SENATE BILL REPORT

                   SB 6450

                    As of January 31, 1996

Title:  An act relating to sales and use tax exemptions for manufacturing or research and development machinery and equipment.

Brief Description:  Allowing sales and use tax exemptions for manufacturing machinery and equipment used for maintenance, improvement, and research and development.

Sponsors:  Senators Bauer, Loveland, Rasmussen, Snyder, Franklin, Sutherland, Winsley, Strannigan, Haugen, Hale, A. Anderson, Sheldon, Quigley, Heavey, Finkbeiner, McAuliffe, Kohl and Cantu; by request of Governor Lowry.

Brief History:

Committee Activity:  Ways & Means:  2/2/96.

SENATE COMMITTEE ON WAYS & MEANS

Staff:  David Schumacher (786-7715)

Background:   The sales tax is imposed on each retail sale of most articles of tangible personal property and certain services.  Taxable services include construction, repair, telephone, lodging of less than 30 days, physical fitness, and some recreation and amusement services.   Materials and labor used to alter or improve real or personal property are subject  to the tax.  Exempt from tax are purchases for resale and purchases of components and ingredients that become part of another product for sale.

SB 5201, passed in the 1995 session, exempts from sales and use taxes, new and replacement  machinery and equipment used directly in the manufacturing process, including installation labor.  Replacement parts are exempt only if they improve efficiency, increase productivity or extend the useful life of the equipment.

Research and development equipment is not exempt under current law unless it falls under either the "high technology" program or the "distressed area" program.  The high technology deferral program is available statewide to businesses involved in "high‑tech" research and development in specific industries.  These businesses may defer sales and use taxes on buildings, machinery and equipment, and installation labor.  Research and development businesses in "distressed areas" may defer sales and use taxes on buildings, machinery and equipment, and installation labor.  Each of these deferrals become exemptions if the specific conditions of the program are met.

Summary of Bill:   The replacement parts and costs of repairing and/or cleaning equipment used in the manufacturing process are exempt from sales tax and use tax.  The requirement to improve efficiency, increase productivity or extend the useful life of the equipment is no longer necessary.

The current sales and use tax exemption on machinery and equipment for manufacturers is expanded to include machinery and equipment used in research and development by manufacturers.

Appropriation:  None.

Fiscal Note:  Available.

Effective Date:  The bill takes effect on July 1, 1996.