Purpose: To implement SHB 1261 (chapter 238, Laws of 1997). This legislation authorizes the department to prepare a step-ranged tax credit table to be used by businesses when determining the amount of small business credit available to them.

Citation of Existing Rules Affected by this Order: Amending WAC 458-20-104 Small business tax relief based on volume of business.

Statutory Authority for Adoption: RCW 82.32.300.

Adopted under notice filed as WSR 98-10-123 on May 6, 1998.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, amended 0, repealed 0; Federal Rules or Standards: New 0, amended 0, repealed 0; or Recently Enacted State Statutes: New 0, amended 1, repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, amended 0, repealed 0.

Number of Sections Adopted on the Agency's Own Initiative: New 0, amended 1, repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, amended 0, repealed 0.

Number of Sections Adopted Using Negotiated Rule Making: New 0, amended 0, repealed 0; Pilot Rule Making: New 0, amended 0, repealed 0; or Other Alternative Rule Making: New 0, amended 1, repealed 0.

Effective Date of Rule: Thirty-one days after filing.

July 27, 1998

Claire Hesselholt

Rules Manager

AMENDATORY SECTION (Amending WSR 97-08-050, filed 3/31/97, effective 5/1/97)

WAC 458-20-104  Small business tax relief based on volume of business. (((1) Introduction. This section explains the small business B&O tax credit (RCW 82.04.4451), and the public utility tax income exemptions (RCW 82.16.040). Chapter 111, Laws of 1996, amended RCW 82.16.040 to increase the income exemptions for the public utility tax, effective July 1, 1996. (See also WAC 458-20-101 on tax registration and tax reporting requirements.)

(2) Business and occupation tax. Persons subject to B&O tax may be eligible to claim a small business tax credit against the amount of B&O tax otherwise due. The B&O tax credit operates completely independent of the volume exemption which applies to the public utility tax. This tax credit should be computed after claiming any other B&O tax credits available under chapter 82.04 RCW, but prior to any credits provided under other chapters of Title 82 RCW. The maximum amount of small business tax credit available to a person is thirty-five dollars multiplied by the number of months in the reporting period assigned by the department of revenue under the provisions of RCW 82.32.045. The small business tax credit applies to the entire reporting period, even though the business may not have been operating during the entire period.

(a) If the amount of B&O tax from all activities engaged in by the taxpayer is equal to or less than the maximum credit, a small business tax credit equal to the amount of the B&O tax will be allowed. If the amount of B&O tax from all activities is greater than the maximum credit, a reduced credit may be available. This reduced credit will be equal to twice the maximum credit minus the B&O tax otherwise due. The credit cannot be less than zero. RCW 82.04.4451.

(b) Persons having multiple tax reporting accounts are eligible for only one small business tax credit per tax reporting period.

(c) Spouses who operate distinct and separate businesses that have different tax registrations are each eligible for the small business tax credit.

(3) Retail sales tax. Persons making retail sales must collect and remit all applicable retail sales taxes even if B&O tax is not due. There is no small business tax credit or volume of business exemption for retail sales tax.

(4) Public utility tax. Persons subject to public utility tax are exempt from payment of this tax for any reporting period in which the taxable amount reported under the combined total of all public utility tax classifications does not equal or exceed the maximum exemption for the assigned reporting period. RCW 82.16.040. The maximum exemptions for public utility tax are:

If the taxable amount for a reporting period equals or exceeds the maximum exemption, tax must be remitted on the full taxable amount. The public utility tax maximum exemptions apply to the entire reporting period, even though the business may not have operated during the entire period.

(5) Tax reporting frequencies. Persons interested in knowing the thresholds used by the department when assigning tax reporting frequencies should refer to WAC 458-20-22801 (Tax reporting frequency--forms).

(6) Examples. The following examples illustrate how the small business B&O tax credit and public utility income exemption systems apply to typical situations. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.

(a) JD Inc. has been assigned a quarterly reporting period by the department of revenue. JD Inc.'s B&O tax liability from all business activities for the third quarter is ninety dollars. This B&O tax liability is less than the one hundred five-dollar maximum small business B&O tax credit available for a quarterly reporting period (three times the monthly credit amount of thirty-five dollars). JD Inc. may claim a small business B&O tax credit for the entire ninety-dollar B&O tax liability.

(b) HM Corporation has been assigned a quarterly reporting period by the department of revenue. HM's B&O tax liability from all business activities for the fourth quarter is one hundred twenty dollars. This tax liability exceeds the one hundred five-dollar maximum small business B&O tax credit available for a quarterly period (three times the monthly credit amount of thirty-five dollars). However, a reduced small business tax credit is available. This credit is computed by subtracting HM's B&O tax liability of one hundred twenty dollars from the figure of two hundred ten dollars (twice the maximum credit available for a quarterly reporting period). HM Corporation may claim a small business tax credit of ninety dollars.

(c) XY Inc. has been assigned a quarterly reporting period by the department of revenue. XY's B&O tax liability for the first quarter is two hundred fifty dollars. As XY's B&O tax liability exceeds the two hundred ten-dollar figure used to determine any reduced B&O tax credit (twice the maximum credit available for a quarterly reporting period), XY Inc. is not eligible for the small business B&O tax credit.

(d) BG Manufacturing has been assigned a quarterly reporting period. BG has incurred a ninety-dollar tax liability under the wholesaling B&O tax classification, and a seventy-dollar tax liability under the manufacturing B&O tax classification, for a total B&O tax liability of one hundred sixty dollars during the first quarter. As BG manufactures much of what it sells at wholesale, BG qualifies for an internal multiple activities tax credit (MATC) of sixty dollars. (See WAC 458-20-19301 on multiple activities tax credits.) BG Manufacturing would claim its MATC prior to computing its small business B&O tax credit. BG's B&O tax liability net of the MATC is one hundred dollars, which is less than the one hundred five-dollar maximum credit available for the reporting period. BG may claim a one hundred-dollar small business B&O tax credit.

(e) OK Inc. has two separate tax reporting accounts with the department, both of which have been assigned quarterly reporting periods. OK Inc. is only allowed one small business B&O tax credit for the activity of both accounts. The total B&O tax for both accounts for this quarter is one hundred fifty dollars (one hundred dollars from the first account and fifty dollars from the second account). Its maximum small business tax credit is sixty dollars.

The credit should be taken from the account that will allow for it to be deducted in full. If one account does not have enough B&O tax to absorb the full credit, it can be applied on the other account until the full credit is used. If the reporting frequency is different between the two accounts, the small business tax credit should not be taken until the filing of the less frequent tax reporting account (the credit computation for the two accounts must cover the same period of time).

(f) BB Corporation has been assigned a quarterly reporting period by the department of revenue. BB's total taxable public utility income for the third quarter is five thousand eight hundred dollars. BB Corporation is exempt for the payment of public utility tax because BB's taxable public utility income does not exceed the six thousand-dollar maximum exemption for this reporting period.)) (1) Introduction. This rule explains the small business B&O tax credit (RCW 82.04.4451), and the public utility tax income exemption (RCW 82.16.040). The public utility tax exemption is a fixed amount, or threshold, based on the reporting frequency assigned to the account. The amount of small business B&O tax credit available on a return can increase or decrease, depending on the reporting frequency of the account and the net B&O tax liability for that return. Readers should refer to WAC 458-20-22801 (Tax reporting frequency--Forms) for an explanation of how the department assigns a particular reporting frequency to each account. Readers may also want to refer to WAC 458-20-101 for an explanation of Washington's tax registration and tax reporting requirements.

(2) The small business B&O tax credit. Persons subject to B&O tax may be eligible to claim a small business tax credit against the amount of B&O tax otherwise due. The B&O tax credit operates completely independent of the volume exemption which applies to the public utility tax. RCW 82.04.4451 authorizes the department of revenue to create a tax credit table to be used by all taxpayers when determining the amount of their small business B&O tax credit. Taxpayers are required to use the tax credit table to determine the appropriate amount of their small business credit. A tax credit table for each of the monthly, quarterly and annual reporting frequencies is provided in this rule (see subsection (5) of this section). As required by statute, the table has been prepared in such a manner that no taxpayer owes a greater amount of tax by using the mandatory table than would have been owed by using the statutory credit formula.

(a) The small business tax credit applies to the entire reporting period, even though the business may not have been operating during the entire period.

(b) Taxpayers who are spouses that operate distinct and separate businesses are each eligible for the small business tax credit.

(c) Taxpayers who are eligible for the small business credit should follow the steps outlined in subsection (4) of this section to find the amount of credit available to them. Taxpayers who have other B&O credits to apply on a return, in addition to the small business credit, may need to refer to the multiple business and occupation tax credit worksheet in subsection (3) of this section before determining the amount of small business credit available to them. Subsection (5) of this section contains the tax credit tables for taxpayers with assigned reporting frequencies of either monthly, quarterly, or annual.

(3) Multiple business and occupation tax credit worksheet. The small business tax credit should be computed after claiming any other B&O tax credits available under chapter 82.04 RCW (Business and occupation tax), but prior to any B&O tax credits provided under other chapters of Title 82 RCW (Excise taxes). For example, the multiple activities tax credit, high technology credit and ride share credit should be taken before the small business credit is determined and applied, but the pollution control credit and cogeneration fee credit should be taken only after the small business credit has been applied. Proper application of the small business credit may never result in a B&O tax liability less than zero and cannot create a carryover amount for future periods. The following multiple B&O tax credit worksheet gives taxpayers an example of the process they should follow to ensure that credits are applied in the necessary order.

MULTIPLE B&O TAX CREDIT WORKSHEET
1.	Determine the total Business and Occupation (B&O) tax due from the B&O section of your Combined Excise Tax Return.				$
2.	Add together the credit amounts taken for:
		Multiple Activities Tax Credit From Schedule C (if applicable)			$
		(Add any other B&O tax credits from chapter 82.04 RCW that will be applied to this return period)	+		$
		Total (Enter 0 if none of these credits are being taken.)				$
3.	Subtract line 2 from line1. This is the total B&O tax allowable for the Small Business Credit.					$
4.	Find the tax credit table which matches the reporting frequency assigned to the account, then find the total B&O tax due amount which include your figure from item 3, above.
5.	Read across to the next column. This is the amount of the Small Business Credit to be used on the Combined Excise Tax Return.					$

(c) Small business credit table for annual reporting frequency:

(6) Retail sales tax must be reported. Persons making retail sales must collect and pay all applicable retail sales taxes even if B&O tax is not due. There is no small business tax credit or volume of business exemption for retail sales tax.

(7) The public utility tax income exemption. Persons subject to public utility tax are exempt from payment of this tax for any reporting period in which the gross taxable amount reported under the combined total of all public utility tax classifications does not equal or exceed the maximum exemption for the assigned reporting period. Effective July 1, 1996, the public utility tax exemption amounts stated in RCW 82.16.040 were increased to:

(a) If the taxable amount for a reporting period equals or exceeds the maximum exemption, tax must be remitted on the full taxable amount.

(b) The public utility tax maximum exemptions apply to the entire reporting period, even though the business may not have operated during the entire period.

(c) The public utility tax exemption or threshold is not affected by the amounts reported in the B&O tax section or any of the other tax sections of the combined excise tax return.

(d) For example, assume that the DEF corporation registers and starts business activities on February 1st. A quarterly reporting frequency is assigned to DEF by the department of revenue. During the two months of the first quarter that DEF is actively in business, DEF's public utility tax gross is seven thousand dollars, but after deductions the total taxable amount is five thousand dollars. In this case, DEF does not owe any public utility tax because the taxable amount of five thousand dollars is less than the six thousand dollar threshold for quarterly taxpayers. The fact that DEF was in business during only two months out of the three months in the quarter has no effect on the threshold amount. However, if DEF had no deductions available, the taxable amount would be seven thousand dollars and public utility tax would be due on the full taxable amount.

[Statutory Authority: RCW 82.32.300. 97-08-050, § 458-20-104, filed 3/31/97, effective 5/1/97; 95-07-088, § 458-20-104, filed 3/17/95, effective 4/17/95; 83-07-034 (Order ET 83-17), § 458-20-104, filed 3/15/83; Order ET 70-3, § 458-20-104 (Rule 104), filed 5/29/70, effective 7/1/70.]