing to rely on statutory provisions, rather than judicial doctrines, federal and other state case law may provide little guidance on interpreting such provisions. This is unfortunate in some respects because case law generally imposes limitations not found in the statutory provisions listed above. For example, federal case law has found that minimizing foreign taxes is a business purpose; whether the statutory provision listed above will result in the same conclusion is unknown. Earlier versions of the bill also expressly required the Department to respect the form of a transaction. This language was regrettably removed from the final enacted version.
The Department may apply Section 201 retroactively to 2006, but it is precluded from doing so when the transaction or arrangement is initiated before May 1, 2010 and the taxpayer reported in conformance with specific written instructions by the Department, a published determination, or other publicly available document that is not materially different from the transaction or arrangement. In regards to this safe harbor, it is unclear when the transaction or arrangement is “initiated” in the context of a structure that results in ongoing avoidance of tax. In other words, if one structured an arrangement in 2000 that continues to avoid tax in 2011, does Section 201 apply?
The Department may also not apply Section 201 to any tax periods ending before May 1, 2010, which were included in a completed field audit conducted by the Department. There is no express date as to when that audit needs to have been completed, although one can speculate that the Department will assert that it must have been completed before May 1, 2010.
Taxpayers found to have engaged in a tax avoidance transaction will be assessed a 35% penalty in addition to other applicable penalties. Thus, tax avoidance, coupled with a substantial underpayment penalty and a delinquency penalty, can result in total penalties of 65%. The tax avoidance penalty will not be assessed, however, if a taxpayer discloses the transaction before the Department discovers it.
The legislation further calls for rulemaking and two studies: one study by the Department and one by a joint committee of the legislature. The Department is tasked with reviewing state policy with respect to the taxation of intercompany transactions. The report findings, or a status report, are scheduled for December 1, 2010, with a final report prepared no later than December 1, 2011. This report will include an analysis of potential alternatives to current policy. In addition, the joint legislative committee will monitor the Department's implementation of Section 201 and provide a report by December 31, 2010. The authorization for the joint legislative committee expires July 1, 2011.
The legislation will effectively end the use of “drop-and-kick” structures to avoid sales and use tax on asset sales. 2ESSB 6173, sec. 206. The basic drop-and-kick strategy involved three steps: (1) the seller contributed assets to a newly created entity (the "drop"); (2) the seller sold the entity to the buyer (the “kick”); and (3) if desired, the buyer liquidated the entity and received the assets as a distribution. This strategy worked because the Department of Revenue respected the form of the transactions and none of the three steps, taken separately, triggered sales or use tax. Section 206 of the new legislation eliminates this planning opportunity by extending the use tax to property “acquired by the user in any manner.”
Although Section 206 effectively ends the perceived abuses with drop-and-kick transactions, the new use tax provisions are not limited to the drop and kick or other tax avoidance situations. For example, a routine contribution of an asset by a parent to a subsidiary would appear to be subject to use tax as “property . . . acquired by the user in any manner.” When this issue was brought to the Department’s attention during the legislative session, the Department provided informal assurance that it did not interpret the new statutory language to provide such a sweeping expansion of the use tax. Although the legal basis for this assurance is unclear, it may rest on the theory that the parent is a "donor" and the property contributed is a "gift" on which sales or use tax was previously paid by the donor. Taxpayers should be very cautious regarding previously tax-free contributions and the distributions of assets between affiliated entities.
Section 206 also appears to do away with use tax on goods manufactured for commercial or industrial use. The new statutory language deletes from the laundry list of transactions subject to tax, property that is “produced or manufactured by the person using the same.” The U.S. Supreme Court interpreted a prior use tax statute, with language similar to the language of the new Section 206, as insufficient to extend use tax on goods manufactured for commercial or industrial use. Henneford v. Silas Mason Co., 300 U.S. 577 (1937).
New Treatment of Options to Purchase Entities
The new legislation reduces the opportunity of parties to avoid Real Estate Excise Tax (“REET”) on a sale or acquisition of a controlling interest (50% or more) in an entity that owns Washington real property through the use of options. 2 ESSB 6143, sec. 207. Under Section 207, the date on which an option agreement is executed (not the date the option is exercised) is used to determine whether a controlling interest has been transferred or acquired within a 12 month period. In addition, companies that own real property in Washington must disclose the granting of options in their annual report to the secretary of state if the exercise of such options would trigger REET.
Expanded Liability for Unpaid REET
The new legislation gives the Department significant tools to collect REET. 2ESSB 6143, secs. 208, 209 and 210. First, Section 208 provides that, in the case of a transfer of a controlling interest in an entity that owns real property in Washington, the Department may collect unpaid REET from any combination of the sellers, buyers or the entity being transferred. The legislation eliminates a safe harbor in existing law that allows buyers or transferees to avoid liability by providing written notice to the Department within 30 days of the date of sale. Section 209 also provides that unpaid REET is a lien on each parcel of real property owned by an entity in which a controlling interest has been transferred or acquired. Finally, Section 210 provides that a parent corporation is liable for REET as a seller when the parent's wholly owned subsidiary transfers real property or a controlling interest and dissolves before paying REET.
BUSINESS & OCCUPATION (“B&O”) TAX
Economic Nexus Replaces Physical Presence for Service and Royalty Income
The Department has long administered Washington’s B&O tax under a physical presence nexus standard to establish the state’s jurisdiction to tax. While the U.S. Supreme Court has repeatedly declined to hear cases raising the question of whether a physical presence nexus is required for taxes other than sales and use taxes, a number of state courts have found economic presence constitutionally sufficient for other taxes. Under 2ESSB 6143, Section 104, Washington follows this trend. Effective June 1, 2010, an out-of-state business will be subject to Washington’s B&O tax on service and royalty income if the business meets one of four criteria:
- More than $50,000 of property located in Washington;
- More than $50,000 of payroll located in Washington;
- More than $250,000 of receipts from Washington; or
- At least 25% of the taxpayer’s total property, total payroll or total receipts located in Washington.
In regards to the four criteria, payroll includes compensation to nonemployee representatives and property does not include software residing in servers located in the state. The bill also provides for a one-year trailing nexus. In other words, a taxpayer who meets one of the four criteria in any one year will be deemed to have substantial nexus for the following year as well. The statutory one-year trailing nexus supplants the four-year trailing nexus the Department has asserted by rule with regard to the sale of goods.
There is an issue whether the new legislation creates a safe harbor for businesses that have some physical presence in Washington, but do not trigger any of the four criteria, and therefore, are not deemed to have substantial nexus with the state. Physical presence nexus, however, continues to be required for retailing, wholesaling and any classification not subject to the new single-factor apportionment formula.
New Single-Factor, Receipts-Based Apportionment Formula
Apportionment is a term used to describe the method by which a taxpayer divides its tax base between multiple taxing jurisdictions. For more than 70 years, Washington has applied a “cost apportionment” formula for businesses reporting under the service B&O classification (although the statute has remained essentially unchanged during that period, the Department has made many changes in the method of its administration), and since 2000, Washington has applied a three-factor apportionment formula for financial institutions. 2ESSB 6143 replaces both apportionment methods with a new single-factor, receipts-based formula. Under this new formula, Washington’s portion of taxable gross income is equal to the gross income attributable to this state divided by the taxpayer’s gross income everywhere.
The bill also expands apportionment beyond the service and other B&O tax classification. “Apportionable income” is now defined to include gross income generated from the following activities:
- Real estate brokers
- Non-profit research and development
- Travel agents and tour operators
- Certain foreign commerce services including customs brokers
- Stevedoring
- Royalties
- Licensed boarding homes
- Low level waste disposal & radioactive cleanup
- Title insurance
- Insurance agents/brokers
- Gambling
- Horse Racing
- Non-profit hospitals
- Certain chemical dependency services
- Canned salmon owned by another
- Printing and publishing (“but only with respect to advertising”)
- International investment management services
The single-factor, receipts-based apportionment method will be a major change for taxpayers who are still adjusting to the Department’s most recent change to cost apportionment that was adopted in January 2006.
Apportionable income is attributed to a state, for purposes of the receipts factor calculation, under a waterfall of sourcing provisions that look first to the state in which the customer received the benefit of the service or used the intangible property, and finally, to the seller’s commercial domicile, if the taxpayer is unable to source the income under one of the higher provisions. The sourcing provisions are as follows:
- First, source the income to the state where the customer received the benefit of the service or used the intangibles;
- If the above is in multiple states, then source to the state in which the customer primarily received the benefit or primarily used the intangibles;
- If unable to source as above, then source to the state where customer ordered the service;
- If unable to source as above, then source to the state of the customer’s office from which the royalty agreement was negotiated;
- If unable to source as above, then source to the state to which the billing statement or invoice is sent;
- If unable to source as above, then source to the state from which the customer sends payment;
- If unable to source as above, then source to the customer’s location (as reflected in business records kept in ordinary course or obtained during the transaction);
- If unable to source as above, then source to the state of the seller's commercial domicile.
The numerator of the receipts factor is the income attributable to Washington while the denominator is worldwide apportionable income. A separate receipts factor and apportionment calculation must be performed for each classification of apportionable income, which should cause the result to equate to separate accounting of income under the attribution waterfall, except when a taxpayer has apportionable income that gets thrown out of the denominator because it is attributable to a state in which the taxpayer does not have economic nexus under the Washington statutory standard.
Taxpayers are generally required to report their income using a receipts factor based on the prior year's data, and to file amended returns truing up the taxes by October 31 of the year following the tax year. Deficiency interest will be due on any underpayments made based on the use of the prior year's data and refund interest will be paid on any resulting overpayments. No late payment penalties will be imposed unless taxes owed on the true up are not paid by October 31 of the year following the base year.
For financial institutions, the specific method of single-factor receipts apportionment will be established by Department rule. The Department's rule is to be based "to the extent feasible" on the Multistate Tax Commission's (“MTC”) model as existing on May 1, 2010 or a subsequent date established by the Department (the MTC is in the process of amending their model act for apportionment of financial institutions). While the MTC model provides for three factor apportionment, the bill expressly requires that the Department's model rule provide a single receipts factor method of apportionment. The Department is granted broad discretion in defining "financial institutions" subject to the rule, with the bill explicitly providing that the MTC's model definition is "advisory only."
Temporary Increase to Service B&O Tax Rate
Taxpayers reporting under the B&O tax classifications for service and other, gambling contests of chance, and real estate brokers will incur a temporary B&O rate increase from 1.5% to 1.8%. The new rate will be in effect for the period May 1, 2010 through June 30, 2013 and is expected to raise $241.9 million (the largest revenue raiser). The rate increase does not apply to hospitals or to amounts received from performing scientific research and development services. In addition, the legislation doubles the small business credit for affected taxpayers. 2ESSB 6143, sec. 1102.
Corporate Directors Now Subject to Tax on Compensation
The new legislation extends B&O tax to amounts received by an individual for serving as a director of a corporation, effective July 1, 2010. While the bill claims director compensation was always intended to be subject to B&O tax, the Department has long treated director compensation as non-taxable on the theory that the activities of directors do not constitute engaging in business. Directors will be taxed under the service and other classification (1.8% rate under the new legislation). Directors will qualify for the expanded small business credit that will eliminate the B&O tax on total service income (including director’s fees) of less than $46,667 per year and reduces the tax on service income of less than $93,333. Directors may also be entitled to apportion their fee revenue to exclude fees from corporations based outside Washington. 2ESSB 6143, sec. 701.
Partial Repeal of Exemption for Certain Amounts Received by Property Managers
The new legislation modifies a B&O exemption for amounts received by a property management company for the wages and benefits paid to on-site personnel. The exemption, provided by RCW 82.04.394, is now limited to nonprofit property management companies or to amounts received by a property management company from a housing authority. Despite this change, Rule 111 may continue to exempt such amounts as qualified advances or reimbursements. The legislature’s findings, with respect to the original language of RCW 82.04.394, acknowledged that the property management company is “merely acting as a conduit for the property owner’s payments to the personnel at the property site.” 2ESSB 6143, sec. 1201.
Repeal of Direct Seller B&O Exemption
In response to the Washington Supreme Court’s decision in Dot Foods, Inc. v. Department of Revenue, 166 Wn.2d 912 (2009), 2ESSB 6143 repeals the B&O exemption for out of state businesses making in-state sales through a direct seller’s representative, effective May 1, 2010. In addition, the bill retroactively imposes restrictions on who qualifies as a direct seller’s representative. Accordingly, a direct seller’s representative may only buy or sell consumer products, and may only sell at retail or solicit retail sales. These two requirements are in addition to other specific criteria unchanged by 2ESSB 6143. See RCW 82.04.423.
New Requirements for Meat, Fruit and Vegetable Processing Classifications
Applying basic principles of statutory construction, the Washington Supreme Court held in Agrilink Foods, Inc. v. Department of Revenue, 153 Wn.2d 392 (2005), that the activity of “processing perishable meat products” does not require the creation of a perishable end product. At the Department’s request, new legislation adds a statutory requirement that the end product must be either (1) a perishable meat product, (2) a nonperishable meat product that is not canned and is primarily comprised of animal carcass by weight or volume; or (3) a meat by-product. To prevent application of the Court’s Agrilink analysis to fruit and vegetable processing classifications, the bill expressly “narrows” those classifications as well by imposing a requirement that the end product must be contain a majority of fruit and/or vegetable content by weight or volume. 2ESSB 6143.
Changes to the First Mortgage Deduction
In Homestreet, Inc. v. Department of Revenue, 166 Wn.2d 444 (2009), the court held that the portion of interest retained by an originating mortgage lender for servicing loans sold or securitized into the secondary market is deductible under RCW 82.04.4292 as “amounts derived from interest” received on first mortgage loans. In response, the Department encouraged legislative action circumventing the court’s holding. The senate initially refused to get involved with the issue, but the house and senate’s 11th hour compromise includes a modification to the first mortgage interest deduction. Ironically, the final bill validates the HomeStreet decision by expressly providing that the deduction includes amounts received for servicing first mortgage loans originated by the servicing lender. The bill also expressly provides that origination and discount fees (points) received by the originating lender are deductible when they are recognized over the life of the loan as an adjustment to yield. Finally the bill provides a nonexclusive laundry list of nondeductible fees paid for services. 2ESSB 6143, sec. 301.
SALES TAX
Corporate Officers Strictly Liable for Unpaid Sales Tax
Currently, responsible individuals may be personally liable for sales tax collected but unpaid upon the termination, dissolution, or abandonment of an LLC or corporation. Section 801 of 2ESSB 6143 expands the definition of responsible individual to include any officer, manager, partner, or trustee of a limited liability business regardless of the individual's tax responsibilities or duty. The legislation also makes chief executive officers and chief financial officers strictly liable for collected and unremitted sales taxes. All other responsible individuals continue to be liable for collected and unremitted sales taxes only if they willfully fail to remit the taxes to the Department. The legislation also allows the Department to rely on the insolvency of a business (as well as termination, dissolution, or abandonment) to collect from responsible individuals.
The final legislation (unlike earlier tax proposals) does not extend personal liability to B&O or other state taxes. It is also relatively clear that liability for sales tax is limited to sales tax collected from customers and not paid over to the Department (i.e., taxes held in trust), and does not include sales taxes that the business failed to collect from customers on its sales or failed to pay on its purchases.
Limiting the Bad Debt Deduction
A seller is entitled to a credit or refund for sales taxes previously paid on bad debts. The new legislation defines “bad debts” to exclude debts sold or assigned by the seller to third parties, where the third party is without recourse against the seller, reversing Puget Sound National Bank v. Department of Revenue, 123 Wn.2d 284 (1994). Furthermore, the right to claim a bad debt credit or refund is no longer assignable. If the original seller in the transaction that generated the bad debt has sold or assigned the debt instrument to a third party with recourse, the original seller may claim the credit or refund only if the debt instrument is reassigned back to the original seller.
New Sales Tax on Bottled Water and Candy
In general, food and food ingredients are exempt from sales and use tax. 2ESSB 6143 repeals this exemption for sales of bottled water and candy. While the Legislature has touted the bottled water tax as being temporary, another bill passed last weekend, authorizing the issuance of bonds to create jobs by funding construction of energy cost savings improvements to schools and other public buildings, makes the bottled water tax permanent, and beginning in 2013, will redirect revenue from the bottled water tax to help repay the bonds.
Bottled water is defined as calorie free and may not contain sweetener but may contain a handful of additives, including carbonation; vitamins, minerals, and electrolytes; and flavors, extracts, or essences derived from a spice or fruit. In addition, bottled water includes water delivered to the buyer in a reusable container that is not sold with the water. There are a few exemptions to this new tax including bottled water dispensed to medical patients for use in the treatment and prevention of a medical condition and sales of bottled water to persons who do not otherwise have a readily available source of potable water.
The legislature adopted the Streamlined definition of candy, which excludes any preparation containing flour. In light of this exclusion, the legislature instructed the Department to compile a list of products that are similar to candy but do not meet the definition. Such list will be made available on the Department’s website. The bill also provides candy manufacturers with a $1,000 credit for maintaining a full-time employee in Washington for 12 consecutive months. There is a potential question whether these provisions violate the Commerce Clause because of the resulting disparate tax treatment of in-state and out-of-state manufacturers.
Nonresidents May Use Streamlined Exemption Certificate
Effective July 1, 2010, acceptable proof of nonresident status is expanded to include a streamlined sales and use tax exemption certificate or "any other exemption certificate as may be authorized by the department and properly completed by the purchaser." In lieu of the streamlined exemption certificate, a seller may also capture the relevant information provided by the streamlined certificate. 2010 Wash. Laws, ch. 106, §215 (E2SHB 1597).
Temporary Repeal of Sales Tax Exemption for Livestock Nutrient Equipment
The sales and use tax exemption for livestock nutrient equipment and facilities is suspended for the period April 1, 2010 through June 30, 2013. 2ESSB 6143,secs. 601, 602.
Insurance Coverage of Sales Tax on Durable Medical Equipment
Health insurance plans, issued or renewed after January 1, 2011, that provide coverage for durable medical equipment will be required to include the sale tax due on the durable medical equipment and mobility enhancing equipment as part of the plan payment. The payment must reflect the negotiated provider agreement for the prescribed equipment and separately identify the sales tax or use tax if the provider submitting a claim or invoice indicates the geographically adjusted sales tax. The definitions of durable medical equipment and mobility enhancing equipment follow the sales tax definitions of the same, and thus, there is no change in what is taxed; rather, the tax will now be paid by the insurance provider instead of the patient or absorbed by the equipment provider. 2010 Wash. Laws, ch. 44 (SSB 6273).
Changes to Reseller Permits
The new law renames “seller’s permit” to “reseller permit.” Effective July 1, 2013, contractor reseller permits will be valid for 24 months instead of 12 months. In addition, beginning July 1, 2011, the Department may issue or renew contractor reseller permits for 24 months if the Department is satisfied that the buyer is entitled to wholesale purchases. The Department is also no longer required to rule on an application within 60 days and may adopt a uniform expiration date for all reseller permits if doing so would improve administrative efficiency. 2010 Wash. Laws, ch. 112 (SHB 2758).
Sales Tax Base for Vending Machines Clarified
The new law provides for vending machine sales of soft drinks and hot prepared foods as including sales tax. 2010 Wash. Laws, ch. 106, §216 (HB 1597).
INCENTIVES
New Uniform Annual Surveys and Reports
All tax incentives requiring an annual accountability report or survey will now be subject to uniform compliance provisions. 2010 Wash. Laws, ch. 114 (HB 3066). The uniform annual surveys and reports will be due by April 30 of the year following any calendar year in which a person becomes eligible for a particular tax incentive. This language nullifies a recent Board of Tax Appeals decision, holding that a taxpayer’s filling of its annual surveys was timely when it submitted a credit covering multiple tax years, and one month later, filed the respective surveys. Surreal Software, Inc. v. State Dep’t of Revenue, BTA Docket No. 70322 (2010). According to the decision, the plain reading of the incentive statute only required taxpayers to file surveys in the year following the year in which a credit is claimed, and not, as the Department maintained, the year for which the credit was claimed.
In addition, under separate legislation, taxpayers may now request a one-time, 90-day filing extension for accountability surveys and reports. The request must be made in writing and all earlier annual reports and surveys must have been timely filed. 2010 Wash. Laws, ch. 137 (SB 6206).
New Sales Tax Exemption for Rural Computer Data Centers
In an effort to attract private investment in technology facilities to rural areas, the legislature has created a 15-month sales and use tax exemption for server and related electrical equipment installation, effective April 1, 2010. 2010 Wash. Laws, 1st Spec. Sess., ch. 1 (ESSB 6789). A qualifying data center must be located in a rural county, consist of at least 20,000 square feet dedicated to housing working servers, and have commenced construction between April 1, 2010 and July 1, 2011. The exemption is not available to persons (and affiliates) who received the benefit of the deferral program under chapter 82.60 RCW with respect to the same facility. In addition, a qualifying business must establish within six years that it increased employment or family wage jobs. 2ESSB 6143, sec. 1601.
Tax Incentives for Aluminum Smelters Extended
The legislature extended current tax incentives for aluminum smelters to 2017. The incentives consist of a reduced B&O rate as well as reductions in local property taxes. The incentives were scheduled to expire January 1, 2012. 2010 Wash. Laws, 1st Spec. Sess., ch. 2 (EHB 2672).
Tax Incentives Extended for Certain Alternative Fuel Vehicles, Producers of Biofuels, and FAR Part 145 Repair Stations
The sales and use tax exemption for new passenger cars, light duty trucks, and medium duty passenger vehicles exclusively powered by a clean alternative fuel is extended from January 1, 2011 to July 1, 2015. This exemption is also extended to certain used vehicles, which are modified after their initial purchase with an EPA certified conversion. The expiration date for Federal Aviation Repair part 145 certified repair stations is extended to from July 1, 2011 to July 1, 2024. The application deadline for the six-year property tax and leasehold excise tax exemptions for new or expanded manufacturing facilities producing alternative fuels (primarily wood biomass fuel) is extended from December 31, 2009 to December 31, 2015. 2010 Wash. Laws, 1st Spec. Sess., ch. 11 (SSB 6712).
Changes to the Rural County Investment Incentive Program
The rural county sales and use tax deferral program grants a deferral of sales and use tax for manufacturing, including computer-related businesses, research and development laboratories, commercial testing facilities, and vegetable seed conditioning facilities located in rural counties or community empowerment zones. This program was set to expire July 1, 2010, but has been extended to July 1, 2020. Eligible localities are now limited to counties with an unemployment rate of at least 20% above the state average for three years, as well as community empowerment zones. In addition, effective July 1, 2010, the definition of qualified manufacturing excludes computer programming and other computer-related services. On a retroactive basis, the definition of qualified manufacturing, with respect to computer programming, requires that the service provides a new, different, or useful substance or article of tangible personal property for sale, reversing oral decision in Yahoo! Inc. v Department of Revenue, Thurston County Superior Court, No. 09-2-00186-1 (2010). ESHB 3014.
Certain Community Centers Exempt from Property Tax
Certain community centers are exempt from property tax for 40 years from the time of acquisition, and in turn, subject to leasehold excise taxes. Exempt community centers are those that include a building or buildings determined to be surplus to the needs of a school district and purchased by a nonprofit organization for the purpose of converting them into community facilities for the delivery of nonresidential coordinated services for community members. 2010 Wash. Laws, ch. 281 (SB 6855).
Changes to the Cost Recovery Incentives for Community Solar Programs
The cost recovery incentives for community solar programs is extended to company-owned community solar projects. Company-owned projects are LLCs, mutual corporations, and cooperatives, which are not electric utilities, so long as the community solar project is installed on the property of a cooperating local governmental entity that is also not an electric or natural gas utility. Members of a company-owned community solar project are eligible for incentive payments in proportion to their ownership share, up to $5,000 per year. The new law also places a cap on the eligibility of community solar projects. Only community solar projects capable of generating up to 75 kilowatts of electricity may qualify for cost-recovery incentive payments. Lastly, the credit provided to public utilities for incentive payments is reduced. The credit is limited to the greater of $100,000 or 0.5% (down from 1%) of the utility’s taxable power sales, and incentive payments to company-owned community solar projects may only account for 5% of the total allowable credit. 2010 Wash. Laws, ch. 202 (ESSB 6658).
MISCELLANEOUS
Taxation of Digital Products Clarified
The legislature clarified 2009 legislation regarding the taxation of digital goods, digital codes, and digital automated services. In general, the new law applies retroactively to the July 26, 2009 date of last year’s legislation. 2010 Wash. Laws, ch. 111 (HB 2620).
The definition of retail sale is amended to include the right to access and use prewritten computer software to perform data processing. “Data processing” includes check processing, image processing, form processing, survey processing, payroll processing, claim processing, and similar activities. The definition of digital automated service is also amended to exclude data processing and advertising services. In addition, the definition of digital goods is amended to include the sale of photographs transferred electronically to a customer, but only if the customer is an end user.
For purposes of allocating income for municipal B&O taxes, the activity takes place where delivery to the buyer occurs. Under the new law, streamlined sourcing provisions provide the method for determining such location with respect to sales of digital products. Unlike streamlined sourcing, however, if none of the allocation provisions determine where delivery occurs, the city and the taxpayer may mutually agree to employ another method.
Effective July 1, 2010, and applying prospectively only, the sales and use tax exemption for standard digital information is expanded to apply to the sale of all digital goods purchased solely for a business purpose. The exemption is limited to digital goods and services rendered in respect to digital goods. Therefore, the purchase of digital automated services does not qualify, assuming such services are not “services rendered in respect to digital goods.”
Lastly, the new law clarifies that ownership of software stored on servers located in Washington will not establish an out-of-state taxpayer’s nexus with the state.
Definition of “Use” With Respect to Brokered Natural Gas Amended
Effective June 10, 2010, taxable use of brokered natural gas is defined as consumption of the gas by burning or storing. This amendment is in response to a 2008 decision by the Division II Court of Appeals, which held that G-P Gypsum Corp incurred taxable use of natural gas where it initially exercised dominion, as opposed to the location where it consumed or stored the gas. This change is neither retroactive nor a clarification of current law. 2010 Wash. Laws, ch. 127, §4 (ESHB 3179).
Additional Protections to Taxpayer Confidentiality
In response to concerns raised by the Washington State Bar Association Tax Section, the legislature has provided for additional protections to taxpayer confidentiality. The new law authorizes cities imposing a B&O tax to provide by ordinance that returns or tax information is confidential and privileged. The Department is no longer permitted to disclose returns and tax information regarding the administration of REET, although affidavit forms may be disclosed. In addition, estate tax is added to the list of confidential tax returns. 2010 Wash. Laws, ch. 106 (E2SSB 1597).
PUD Privilege Tax Imposed on Recurring Charges
The PUD privilege tax is amended with respect to the definition of “gross revenue” to include “any regularly recurring charges billed to consumers as a condition of receiving electric energy.” This legislation applies prospectively only and reverses Clark County Public Utility District No. 1 v. Department of Revenue, 153 Wn. App. 737 (2009), as amended on denial of reconsideration (2010). 2ESSB 6143, §1001.
Direct Mail Sourced to Place of Delivery
Effective July 1, 2010, sellers of advertising and promotional direct mail may source in-state sales to the place the mail was delivered or the location of the printer. 2010 Wash. Laws, ch. 106, §229 (E2SHB 1597).
OTHER REVENUE SOURCES
Increase in Cigarette Tax and Tobacco Products Tax
ESHB 2493 increases the tobacco products tax and the cigarette tax by $1 per pack. This increase is expected to raise $101 million in revenue.
Temporary Increase to Beer Taxes
The tax on beer is temporarily increased, effective July 1, 2010 through June 30, 2013. This increase is expected to raise $59 million. The additional tax is equal to $.50 per gallon and like the current tax is not imposed on microbreweries. 2ESSB 6143, sec. 1301.
Temporary Tax on Carbonated Beverages
A new tax on carbonated beverage, effective July 1, 2010 and expiring June 30, 2013, is expected to raise $38 million. The rate of tax is $.02 per 12 ounces of carbonated beverage. The first $10 million of carbonated beverages sold by any bottler in this state is exempt from the tax. Carbonated beverages qualifying under this exemption are also exempt from the tax with respect to all successive sales. For purposes of the exemption, affiliated bottlers or distributors may only exempt the first $10 million based on the combined gross proceeds of sales for all affiliated persons. 2 ESSB 6143, secs. 1402, 1404.
