WSR 98-02-046

EMERGENCY RULES

DEPARTMENT OF REVENUE

[Filed January 5, 1998, 3:43 p.m.]

Date of Adoption: January 5, 1998.

Purpose: To implement SHB 1261 (chapter 238, Laws of 1997). This legislation authorizes the department to prepare a step-ranged tax credit table to be used by businesses when determining the amount of small business credit available to them. No taxpayer will pay any greater amount of tax when using this step-ranged table.

Citation of Existing Rules Affected by this Order: Amending WAC 458-20-104 Small business tax relief based on volume of business.

Statutory Authority for Adoption: RCW 82.32.300 and 82.04.4451.

Under RCW 34.05.350 the agency for good cause finds that immediate adoption, amendment, or repeal of a rule is necessary for the preservation of the public health, safety, or general welfare, and that observing the time requirements of notice and opportunity to comment upon adoption of a permanent rule would be contrary to the public interest.

Reasons for this Finding: To implement SHB 1261 (chapter 238, Laws of 1997). The purpose of this legislation is to provide taxpayers determining the amount of their small business B&O tax credit an alternative to the calculations necessary under the statutory formula. The complexity of the currently required computations has proven frustrating to the taxpayers, and has resulted in a high number of errors. The step-ranged table contained in the rule will be much simpler to use, and will reduce the number of errors currently being made. This rule is being adopted on an emergency basis until the rule can be permanently adopted.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, amended 0, repealed 0; Federal Rules or Standards: New 0, amended 0, repealed 0; or Recently Enacted State Statutes: New 0, amended 1, repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, amended 0, repealed 0.

Number of Sections Adopted on the Agency's own Initiative: New 0, amended 1, repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, amended 0, repealed 0.

Number of Sections Adopted using Negotiated Rule Making: New 0, amended 0, repealed 0; Pilot Rule Making: New 0, amended 0, repealed 0; or Other Alternative Rule Making: New 0, amended 0, repealed 0.

Effective Date of Rule: Immediately.

January 5, 1998

Russell W. Brubaker

Assistant Director

AMENDATORY SECTION (Amending WSR 97-08-050, filed 3/31/97, effective 5/1/97)

WAC 458-20-104 Small business tax relief based on volume of business. (1) Introduction. This section explains the small business B&O tax credit (RCW 82.04.4451), and the public utility tax income exemptions (RCW 82.16.040). Chapter 111, Laws of 1996, amended RCW 82.16.040 to increase the income exemptions for the public utility tax, effective July 1, 1996. RCW 82.04.4451 authorized the department of revenue to create a tax credit table to be used by all taxpayers when determining the amount of their small business B&O tax credit. This table is required to be prepared in such a manner that no taxpayer will owe a greater amount of tax than would be owed by performing the statutory calculations. This change was effective July 27, 1997. (See also WAC 458-20-101 on tax registration and tax reporting requirements.)

(2) Business and occupation tax. Persons subject to B&O tax may be eligible to claim a small business tax credit against the amount of B&O tax otherwise due. The B&O tax credit operates completely independent of the volume exemption which applies to the public utility tax. This tax credit should be computed after claiming any other B&O tax credits available under chapter 82.04 RCW, but prior to any B&O tax credits provided under other chapters of Title 82 RCW. ((The maximum amount of small business tax credit available to a person is thirty-five dollars multiplied by the number of months in the reporting period assigned by the department of revenue under the provisions of RCW 82.32.045. The small business tax credit applies to the entire reporting period, even though the business may not have been operating during the entire period.)) Taxpayers who are eligible for the small business credit use a step-ranged tax credit table to find the amount of credit available to them. Subsection (6) of this section contains the tax credit tables for taxpayers with assigned reporting frequencies of either monthly, quarterly, or annual.

(a) ((If the amount of B&O tax from all activities engaged in by the taxpayer is equal to or less than the maximum credit, a small business tax credit equal to the amount of the B&O tax will be allowed. If the amount of B&O tax from all activities is greater than the maximum credit, a reduced credit may be available. This reduced credit will be equal to twice the maximum credit minus the B&O tax otherwise due. The credit cannot be less than zero. RCW 82.04.4451.

(b))) Persons having multiple tax reporting accounts are eligible for only one small business tax credit per tax reporting period.

(((c))) (b) Spouses who operate distinct and separate businesses that have different tax registrations are each eligible for the small business tax credit.

(3) Retail sales tax. Persons making retail sales must collect and remit all applicable retail sales taxes even if B&O tax is not due. There is no small business tax credit or volume of business exemption for retail sales tax.

(4) Public utility tax. Persons subject to public utility tax are exempt from payment of this tax for any reporting period in which the taxable amount reported under the combined total of all public utility tax classifications does not equal or exceed the maximum exemption for the assigned reporting period. RCW 82.16.040. The maximum exemptions for public utility tax are:

Monthly reporting basis $2,000 per month

Quarterly reporting basis $6,000 per quarter

Annual reporting basis $24,000 per annum

(a) If the taxable amount for a reporting period equals or exceeds the maximum exemption, tax must be remitted on the full taxable amount. The public utility tax maximum exemptions apply to the entire reporting period, even though the business may not have operated during the entire period. The public utility tax exemption is not affected by the amounts reported in other tax sections of the combined excise tax return (e.g., B&O).

(b) For example, assume that the ABC corporation registers and starts business activities on February 1st. A quarterly reporting frequency is assigned to ABC by the department of revenue. During the two months of the first quarter that ABC is actively in business, ABC's public utility tax gross is seven thousand dollars, but after deductions the total taxable is five thousand dollars. In this case, ABC does not owe any public utility tax because their taxable figure of five thousand dollars is less than the six thousand dollar threshold for quarterly taxpayers. The fact that ABC was in business during only two months out of the three months in the quarter has no effect on the threshold amount. However, if ABC had no deductions available, the corporation's taxable figure would be seven thousand dollars and public utility tax would be due on the full taxable amount.

(5) Tax reporting frequencies. Persons interested in knowing the thresholds used by the department when assigning tax reporting frequencies should refer to WAC 458-20-22801 (Tax reporting frequency--Forms).

(6) ((Examples. The following examples illustrate how the small business B&O tax credit and public utility income exemption systems apply to typical situations. These examples should be used only as a general guide. The tax status of other situations must be determined after a review of all of the facts and circumstances.

(a) JD Inc. has been assigned a quarterly reporting period by the department of revenue. JD Inc.'s B&O tax liability from all business activities for the third quarter is ninety dollars. This B&O tax liability is less than the one hundred five-dollar maximum small business B&O tax credit available for a quarterly reporting period (three times the monthly credit amount of thirty-five dollars). JD Inc. may claim a small business B&O tax credit for the entire ninety-dollar B&O tax liability.

Maximum Credit available for quarterly

filers (3 x $35) $105

B&O Tax $ 90

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Credit Available $ 90

Net B&O Tax Due 0

(b) HM Corporation has been assigned a quarterly reporting period by the department of revenue. HM's B&O tax liability from all business activities for the fourth quarter is one hundred twenty dollars. This tax liability exceeds the one hundred five-dollar maximum small business B&O tax credit available for a quarterly period (three times the monthly credit amount of thirty-five dollars). However, a reduced small business tax credit is available. This credit is computed by subtracting HM's B&O tax liability of one hundred twenty dollars from the figure of two hundred ten dollars (twice the maximum credit available for a quarterly reporting period). HM Corporation may claim a small business tax credit of ninety dollars.

Twice the Maximum Credit available for

quarterly filers (2 x $105) $210

Less: B&O Tax $120

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Credit Available $ 90

Net B&O Tax Due $ 30

(c) XY Inc. has been assigned a quarterly reporting period by the department of revenue. XY's B&O tax liability for the first quarter is two hundred fifty dollars. As XY's B&O tax liability exceeds the two hundred ten-dollar figure used to determine any reduced B&O tax credit (twice the maximum credit available for a quarterly reporting period), XY Inc. is not eligible for the small business B&O tax credit.

Twice the Maximum Credit available for

quarterly filers (2 x $105) $210

Less: B&O Tax $250

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Credit Available $ 0

Net B&O Tax Due $250

(d) BG Manufacturing has been assigned a quarterly reporting period. BG has incurred a ninety-dollar tax liability under the wholesaling B&O tax classification, and a seventy-dollar tax liability under the manufacturing B&O tax classification, for a total B&O tax liability of one hundred sixty dollars during the first quarter. As BG manufactures much of what it sells at wholesale, BG qualifies for an internal multiple activities tax credit (MATC) of sixty dollars. (See WAC 458-20-19301 on multiple activities tax credits.) BG Manufacturing would claim its MATC prior to computing its small business B&O tax credit. BG's B&O tax liability net of the MATC is one hundred dollars, which is less than the one hundred five-dollar maximum credit available for the reporting period. BG may claim a one hundred-dollar small business B&O tax credit.

Wholesaling B&O Tax $ 90

Add: Manufacturing B&O Tax $ 70

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Subtotal of B&O Tax $160

Less: MATC $ 60

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Total B&O Tax Liability $100

Maximum Credit available for quarterly

filers (3 x $35) $105

B&O Tax $100

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Credit Available $100

Net B&O Tax Due 0

(e) OK Inc. has two separate tax reporting accounts with the department, both of which have been assigned quarterly reporting periods. OK Inc. is only allowed one small business B&O tax credit for the activity of both accounts. The total B&O tax for both accounts for this quarter is one hundred fifty dollars (one hundred dollars from the first account and fifty dollars from the second account). Its maximum small business tax credit is sixty dollars.

B&O tax account #1 $100

B&O tax account #2 $ 50

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Total B&O tax $150

Twice the Maximum Credit available for

quarterly filers (2 x $105) $210

Less: B&O tax ($150)

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Credit Available $ 60

Net B&O Tax Due $ 90

The credit should be taken from the account that will allow for it to be deducted in full. If one account does not have enough B&O tax to absorb the full credit, it can be applied on the other account until the full credit is used. If the reporting frequency is different between the two accounts, the small business tax credit should not be taken until the filing of the less frequent tax reporting account (the credit computation for the two accounts must cover the same period of time).

(f) BB Corporation has been assigned a quarterly reporting period by the department of revenue. BB's total taxable public utility income for the third quarter is five thousand eight hundred dollars. BB Corporation is exempt for the payment of public utility tax because BB's taxable public utility income does not exceed the six thousand-dollar maximum exemption for this reporting period.)) Tax credit tables. As authorized in RCW 82.04.4451, the department of revenue has prepared tax credit tables for all taxpayers to use when taking the small business B&O tax credit. Taxpayers must use the tax credit table to determine the correct amount of small business credit available to them. The monthly, quarterly and annual reporting frequencies each have their own table to refer to. Taxpayers must be careful to use the table that matches their assigned reporting frequency.

(a) Small business credit table for MONTHLY reporting frequency:

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(b) Small business credit table for QUARTERLY reporting frequency:

(c) Small business credit table for ANNUAL reporting frequency:

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(7) Using the table to find your small business credit. The following steps explain how to use the tax table:

(a) Determine the total tax figure for the B&O tax classification from the combined excise tax return. This figure will normally be the total of the tax amounts calculated for each classification in the B&O section of the combined excise tax return. However, if additional B&O credits will be taken on the return, refer to subsection (8) of this section and the multiple B&O tax credit worksheet before going to step (b).

(b) Find the small business tax credit table which matches the assigned reporting frequency (i.e., the monthly table shown in subsection (6)(a) of this section, the quarterly table in (6)(b) of this section, or the annual table in (6)(c) of this section).

(c) Find the "If Your Total Business and Occupation Tax is" column of the credit table and come down the column until you find the range of figures which includes the total B&O tax due figure obtained from the combined excise tax return or multiple B&O tax credit worksheet.

(d) Read across to the "Your Small Business Credit is" column. The figure shown is the amount of the small business tax credit that can be applied back to the credit lines on the combined excise tax return.

(e) For example, assume that DEF Company has been assigned an annual reporting frequency. At the end of the year DEF has retailing B&O tax due in the amount of five hundred thirty dollars. DEF goes to the small business tax credit table for annual reporting and finds the "If Your Total Business and Occupation Tax is" column. Following down that column, the taxpayer finds a tax range of five hundred twenty-six to five hundred thirty-one dollars and comes over to the "Your Small Business Credit is" column which shows that a credit in the amount of three hundred fifteen dollars is available. This credit amount should be entered on the appropriate lines of DEF's combined excise tax return before calculating the total tax due for that return.

(8) Multiple business and occupation tax credits and the small business credit. The B&O tax credits available in chapter 82.04 RCW (i.e., Multiple Activities Tax Credit, High Technology credit and Ride Share credit) should be taken before the small business credit is applied. The B&O tax credits available in other chapters of Title 82 RCW should be taken only after the small business credit is calculated. Application of the small business credit may never result in a B&O tax liability less than -0-. The following multiple B&O tax credit worksheet can be used by taxpayers to ensure that credits are applied in the necessary order.

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For example, GHI Manufacturing and Distributing has been assigned a quarterly reporting frequency. During one quarter, GHI owes ninety dollars in wholesaling B&O tax, plus another seventy dollars in manufacturing B&O tax, for a total B&O tax due of one hundred sixty dollars. GHI qualifies for a multiple activities tax credit (MATC) and completes schedule C which identifies a MATC of seventy dollars. The multiple B&O tax credit worksheet shows that the MATC is one of the credits which should be subtracted from the B&O tax due amount before referring to the small business tax credit table. Using the worksheet, line one for GHI is the one hundred sixty dollars of total B&O tax due. Line two is the total of B&O credits available, in this case the MATC, and equals seventy dollars. Line three directs that the seventy dollars of B&O credits should be subtracted from the original one hundred sixty dollars of B&O taxes due which leaves ninety dollars of B&O taxes potentially available for application of the small business credit. The quarterly table for the small business credit shows that at the ninety dollar level a quarterly reporter receives an equal amount of credit and as a result owes no B&O tax liability.