Brief Description: Extending a sales and use tax exemption to the construction of new facilities to be used for the conditioning of vegetable seeds.

Sponsors: Representatives Quall, Morris, Pettigrew, Kilmer, Talcott, Pearson, Linville and Kristiansen.

Hearing Date: 2/15/05

Staff: Meg Van Schoorl (786-7105).

Background:

Retail sales and use tax
The retail sales tax applies to the selling price of tangible personal property and of certain services purchased at retail. Sales tax is paid by the purchaser and collected by the seller. The use tax is imposed on items used in the state that were not subject to the retail sales tax and includes purchases made in other states and from sellers who do not collect Washington sales tax. The retail sales and use tax is imposed at a 6.5 percent rate by the state. In addition, state law allows for 17 different local option sales and use taxes for purposes including but not limited to transportation, criminal justice, public safety, public facilities, zoos, and sports stadiums. As of December 2004, local rates ranged from 0.5 percent to 2.4 percent.

Rural county/distressed area sales and use tax deferral program
The rural county and distressed area tax deferral as originally enacted in 1985 provided a deferral of sales and use taxes due on plant construction and expansion or on acquisition of equipment by firms that engaged in manufacturing, research and development, or computer programming activities in counties with high rates of unemployment. In 1999, the program was changed so that the incentive became available in any "rural county," defined as a county with a population density of less than 100 people per square mile, and in counties with community empowerment zones. In 2004, the program was again revised so that the incentive also became also available in counties smaller than two hundred twenty-five square miles.

Under the original deferment, the sales/use tax liability was deferred for three years, followed by a five-year graduated repayment. Since 1994, the repayment requirement has been waived provided program requirements are maintained, thereby making the program an outright exemption. The statute is currently scheduled to expire on July 1, 2010.

To receive the deferral, a firm must apply to the Department of Revenue (Department) prior to the initiation of construction or acquisition of equipment. The application must contain information regarding the project location, costs, employment, wages and schedules.

Under the program, a person that owns property and leases to another may receive deferral of taxes on qualifying expenditures, if the owner under a written contract agrees to pass the economic benefit of the deferral onto the lessee by reducing the amount of the lease payments.

Recipients of a deferral are required to submit a report to the Department by the end of the year in which the project is put into operation, and for each of the seven following years. The report must contain information that allows the Department to determine whether the recipient is meeting the eligibility requirements of the program. If the Department finds that an investment project is not eligible for the tax deferral, the deferred taxes outstanding for the project are immediately due.

The Department is required to study the sales and use tax deferral program and report back to the Legislature by December 1, 2009 on the effects of the program on job creation, company growth, introduction of new products, diversification of the state's economy, and other outcome measures.

Thirty-two counties are eligible as rural counties under the program and four additional counties are eligible because they contain community empowerment zones. According to the Department, in recent years, the number of projects approved has ranged from a low of 20 per year to a high of 168, and annual taxpayer savings has ranged from a low of $2.5 million to a high of $16 million.

Summary of Bill:

The bill expands the definition of "manufacturing" to include the conditioning of vegetable seed.

Appropriation: None.

Fiscal Note: Available.

Effective Date: The bill contains an emergency clause and takes effect on July 1, 2005.