WSR 10-10-031

PERMANENT RULES

DEPARTMENT OF REVENUE


[ Filed April 26, 2010, 3:45 p.m. , effective May 27, 2010 ]


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

Purpose: WAC 458-20-121 provides tax reporting information for persons who sell heat and/or steam. It also provides information on the use tax liability of persons that produce fuel used to produce heat or steam. WAC 458-20-134 discusses the taxability of manufacturers and extractors that are consumers of products or by-products that they themselves have manufactured or extracted.

The department amended these rules to recognize provisions of chapter 469, Laws of 2009 (ESSB 6170). These provisions provide a sales and use tax exemption for hog fuel sold or used to produce electricity, steam, heat, or biofuel. WAC 458-20-134 was also amended to include language providing information regarding the "value of article used" in the case of prototypes, RCW 82.12.010 (2)(e). This rule did not previously recognize these provisions.

Citation of Existing Rules Affected by this Order: Amending WAC 458-20-121 Sales of heat or steam--Including production by cogeneration and 458-20-134 Commercial or industrial use.

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

Adopted under notice filed as WSR 10-05-074 on February 12, 2010.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 0, Amended 2, Repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 2, Repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 0, Repealed 0.

Date Adopted: April 26, 2010.

Alan R. Lynn

Rules Coordinator

OTS-2942.2


AMENDATORY SECTION(Amending WSR 94-13-033, filed 6/6/94, effective 7/7/94)

WAC 458-20-121   Sales of heat or steam -- Including production by cogeneration.   (1) Introduction. This section provides tax reporting information to persons who sell heat and/or steam. Because heat and steam are often the product of a cogeneration facility, this section also provides tax information for persons operating cogeneration facilities. Persons generating electrical power should also refer to WAC 458-20-179 ((and 458-20-17901)) (Public utility tax).

(2) Sale of heat or steam - business and occupation (B&O) tax. Persons engaging in the business of operating a plant for the production, extraction, or storage of heat or steam for distribution, for hire or sale, are taxable under the service and other business activities classification. This includes heat or steam produced by a biomass system, cogeneration, geothermal sources, fossil fuels, or any other method.

(3) Sale or production of electricity - cogeneration. The production of steam, heat, or electricity is not a manufacturing activity within the definition of RCW 82.04.120. Persons who operate a plant or system for the generation, production or distribution of electrical energy for hire or sale are subject to the provisions of the public utility tax under the light and power tax classification. Persons who generate electrical energy should refer to WAC 458-20-179 (Public utility tax). A deduction may be taken for:

(a) Power generated in Washington and delivered out-of-state. (See RCW 82.16.050(6).)

(b) Amounts derived from the sale of electricity to persons who are in the business of selling electricity and are purchasing the electricity for resale. (See RCW 82.16.050(2).)

(4) Tax incentive programs - cogeneration. There were tax incentive programs available for cogeneration projects begun before January 1, 1990. ((See WAC 458-20-17901 for the requirements which applied.)) Sales and use tax deferrals may apply under certain conditions for power generation facilities, even though the production of power is not specifically subject to a manufacturing tax. For example, if the cogeneration facilities are part of a manufacturing plant for the production of new articles of tangible personal property and the requirements for tax deferral are met, the business may apply for tax deferral programs. These incentive programs are discussed in WAC 458-20-240 (Manufacturer's new employee tax credits), 458-20-24001 (Sales and use tax deferral -- Manufacturing and research/development activities in rural counties -- Applications filed after March 31, 2004), and 458-20-24002 (Sales and use tax deferral -- New manufacturing and research/development facilities).

(5) Fuel. Persons who produce their own fuel to generate heat, steam, or electricity are subject to the manufacturing B&O tax on the value of the fuel. This includes the value of fuel which is created at the same site as a by-product of another manufacturing process, such as production of hog fuel. The taxable value should be determined based on comparable sales, or on the basis of all costs in the absence of comparable sales. Refer to WAC 458-20-112 (Value of products).

((The)) (a) Fuel does not become an ingredient or component of power, steam, or electricity. The sale of fuel to be used by the purchaser to generate heat, steam, or electricity is a retail sale. In most cases, the purchase of fuel for such purposes is subject to payment of retail sales tax to the supplier. (See (b) of this subsection for discussion of a sales and use tax exemption specific to hog fuel.)

In the event retail sales tax is not paid to the supplier, and no exemption from retail sales tax is available, deferred sales or use tax must be paid. However, the law provides a specific exemption from the use tax for fuel which is used in the same manufacturing plant which produced the fuel. For example, if a lumber manufacturer produces wood waste which is used in the same plant to produce heat for drying lumber and also electricity which is sold to a public utility district, the wood waste is not subject to use tax even though the manufacturing tax will apply. (See RCW 82.12.0263.)

(b) Effective July 1, 2009:

Sales of hog fuel used to produce electricity, steam, heat, or biofuel are exempt from retail sales tax when the purchaser provides the seller with a properly filled out "buyer's retail sales tax exemption certificate." RCW 82.08.956.

The use of hog fuel for production of electricity, steam, heat, or biofuel is exempt from use tax. RCW 82.12.956. For these exemptions, "hog fuel" means wood waste and other wood residuals including forest derived biomass, but not including firewood or wood pellets. "Biofuel" has the same meaning as provided in RCW 43.325.010.

(6) Equipment and supplies. Persons who are in the business of producing heat, steam, or electricity are required to pay retail sales tax to suppliers of all equipment and supplies. If the supplier fails to collect retail sales tax, deferred sales or use tax must be paid.

[Statutory Authority: RCW 82.32.300. 94-13-033, 458-20-121, filed 6/6/94, effective 7/7/94; 83-07-034 (Order ET 83-17), 458-20-121, filed 3/15/83; Order ET 70-3, 458-20-121 (Rule 121), filed 5/29/70, effective 7/1/70.]

OTS-2943.2


AMENDATORY SECTION(Amending Order 86-17, filed 9/23/86)

WAC 458-20-134   Commercial or industrial use.   (1) Introduction. "The term 'commercial or industrial use' means the following uses of products, including by-products, by the ((extractor)) same person that extracted or ((manufacturer thereof)) manufactured them:

(a) Any use as a consumer; and

(b) The manufacturing of articles, substances or commodities." (RCW 82.04.130.)

(2) Examples of commercial or industrial use. The following are examples of commercial or industrial use:

(a) The use of lumber by the manufacturer ((thereof)) of that lumber to build a shed for its own use.

(b) The use of a motor truck by the manufacturer ((thereof)) of that truck as a service truck for itself.

(c) The use by a boat manufacturer of patterns, jigs and dies which it has manufactured.

(d) The use by a contractor building or improving a publicly owned road of crushed rock or pit run gravel which it has extracted.

(3) Business and occupation tax. Persons manufacturing or extracting tangible personal property for commercial or industrial use are subject to tax under the manufacturing or extracting B&O tax classifications ((manufacturing or extracting)), as the case may be. The tax is measured by the value of the product manufactured or extracted and used. (See WAC 458-20-112 for definition and explanation of value of products.)

(4) Use tax. Persons manufacturing or extracting tangible personal property for commercial or industrial use are subject to use tax on the value of the articles used, unless a specific exemption is provided. (See WAC 458-20-178 for further explanation of the use tax and definition of value of the article used.)

(5) Exemptions. The following uses of articles produced for commercial or industrial use are expressly exempt of use tax.

(a) RCW 82.12.0263 exempts from the use tax the use of fuel by the ((extractor)) same person that extracted or ((manufacturer thereof)) manufactured that fuel when it is used directly in the operation of the particular extractive operation or manufacturing plant which produced or manufactured the same. (((Example: The use of hog fuel to produce heat or power in the same plant which produced it.)))

(b) ((Effective April 3, 1986, (chapter 231, Laws of 1986))) Property produced for use in manufacturing ferrosilicon which is subsequently used to make magnesium for sale is exempt of use tax if the primary purpose is to create a chemical reaction directly through contact with an ingredient of ferrosilicon. (RCW 82.04.190(1).)

(c) Effective July 1, 2009, hog fuel used to produce electricity, steam, heat, or biofuel is exempt from use tax. RCW 82.12.956. For the purposes of this exemption, "hog fuel" means wood waste and other wood residuals including forest derived biomass, but not including firewood or wood pellets. "Biofuel" has the same meaning as provided in RCW 43.325.010.

(6) ((RCW 82.12.010 provides that in the case of articles manufactured for commercial or industrial use by manufacturers selling to the United States Department of Defense, the value of the articles used shall be determined according to the value of the ingredients of such articles, rather than the full value of the manufactured articles as is normally the case.)) Special provisions regarding value of article used. RCW 82.12.010 provides the following special valuation provisions to persons manufacturing products for commercial or industrial use:

(a) In the case of articles manufactured or produced by the user and used in the manufacture or production of products sold or to be sold to the United States Department of Defense, the value of the articles used is determined according to the value of the ingredients of those articles.

(b) In the case of an article manufactured or produced for purposes of serving as a prototype for the development of a new or improved product, the value of the article used is determined by:

The retail selling price of such new or improved product when first offered for sale; or

The value of materials incorporated into the prototype in cases in which the new or improved product is not offered for sale.

[Statutory Authority: RCW 82.32.300. 86-20-027 (Order 86-17), 458-20-134, filed 9/23/86; 83-07-032 (Order ET 83-15), 458-20-134, filed 3/15/83; Order ET 70-3, 458-20-134 (Rule 134), filed 5/29/70, effective 7/1/70.]

Washington State Code Reviser's Office