The Department of Revenue is developing administrative rules pertaining to the leasehold excise tax authorized by chapter 82.29A RCW. The following outline describes the major areas/issues which have been identified for inclusion in the rules.

I. Definitions.

Definitions will be provided for the following terms:

(1) Leasehold interest. What constitutes a "leasehold interest"? What criteria distinguish other kinds of contractual arrangements, such as management agreements, from leasehold interests? Are grazing rights properly included within the definition of leasehold interests, and, if so, under what criteria?

(2) Taxable rent. What should be included in the computation of "taxable rent" and how is it distinguished from "contract rent"?

(3) Contract rent.

(4) Product lease.

(5) Management agreement. When are management agreements not subject to the leasehold excise tax? What criteria does the department follow in determining whether such an arrangement is a bona fide management agreement as opposed to a leasehold interest?

II. Contract rent and taxable rent.

Direction will be given on how taxable rent is to be computed, and under what circumstances and by which methods taxable rent will be established by the department. Direction will be given for distinguishing "contract rent" and for the proper computation of prepaid rents and product leases. Exclusions from the computation of "contract rent" will be identified. The issues of pass-through utility charges and similar fees will be addressed

Retroactive vs. prospective application of increased leasehold excise tax rates based upon the department's establishment of taxable rent computation will be addressed.

III. Collection and remittance - liability.

The issues regarding lessor/lessee liability for unpaid leasehold excise tax will be identified and addressed.

IV. Tax administration.

The following broad areas of tax administration and tax policy will be addressed:

(1) Exclusion from tax imposition.

(2) Reporting requirements and credits.

(3) Retroactive application of fair market rent rate.

(4) Computation of product lease liability.

(5) Exemptions and partial exemptions.

(6) Payment and collection responsibilities of the lessor and lessee.

(7) Collection and distribution of tax by the department.

(8) Appeals procedure.

Statutes Authorizing the Agency to Adopt Rules on this Subject: RCW 82.29A.140 Rules and regulations.

Reasons Why Rules on this Subject may be Needed and What They Might Accomplish: The department currently has no rules discussing the leasehold excise tax. Taxpayers and Department of Revenue personnel alike have requested that the department adopt rules to explain the administration of the leasehold excise tax, and the exemptions and credits available under the program. Counties and cities are also authorized to impose local leasehold excise taxes, which are to be administered by the department. Rules adopted by the department will provide important tax information to taxpayers, cities and counties imposing a leasehold excise tax, and department personnel. This information will enhance the consistent application and administration of the leasehold excise tax program.

Other Federal and State Agencies that Regulate this Subject and the Process Coordinating the Rule with These Agencies: There are no other federal or state agencies that regulate this subject.

Process for Developing New Rule: Modified negotiated rule making.

Interested parties can participate in the decision to adopt the new rule and formulation of the proposed rule before publication. Written comments may be submitted at the public meeting, or by mail or FAX on or before the date of the public meeting. Oral comments will be accepted at the public meeting. The above outline of major areas identified as needing to be addressed is available upon request. Written comments on and/or requests for copies of the outline may be directed to Alan R. Lynn, Legislation and Policy, P.O. Box 47467, Olympia, WA 98504-7467, phone (360) 586-9040, FAX (360) 664-0693.

Location and Date of Public Meeting: General Administration Building, Room 207, 11th and Columbia, Olympia, Washington, on July 30, 1998, at 10 a.m.

Assistance for Persons with Disabilities: Contact Arturo Haro by July 20, 1998, TDD 1-800-451-7985 or (360) 586-0721.

June 11, 1998

Russell W. Brubaker

Assistant Director