Date Adopted: December 18, 2003.

     Purpose: This rule explains the business and occupation (B&O), retail sales, and use tax reporting responsibilities of extractors and extractors for hire. Persons extracting natural products often use the same extracted products in a manufacturing process, and the rule provides guidance for determining when an extracting activity ends and the manufacturing activity begins. This rule has been amended to incorporate provisions of chapter 118, Laws of 2001, which in part changed the definition of "extractor" to specifically recognize and exclude "farmers" as defined in RCW 82.04.213. This rule does not discuss the taxability of persons engaging in activities associated with timber harvest operations, which are addressed in WAC 458-20-13501 Timber harvest operations.

     Citation of Existing Rules Affected by this Order: Amending WAC 458-20-135 Extracting natural products.

     Statutory Authority for Adoption: RCW 82.32.300 and 82.01.060(2).

      Adopted under notice filed as WSR 03-21-035 on October 8, 2003.

     Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0;      Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 1, Repealed 0.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

December 18, 2003

Alan R. Lynn

Rules Coordinator

Legislation and Policy Division

OTS-6016.3

AMENDATORY SECTION(Amending WSR 00-11-096, filed 5/17/00, effective 6/17/00)

WAC 458-20-135   Extracting natural products.   (1) Introduction. This rule explains the application of the business and occupation (B&O), retail sales, and use taxes to persons extracting natural products. Persons extracting natural products often use the same extracted products in a manufacturing process. The rule provides guidance for determining when an extracting activity ends and the manufacturing activity begins. In addition to all other taxes, commercial fishermen may be subject to the enhanced food fish excise tax levied by chapter 82.27 RCW (Tax on enhanced food fish).

     Persons engaging in activities associated with timber harvest operations should refer to WAC 458-20-13501 (Timber harvest operations). Persons engaged in a manufacturing activity should also refer to WAC 458-20-136 (Manufacturing, processing for hire, fabricating) and 458-20-13601 (Manufacturers and processors for hire--Sales and use tax exemptions for machinery and equipment).

     ((In addition to all other taxes, commercial fishermen may be subject to the enhanced fish excise tax levied by chapter 82.27 RCW (Tax on enhanced food fish).))

     (2) ((Extracting activities.)) Who is an "extractor"? RCW 82.04.100 defines the term "extractor" to mean every person who, from the person's own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, for sale or for commercial or industrial use mines, quarries, takes or produces coal, oil, natural gas, ore, stone, sand, gravel, clay, mineral, or other natural resource product. The term includes a person who fells, cuts, or takes timber, Christmas trees other than plantation Christmas trees, or other natural products. It also includes any person who takes fish, shellfish, or other sea or inland water foods or products.

     (a) Persons excluded from the definition of "extractor." The term "extractor" does not include:

     (i) Persons performing under contract the necessary labor or mechanical services for others (these persons are extractors for hire, see subsection (4) below); or

     (ii) ((Persons cultivating or raising fish entirely within confined rearing areas on the person's own land or on land in which the person has a present right of possession;

     (iii) Persons who fell, cut, or take plantation Christmas trees from the person's own land or from land in which the person has a present right of possession; or

     (iv) Persons cultivating or raising shellfish or any other cultural aquatic product as defined in RCW 15.85.020 on the person's own land or on land in which the person has a present right of possession. This exclusion from the definition of "extractor" is because these persons qualify as farmers under RCW 82.04.213. (Persons identified under subsection (2)(a)(ii) and (iii) are also considered farmers.))) Persons who are farmers as defined in RCW 82.04.213. Refer to WAC 458-20-209 and 458-20-210 for tax-reporting information for farmers and persons selling property to or performing horticultural services for farmers.

     (b) When an extractor is also a manufacturer. An extractor may subsequently take an extracted product and use it as a raw material in a manufacturing process. The following examples explain when an extracting process ends and a manufacturing process begins for various situations. These examples should be used only as a general guide. ((Similar determinations)) A determination of when extracting ends and manufacturing begins for other situations can be made only after a review of all of the facts and circumstances.

     (i) Mining and quarrying. Mining and quarrying operations are extracting activities, and generally include the screening, sorting, and piling of rock, sand, stone, gravel, or ore. For example, an operation that extracts rock, then screens, sorts, and with no further processing places the rock into piles for sale, is an extracting operation.

     (A) The crushing and/or blending of rock, sand, stone, gravel, or ore are manufacturing activities. These are manufacturing activities whether or not the materials were previously screened or sorted.

     (B) Screening, sorting, piling, or washing of the material, when the activity takes place in conjunction with crushing or blending at the site where the materials are taken or produced, is considered a part of the manufacturing ((activity)) operation if it takes place after the first screen. If there is no separate first screen, only those activities subsequent to the materials being deposited into the screen are considered a part of the manufacturing ((activities)) operation.

     (ii) Commercial fishing. Commercial fishing operations, including the taking of any fish in Washington waters (within the statutory limits of the state of Washington) and the taking of shellfish or other sea or inland water foods or products, are extracting activities. These activities often include the removal of meat from the shell and the icing of fish or sea products ((by the person catching or taking them are extracting activities. As explained in subsection (2)(a), a person taking fish, shellfish, or other sea or inland water food or product cultivated or raised)).

     (A) A person growing, raising, or producing a product of aquaculture as defined in RCW 15.85.020 on the person's own land or on land in which the person has a present right of possession is considered a farmer. RCW 82.04.213.

     ((The filleting, steaking, or)) (B) Cleaning (removal of the head, fins, or viscera) ((of)), filleting, and/or steaking fish are manufacturing activities. The cooking of fish or seafood is also a manufacturing activity. Refer to RCW 82.04.260 and WAC 458-20-136 for information regarding the special BO tax rate/classification that applies to the manufacturing of seafood products that remain in a raw, raw frozen, or raw salted state.

     (C) The removal of meat from the shell or the icing of fish or sea products, when the activity is performed in conjunction with and at the site where manufacturing takes place (e.g., cooking the fish or seafood), is considered a part of the manufacturing operation.

     (3) Tax-reporting responsibilities for income received by extractors. ((Persons who extract natural products in this state)) Extractors are subject to the extracting B&O tax upon the value of the extracted products. (See WAC 458-20-112 regarding "value of products.") Extractors who sell the products at retail or wholesale in this state are subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases, the extractor must report under both the "production" (extracting) and "selling" (wholesaling or retailing) classifications of the B&O tax, and claim a tax credit under the multiple activities tax credit (MATC). See also WAC 458-20-19301 (Multiple activities tax credits) for a more detailed explanation of the MATC reporting requirements.

     For example, Corporation quarries rock without further processing. Corporation sells and delivers the rock to Landscaper, who is located in Washington. Landscaper provides Corporation with a resale certificate. Corporation should report under both the extracting and wholesaling BO tax classifications, and claim a MATC per WAC 458-20-19301. Had Corporation delivered the quarried rock to an out-of-state location, Corporation would have incurred only an extracting BO tax liability.

     (a) When extractors use their products in a manufacturing process. Persons who extract products, use these extracted products in a manufacturing process, and then sell the products all within Washington are subject to both "production" taxes (extracting and manufacturing) and the "selling" tax (wholesaling or retailing), and may claim the appropriate credits under the MATC. (See also WAC 458-20-136 on manufacturing.)

     For example, Company quarries rock (an extracting activity), crushes and blends the rock (a manufacturing activity), and sells the resulting product at ((wholesale)) retail. The taxable value of the extracted rock is $50,000 (the amount subject to the extracting B&O tax). The taxable value of the crushed and blended rock is $140,000 (the amount subject to the manufacturing B&O tax). The crushed and blended rock is sold for $140,000 (the amount subject to the ((wholesaling)) retailing B&O tax). ((Under the MATC, Company should report $50,000 subject to the extracting B&O tax, $140,000 subject to the manufacturing B&O tax, and $140,000 subject to the wholesaling B&O tax. Company should then claim the appropriate MATC per WAC 458-20-19301.)) Assume the tax rates for the extracting and manufacturing B&O taxes are .00484, and the tax rate for the retailing B&O tax is .00471. Company should compute its tax liability as follows:

     (i) Reporting BO tax on the combined excise tax return:

     (A) Extracting BO tax liability of $242 ($50,000 x .00484);

     (B) Manufacturing BO tax liability of $678 ($140,000 x .00484); and

     (C) Retailing BO tax liability of $659 ($140,000 x .00471).

     (ii) Completing the multiple activities tax credit (Part II of Schedule C):

Activity which results in a tax credit	Taxable Amount	Business and Occupation Tax Reported
		Extracting	Manufacturing	Wholesaling	Retailing	Total Credit
Washington extracted products manufactured in Washington	50,000	242	242			242
Washington extracted products sold in Washington
Washington manufactured products sold in Washington	140,000		678		659	659
			Multiple Activities Tax Credit Subtotal of taxes paid to Washington state			901
					Credit ID 800	901

     Schedule C helps taxpayers calculate and claim the multiple activities tax credit provided by RCW 82.04.440. In the Schedule C example above, materials that a person extracts and then uses in a manufacturing process in Washington are entered at their value when extracting ceases and manufacturing begins ($50,000 shown on the "Washington extracted products manufactured in Washington" line of the Schedule C). The taxable amount reported on the "Washington manufactured products sold in Washington" line of the Schedule C is the value of products at the point that manufacturing ceases ($140,000), not simply the value added by the manufacturing activity. For more information and examples that are helpful in determining the value of products, refer to WAC 458-20-112 (Value of products).

     (b) When extractors sell their products at retail or wholesale. An extractor making retail sales must collect and remit retail sales tax on all sales to consumers, unless the sale is exempt by law (e.g., see WAC 458-20-244 regarding sales of certain food products). Extractors making wholesale sales must obtain resale certificates from their customers to document the wholesale nature of any transaction. (Refer to WAC 458-20-102 on resale certificates.)

     (4) Tax-reporting responsibilities for income received by extractors for hire. Persons performing extracting activities for extractors are subject to the extracting for hire B&O tax upon their gross income from those services.

     For example, a person removing ore, waste, or overburden at a mining pit for the operator of the mining operation is an extractor for hire. Likewise, a person drilling to locate or provide access to a satisfactory grade of ore at the mining pit for the operator is also an extractor for hire. The gross income derived from these activities is subject to the extracting for hire B&O tax classification.

     (5) Mining or mineral rights. Royalties or charges in the nature of royalties for granting another the privilege or right to remove minerals, rock, sand, or other natural resource product are subject to the service and other activities B&O tax. The special B&O tax rate provided by RCW 82.04.2907 does not apply because this statute specifically excludes compensation received for any natural ((product)) resource. Refer also to RCW 82.45.035 and WAC 458-61-520 (Mineral rights and mining claims) for more information regarding the sale of mineral rights and the real estate excise tax.

     Income derived from the sale or rental of real property, whether designated as royalties or another term, is exempt of the B&O tax.

     (6) Tax liability with respect to purchases of equipment or supplies and property extracted and/or manufactured for commercial or industrial use. The retail sales tax applies to all purchases of equipment, component parts of equipment, and supplies by persons engaging in extracting or extracting for hire activities unless a specific exemption applies. If the seller fails to collect the appropriate retail sales tax, the buyer is required to remit the retail sales tax (commonly referred to as "deferred retail sales tax") or use tax directly to the department.

     (a) Exemption available for certain manufacturing equipment. RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for certain machinery and equipment used by manufacturers and processors for hire. While this exemption does not extend to extractors or extractors for hire, persons engaged in both extracting and manufacturing activities should refer to WAC 458-20-13601 for an explanation of how these exemptions may apply to them.

     (b) Property manufactured for commercial or industrial use. Persons manufacturing tangible personal property for commercial or industrial use are subject to both the manufacturing B&O and use taxes upon the value of the property manufactured, unless a specific exemption applies. (See also WAC 458-20-134 on commercial or industrial use.)

     If the person also extracts materials used in the manufacturing process, the extracting B&O tax is due on the value of the extracted materials and a MATC may be taken. For example, Quarry extracts rock, crushes the rock into desired size, and then uses the crushed rock in its parking lot. The use of the crushed rock by Quarry in its parking lot is a commercial or industrial use. Quarry is subject to the extracting and manufacturing B&O taxes and may claim a MATC. Quarry is also responsible for remitting use tax on the value of the crushed rock applied to the parking lot.

[Statutory Authority: RCW 82.32.300. 00-11-096, § 458-20-135, filed 5/17/00, effective 6/17/00; 86-09-058 (Order ET 86-7), § 458-20-135, filed 4/17/86; 83-07-034 (Order ET 83-17), § 458-20-135, filed 3/15/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. 78-07-045 (Order ET 78-4), § 458-20-135, filed 6/27/78; Order ET 70-3, § 458-20-135 (Rule 135), filed 5/29/70, effective 7/1/70.]