BILL REQ. #:  S-4825.1 

Read first time 02/24/12.   Referred to Committee on Ways & Means.

     AN ACT Relating to increasing accountability for the tax preferences for manufacturing machinery and equipment by requiring a net benefit to the state and deferring sales and use tax; adding a new chapter to Title 82 RCW; repealing RCW 82.08.02565 and 82.12.02565; and providing an effective date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION.  Sec. 1   (1)(a) The state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW may be deferred for sales to a manufacturer or processor for hire of machinery and equipment used directly in a manufacturing operation or research and development operation, to sales to a person engaged in testing for a manufacturer or processor for hire of machinery and equipment used directly in a testing operation, or to sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving the machinery and equipment only when the person claiming the exemption can demonstrate that there is a net benefit to the state.
     (b) Sellers making tax-exempt sales under this section must obtain from the purchaser the exemption certificate issued under section 3 of this act. The seller must retain a copy of the certificate for the seller's files.
     (2) For purposes of this section:
     (a) "Applicant" means a person applying for a tax deferral under this chapter.
     (b) "Cogeneration" means the simultaneous generation of electrical energy and low-grade heat from the same fuel.
     (c) "Department" means the department of revenue.
     (d)(i) "Machinery and equipment" means industrial fixtures, devices, and support facilities, and tangible personal property that becomes an ingredient or component thereof, including repair parts and replacement parts. "Machinery and equipment" includes pollution control equipment installed and used in a manufacturing operation, testing operation, or research and development operation to prevent air pollution, water pollution, or contamination that might otherwise result from the manufacturing operation, testing operation, or research and development operation. "Machinery and equipment" also includes digital goods.
     (ii) "Machinery and equipment" does not include:
     (A) Hand-powered tools;
     (B) Property with a useful life of less than one year;
     (C) Buildings, other than machinery and equipment that is permanently affixed to or becomes a physical part of a building; and
     (D) Building fixtures that are not integral to the manufacturing operation, testing operation, or research and development operation that are permanently affixed to and become a physical part of a building, such as utility systems for heating, ventilation, air conditioning, communications, plumbing, or electrical.
     (e) Machinery and equipment is "used directly" in a manufacturing operation, testing operation, or research and development operation if the machinery and equipment:
     (i) Acts upon or interacts with an item of tangible personal property;
     (ii) Conveys, transports, handles, or temporarily stores an item of tangible personal property at the manufacturing site or testing site;
     (iii) Controls, guides, measures, verifies, aligns, regulates, or tests tangible personal property at the site or away from the site;
     (iv) Provides physical support for or access to tangible personal property;
     (v) Produces power for or lubricates machinery and equipment;
     (vi) Produces another item of tangible personal property for use in the manufacturing operation, testing operation, or research and development operation;
     (vii) Places tangible personal property in the container, package, or wrapping in which the tangible personal property is normally sold or transported; or
     (viii) Is integral to research and development as defined in RCW 82.63.010.
     (f) "Manufacturer" means a person that qualifies as a manufacturer under RCW 82.04.110. "Manufacturer" also includes a person that prints newspapers or other materials.
     (g) "Manufacturing" means only those activities that come within the definition of "to manufacture" in RCW 82.04.120 and are taxed as manufacturing or processing for hire under chapter 82.04 RCW, or would be taxed as such if such activity were conducted in this state or if not for an exemption or deduction. "Manufacturing" also includes printing newspapers or other materials. An activity is not taxed as manufacturing or processing for hire under chapter 82.04 RCW if the activity is within the purview of chapter 82.16 RCW.
     (h) "Manufacturing operation" means the manufacturing of articles, substances, or commodities for sale as tangible personal property. A manufacturing operation begins at the point where the raw materials enter the manufacturing site and ends at the point where the processed material leaves the manufacturing site. With respect to the production of class A or exceptional quality biosolids by a wastewater treatment facility, the manufacturing operation begins at the point where class B biosolids undergo additional processing to achieve class A or exceptional quality standards. Notwithstanding anything to the contrary in this section, the term also includes that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site of which the cogeneration project is an integral part. The term does not include the preparation of food products on the premises of a person selling food products at retail.
     (i) "Person" has the meaning given in RCW 82.04.030.
     (j) "Recipient" means a person receiving a tax deferral under this chapter.
     (k) "Research and development operation" means engaging in research and development as defined in RCW 82.63.010 by a manufacturer or processor for hire.
     (l) "Testing" means activities performed to establish or determine the properties, qualities, and limitations of tangible personal property.
     (m) "Testing operation" means the testing of tangible personal property for a manufacturer or processor for hire. A testing operation begins at the point where the tangible personal property enters the testing site and ends at the point where the tangible personal property leaves the testing site. The term also includes the testing of tangible personal property for use in that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site of which the cogeneration project is an integral part. The term does not include the testing of tangible personal property for use in the production of electricity by a light and power business as defined in RCW 82.16.010 or the preparation of food products on the premises of a person selling food products at retail.

NEW SECTION.  Sec. 2   (1) For purposes of this chapter, "net benefit to the state" means the amount of economic benefit to the state in jobs created or retained, plus the amount of increased economic activity directly related to the deferral provided by this section which was claimed, measured by the amount of taxes paid by the increased economic activity claimed, minus the annual amount of taxpayer savings.
     (2) For purposes of this section, the amount of economic benefit to the state in jobs created or retained must be measured by state and local taxes paid by an employee, which must be calculated as a percentage of the annual wage for each employment position as follows:
     (a) For an annual wage of less than twenty thousand dollars, the percentage is 17.3 percent;
     (b) For an annual wage of more than twenty thousand dollars and less than thirty-seven thousand dollars, the percentage is 12.7 percent;
     (c) For an annual wage of more than thirty-seven thousand dollars and less than sixty-two thousand dollars, the percentage is 11.2 percent;
     (d) For an annual wage of more than sixty-two thousand dollars and less than ninety-nine thousand dollars, the percentage is 9.5 percent; and
     (e) For an annual wage of more than ninety-nine thousand dollars, the percentage is 7.6 percent.
     (3) For purposes of this section, the amount of increased economic activity directly related to the deferral provided in this section claimed must be measured by the increased taxes paid by the taxpayer annually on the activity directly related to this exemption minus the annual amount of taxpayer savings.

NEW SECTION.  Sec. 3   (1) The department must issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW to a manufacturer or processor for hire meeting the qualifications in section 1(1)(a) of this act for machinery and equipment used for the purposes specified in section 1(1)(a) of this act.
     (2) The department must keep a running total of all deferrals granted under this chapter during each fiscal biennium.

NEW SECTION.  Sec. 4   (1) Application for deferral of taxes under this chapter must be made before the acquisition of equipment or machinery. The application must be made to the department in a form and manner prescribed by the department. The application must contain information regarding the potential net benefit to the state from the public investment of the deferral, with factors provided in section 2 of this act, as well as any other information required by the department. The department must rule on the application within sixty days.
     (2) Recipients of a tax deferral under this chapter must file an annual report providing information pursuant to demonstrating a net benefit to the state in a form and manner prescribed by the department. The report is due by January 31st following the calendar year in which the qualifying machinery and equipment is purchased and the tax is deferred, and through the subsequent nineteen calendar years. Failure to file the report constitutes failure to demonstrate a net benefit to the state.

NEW SECTION.  Sec. 5   (1) The recipient must repay the taxes deferred under this chapter:
     (a) At the rate of five percent of the deferred amount for any calendar year in which the recipient fails to demonstrate a net benefit to the state, commencing with the calendar year in which the qualifying machinery and equipment is purchased and the tax is deferred, and through the subsequent nineteen calendar years. Payment is due on January 31st of the year following the calendar year in which the recipient fails to show a net benefit to the state; or
     (b) Pursuant to the following schedule if the machinery and equipment for which tax was deferred is sold by the recipient. Payment is due within thirty days of the date the machinery and equipment is sold:

NEW SECTION.  Sec. 6   Chapter 82.32 RCW applies to the administration of this chapter.

NEW SECTION.  Sec. 7   The following acts or parts of acts are each repealed:
     (1) RCW 82.08.02565 (Exemptions -- Sales of machinery and equipment for manufacturing, research and development, or a testing operation--Labor and services for installation -- Exemption certificate -- Rules) and 2011 c 23 s 2, 2009 c 535 s 510, 1999 c 211 s 5, 1999 c 211 s 3, & 1998 c 330 s 1; and
     (2) RCW 82.12.02565 (Exemptions -- Machinery and equipment used for manufacturing, research and development, or a testing operation) and 2003 c 5 s 5, 1999 c 211 s 6, 1998 c 330 s 2, 1996 c 247 s 3, & 1995 1st sp.s. c 3 s 3.

NEW SECTION.  Sec. 8   This act does not affect any existing right acquired or liability or obligation incurred under the sections amended or repealed or under any rule or order adopted under those sections, nor does it affect any proceeding instituted under those sections.

NEW SECTION.  Sec. 9   Sections 1 through 6, 8, and 10 of this act constitute a new chapter in Title 82 RCW.

NEW SECTION.  Sec. 10   This act takes effect July 1, 2012.